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Covid-19 and pension contributions

It is important to consider pension contributions when looking at the grant available under the Coronavirus Job Retention Scheme as this does not change an employer’s usual pension contribution payment obligations or processes

Within this article we look at important points to consider with regard to the retention scheme and existing salary sacrifice agreements and employer consultation if an employer would like to make a change to the existing pension provision.

Key facts

  • The requirement under pensions legislation to consult on certain changes only applies if an employer has at least 50 employees
  • A salary sacrifice arrangement for pension contributions is separate from the automatic enrolment provisions and pension contribution obligations set out in a pension scheme’s rules or governing documentation
  • The existence of the grant available under the Coronavirus Job Retention Scheme does not change an employer’s usual pension contribution payment obligations or processes
  • The salary for calculating the grant should not include the cost of non-monetary benefits provided to employees, including taxable benefits in kind
  • Benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should not be included in the reference salary
  • Benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should not be included in the reference salary
  • contractual obligations and pension scheme rules apply as normal
  • all of the grant claimed must be paid to a furloughed worker in the form of money
  • the employer may need to amend their payroll processes to calculate the pension contribution to be paid to the pension scheme
  • the requirement under pension legislation to consult on certain changes only applies if an employer has at least 50 employees
  • before an employer can decrease employer pension contributions they must carry out a consultation in accordance with a number of rules. These rules include a 60 day minimum period of consultation

The Pensions Regulator expects employers to comply with the full 60 day consultation but has confirmed it will not take regulatory action for a failure to consult for the full 60 days if all of the following apply:

  • they have furloughed staff for whom they are making a claim under the Coronavirus Job Retention Scheme
  • they are proposing to reduce the employer contribution to their defined contribution scheme for furloughed staff only
  • the reduced contribution rate for furloughed staff will only apply during the furlough period, and revert thereafter
  • the employer has written to the affected staff and their representatives to describe the intended change and the effects on the scheme and on the furloughed staff

The Pensions Regulator is encouraging employers to carry out as much consultation as they can. This regulatory easement will be maintained until 30 September 2020, but this date may be reviewed.

The operation of a salary sacrifice arrangement for pension contributions is separate from the automatic enrolment provisions and pension contribution obligations set out in a pension scheme’s rules or governing documentation.

  • if pensionable pay sacrifice is operated then usually the employer is obliged to pay the total contribution
  • in most cases, the scheme rules or governing documentation will define pensionable pay as the notional pre-sacrifice pay
  • the amount the employee sacrifices is paid across to the pension scheme as part of the overall employer contribution
  • there is no obligation under the pension scheme rules or governing documentation for the member of staff to contribute

The existence of the grant available under the Coronavirus Job Retention Scheme does not change an employer’s usual pension contribution payment obligations or processes.

The salary for calculating the grant should not include:

  • the cost of non-monetary benefits provided to employees, including taxable benefits in kind
  • benefits provided through salary sacrifice schemes, including pension contributions, that reduce an employee’s taxable pay should not be included in the reference salary

Schemes which operate a salary sacrifice basis will get back less from the Job Retention Scheme than if they didn’t have the arrangement.

All the grant received to cover an employee’s subsidised furlough pay must be paid to them in the form of money. The grant cannot be reduced to pay for the pension contribution.

Choosing to remove the agreement after the event would not change the grant. If an employer does this it will have an impact on both employer and employee National Insurance contributions.

HMRC has confirmed that COVID-19 counts as a life event that could warrant changes to salary sacrifice arrangements, if the relevant employment contracts are updated accordingly.

Under the rules of the Coronavirus Job Retention Scheme:

  • pay cannot be reduced below the lower of 80% of their wages or £2,500 a month (or the pro-rated equivalent if the employee is working for the employer part time after 1 July 2020)
  • it may be possible to operate salary sacrifice as normal if the amount of pay above the furlough pay is sufficient

Example:

  • an employee has a salary sacrifice arrangement in place to sacrifice £50 a week to be paid as a pension contribution
  • their total pay in a week is £150, made up of £80 for the period they were working whilst on furlough and £70 furlough pay
  • their pay cannot be reduced below £70, so depending upon the contractual agreements between the employer and the employee during the furlough period the £50 sacrifice may be made
  • if the amount of pay above the furlough pay is not sufficient, for example the employee’s total pay in the example above was £100 in the week, then whether or not part of the sacrifice can be made (£30 instead of £50 in this example) will depend on the contractual agreement in place between the employer and employee

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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