Government plans to cover auto-enrolment pension contributions through the Coronavirus Job Retention Scheme have been welcomed but they still leave some unanswered questions.
The government has confirmed its grants for workers ‘furloughed’ during the coronavirus crisis will also pay auto-enrolment contributions on behalf of employers at the minimum rate of 3 per cent.
Employers will receive a grant from HM Revenue and Customs to cover the lower of 80 per cent of an employee’s regular wage or £2,500 per month, plus associated employer pension contributions on that subsidised wage.
But Stephen Scholefield, partner at law firm Pinsent Masons, said it was not yet clear how it will work for those using salary sacrifice and those accruing defined benefits.
Employees on salary sacrifice have agreed a reduced salary in return for a higher pension contribution but it appears only the reduced salary will be covered by the grant, along with the minimum pension contribution based on that reduced salary, according to Mr Scholefield.
Therefore people may be worse off than if they had not sacrificed part of their salary, he said.
It is also unknown whether the grant for 3 per cent of qualifying earnings will apply to defined benefit schemes but Mr Scholefield warned if this was the case this would not be enough to cover the cost of ongoing accrual.
He pointed out that by only paying the minimum 3 per cent, the government will not make up for lost pension money from employers which pay a higher rate.
Mr Scholefield said: “Employers will have to decide whether to carry on with their current contribution structure or whether to reduce contributions to reflect the grant.
“If they look to reduce then they may need to take a view on the usual 60 day consultation requirement, and clearly there isn’t time to do that.”
He added: “Further guidance on the pension contributions covered by the grant is to be provided, so it may be that some of this will become clear in the next few days.
“Overall, the announcement brings some welcome clarity, but some issues still remain to be addressed. Hopefully employers will be able to manage the practical challenges with good will from their employees.”
Andrew Tully, technical director at Canada Life, said it was good news that employees would continue to benefit from their pension during this uncertain time.
Mr Tully said: “Any employee who meets the AE requirements who is put into the furlough scheme, the employer would be able to claim back the 3 per cent employer contribution in addition to the salary."
"And the employer can also reclaim employer NIC (approximately £245 per month). So a maximum total grant that can be applied for each employee per month of £2,804.”
He arrived at this figure by discounting the first £520 a month for someone who got the maximum £2,500 a month. Contribution which could be reclaimed would be 3 per cent x (£2,500 - £520) = approximately £59 a month.
Steven Cameron, pensions director at Aegon, said this will alleviate any pressure to suspend auto-enrolment contributions which “even for a short period might have undermined the huge success of auto-enrolment to date”.
He added: “Importantly, it also avoids affecting individuals’ longer term finances. Individuals will be expected to pay their minimum contributions from ongoing pay and while they can opt out, this would mean losing valuable employer contributions.
“While employers paying above the minimum will not be able to claim back these additional amounts, including the auto-enrolment minimum in job retention grants is a very welcome demonstration of the importance the government places on ongoing retirement savings.”
amy.austin@ft.com
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