Articles - Key Pension Issues on Coronavirus Furlough Scheme


On Thursday 27 March, the UK Government released fuller details of the new Coronavirus Job Retention Scheme (or “Furlough Scheme”) first announced on Friday 20 March, with guidance being published for both employers and employees. Under the Furlough Scheme, employers who opt to keep staff on payroll but away from work (‘furloughed’) rather than making them redundant will be able to reclaim 80% of their wage costs from HMRC, up to a monthly cap of £2,500 per employee.

 By Sarah Swift, Partner at Eversheds Sutherland

 The key pensions issues for employers to note are:

 Employers are unlikely to be able to recoup the full pension costs associated with keeping furloughed staff on the books under the Furlough Scheme

 If employers want to make the Furlough Scheme cost-neutral for them, this is likely to require employee or union agreement to changes to pension terms

 The necessary changes are likely to be “listed changes”, which require a 60-day consultation period – in practice, a view may need to be taken on whether employee or union agreement to the changes is sufficient for compliance, given the urgency of getting workers onto the Furlough Scheme without delay

 Scheme rules will need to be checked to understand the implications for employer and employee contributions, life cover and pension benefits

 Particular difficulties arise with employees on salary sacrifice arrangements

 How will the Furlough Scheme work?

 All employers are eligible to access the Furlough Scheme, though public sector employers and employers in receipt of public funding for staff costs are generally expected to continue to employ and pay staff as usual, rather than placing them on furlough.

 The essence of the Furlough Scheme, as set out in the government guidance, is as follows:

 it covers employees who were within their UK employer’s PAYE scheme on 28 February – those hired subsequently are not eligible, unless the employee was made redundant after 28 February and is then rehired by the same employer. Employees on any type of contract can be furloughed, including fixed-term, temporary and zero-hours contracts, and also agency employees

 the employee must not do any work for the employer during the furlough period. Therefore, if the employer decides instead to move employees onto reduced hours, they will not be eligible for the Furlough Scheme. Furloughed employees can, however, take part in volunteer work or training (subject to certain conditions)

 the minimum length of a period of furlough is three weeks. The current maximum planned duration for the Furlough Scheme is three months (ie four x three-week furlough periods), though this will be reviewed in due course

 the employer must designate affected individuals as ‘furloughed employees’, and notify them in writing of this designation. Changes to the employment contract to place employees onto furlough should be discussed with staff and made by agreement; collective consultation may be required

 to claim, the employer must submit information to HMRC about the furloughed employees and their earnings through a new online portal. Claims can be backdated (as far 1 March, if applicable)

 HMRC will reimburse 80% of furloughed employees’ wages, up to a cap of £2,500 per month. For salaried employees, the 80% figure will be based on gross salary before tax as of 28 February. For employees whose pay varies, this will be based on the higher of the same month’s earnings from the previous year (if employed for at least 12 months before the date of claim) and average monthly earnings from the 2019-20 tax year. Fees, commission and bonuses will not be included

 What about employer NI and pension contributions?

 The government has said that HMRC will also reimburse employer NI contributions and minimum auto-enrolment employer pension contributions due on the amount claimed for wages.

 However, it appears that this “minimum” is being assessed purely by reference to the standard quality requirements for money purchase (DC) schemes, since the guidance refers expressly to employer contributions of 3% of qualifying earnings, based on the gross amount of furlough pay.

 This leads to some obvious questions:

 What if the employer’s DC scheme uses one of the alternative quality requirements, or provides more than the strict auto-enrolment minimum? Many schemes provide for contributions to be paid on all earnings, rather than just qualifying earnings, for example

 What about defined benefit (DB) schemes? Most DB schemes which are used as qualifying schemes for the purposes of auto-enrolment compliance will have future service accrual rates which require employer contributions above the DC minima for auto-enrolment

 Although the government has said that further guidance will be provided on how employers are to calculate the pensions element of the Furlough Scheme reclaim, it is clear that this will just be about the maths: employers who pay more than the 3% of qualifying earnings minimum will not be able to reclaim that additional amount.

 On that basis, employers in this situation who need the Furlough Scheme to be totally cost-neutral will need to change their furloughed employees’ terms and conditions relating to pensions as well as pay. Any reduction in employer contributions will count as a “listed change” for the purposes of the 60-day pension consultation requirement. It is unclear whether agreeing such changes with workers or trade unions will be sufficient to avoid possible enforcement action from the Pensions Regulator where consultation is not undertaken. Since the policy intent behind the Furlough Scheme requires the employer to be able to move staff onto furlough swiftly, it is to be hoped that the Regulator will take a pragmatic approach.

 Any changes to pensions terms in respect of the furlough period may also need to be reflected in changes to scheme rules. Again, the urgency of the current situation may demand that employers agree changes first with workers or trade unions, with any rule changes following after the event.

 Can employee contributions be deducted from furlough pay?

 The guidance is clear that normal deductions (including employee tax, NI and pension contributions) can be made. Given that employees will be on reduced wages, it is likely that the amount of employee contributions will also reduce – although scheme rules should be checked.

 Employers with DC schemes may want to go further and offer the option of reducing contributions to auto-enrolment minimum (4% of qualifying earnings) when agreeing any changes to pension terms. Those with DB schemes will need to consider this option too, but there are different implications here (eg for scheme funding). In particular, employers will need to consider whether accrual rates can and should be reduced during the furlough period to reflect the lower contributions being paid.

 What about salary sacrifice?

 This is a particular problem area. The guidance makes no mention at all of salary sacrifice arrangements. However, certain passages in it suggest that the making of salary sacrifice reductions to the gross amount of furlough pay is prohibited. Instead, the amount claimed from HMRC must be paid across in full to the worker. If this interpretation is correct, it is likely that employees will need to come out of salary sacrifice arrangements during furlough leave, unless the employer is willing to shoulder the cost of the additional employer contributions. Again, such a change would usually need to be agreed with the employee as part of the furlough terms.

 In addition, it seems likely that the 80% figure will be based on the actual (post-sacrifice) salary or wages paid to the furloughed employee at 28 February. In this respect, employees in a salary sacrifice arrangement are at a disadvantage when compared with those who pay member contributions through normal payroll deductions.
 How will calculation of any defined benefits (including death in service) be affected?

 This will depend entirely on the details of the relevant scheme or arrangement. In a typical set of DB scheme rules relating to temporary absence, staff who are on furlough would continue to count as being in pensionable service and in receipt of pensionable pay. But each set of scheme rules will need to be checked carefully: because scheme rules are not standardised, it is not safe for employers or trustees to make assumptions.

 In relation to death in service benefits, details of underlying insurance policies should always be checked. It may be possible to continue cover based on the pre-furlough contractual pay, but confirmation should be sought from the insurer concerned.
 Comments

 The spirit of the Furlough Scheme and the speed with which the government has put together guidance to assist employers in using it is commendable. It is also welcome that at least some upfront consideration has been given to the issue of employer pension costs.

 Whilst some questions remain unanswered, this is understandable given the time constraints under which the Furlough Scheme has been designed. There are, however, a number of pensions issues which employers (and trustees) will need to check carefully and potentially address, if the Furlough Scheme is to fulfil its purpose of allowing employers to keep staff on payroll without unexpected costs at a time when their business may well be under unique strain.  

Back to Index


Similar News to this Story

How to identify the key issues early in reserving
This article looks at how an analytical approach to reserving can help actuaries focus on what really matters, right at the start of the process. We
Closing the net on ghost brokers with email intelligence
As households face the biggest economic squeeze in generations , finding ways to cut the cost of everyday but essential living expenses such as motor
10 Plus C level Claims Executives share their insights
C-level claims executives from Arch, Aviva Canada, Berkley Mid-Atlantic Group and SageSure have just been announced as speakers for Intelligent Insure

Site Search

Exact   Any  

Latest Actuarial Jobs

Actuarial Login

Email
Password
 Jobseeker    Client
Reminder Logon

APA Sponsors

Actuarial Jobs & News Feeds

Jobs RSS News RSS

WikiActuary

Be the first to contribute to our definitive actuarial reference forum. Built by actuaries for actuaries.