The economic turmoil created by the Covid-19 outbreak has affected all parts of our lives.
As well as hitting many employees’ jobs and salaries it will also cut many people’s pension contributions.
As part of its emergency response to the Covid-19 outbreak, under the Coronavirus Job Retention Scheme, the government will pay up to 80 per cent of the salaries of employees who are temporarily ‘furloughed’, up to a maximum of £2,500 a month (equivalent to £30,000 a year).
The government grants received by employers also cover employer automatic enrolment pension contributions up to the statutory minimum of 3 per cent of band earnings (between £6,240 and £50,000 for 2020/21).
Pensions and furloughed employees
The Pension Regulator (TPR) has pointed out employers’ obligations to pay pension contributions continue to apply as normal, even if staff are furloughed.
If contributions are based on a percentage of salary, then if furloughed salaries are reduced the monetary amount of the pension contributions will also fall.
Employees can reduce their contributions (if scheme rules allow this), or they can opt out of pension saving if they decide that is right for them at this time.
However, employers must not encourage or induce employees to do this.
If employees choose to reduce their contributions, say to a lower percentage of salary, then the pension scheme rules may allow the employer to also reduce their contributions.
If an employee reduces their contributions below the statutory minimum or opts out or ceases active membership, then they must be re-enrolled back into the pension scheme at the next re-enrolment date (as long as they meet the criteria).
However, if the employee stops contributions within the 12 months before the re-enrolment date, then the employer doesn’t have to re-enrol them – although, of course, they could choose to do so.
Salary sacrifice for furloughed employees
Salary sacrifice is where an employee gives up some of their salary in return for a pension contribution by the employer.
Usually the employer pays the total pension contribution, including the amount the employee has sacrificed, and in most cases the contribution is based on notional pre-sacrifice pay.
When working out the pension contribution due for a furloughed employee, any salary sacrifice contractual agreement has to apply as normal, but may be affected by the reduction in salary.
If an employer is claiming the government grant under the Coronavirus Job Retention Scheme then this is worked out as 80 per cent of the employee’s post-sacrifice salary (not the notional salary).
All of the grant claimed must be paid to a furloughed worker in the form of money.