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Employers’ pension obligations during COVID-19.

As businesses are significantly impacted by COVID-19, we review here what employers should consider in relation to pension benefits to ensure that they are not in breach of regulations. We also answer some frequent queries received from our clients as we support them.

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In March, the Chancellor introduced a series of emergency measures to assist businesses and their staff. The Coronavirus Job Retention Scheme (CJRS) in particular is designed to help employers to retain staff rather than make their roles redundant. By furloughing staff, employers can apply for a grant from the government to cover 80% of an employee’s ‘wage costs’ (subject to certain conditions) up to a maximum of £2,500 per month. The employer would then have the option to top up the salary of the furloughed employee, to their full salary level but they are not obliged to do so. In addition, the grant would also cover the cost of the minimum level of auto-enrolment employer pension contributions along with employer national insurance contributions for furloughed staff. 

While the government recognises the success of the auto-enrolment legislation since its introduction, evidenced by the fact that minimum employer contributions will be covered by the CJRS; in an ever-changing landscape there is still a lot of uncertainty about the auto-enrolment rules and whether any easements have been applied as a result of the current pandemic.

We have addressed below some common questions that have been posed to us by our clients:

Q: Has the current pandemic changed how the auto-enrolment legislation applies to my business?

A: No, broadly speaking the auto-enrolment legislation continues to apply in full. Although many businesses have currently put a freeze on recruitment, any new employees must continue to be offered a pension scheme and auto-enrolled if they meet the set criteria. Employers also need to carry out their re-enrolment and re-declaration duties where applicable or they will be subject to fines.

The Pensions Regulator (TPR) intends to support both employers and savers during this challenging time and it has indicated that it will take a ‘proportionate and risk-based approach’ towards enforcement decisions but its focus is still on ensuring that workers’ pensions entitlements are protected. 

We understand that TPR is working closely with pension providers and encouraging them to be flexible, especially when agreeing potential payment plans with employers who may be struggling to meet their ongoing liabilities. The knock on effect of COVID-19 has undoubtedly meant that many employers will have immediate cash flow problems affecting their ability to meet fixed costs such as pension contributions. Spreading pension contributions over a longer period, if permitted, will help alleviate the difficulties that some employers will face.

As a result, employers should aim to comply with the legislation in all cases or seek professional advice if they are concerned about meeting their obligations.

Q: What salary and contribution levels should auto-enrolment be based on during the pandemic?

A: Auto-enrolment contributions should continue at the same percentage level and earnings definition as before. If, for example, the auto-enrolment structure the employer provides is linked to basic salary, then pension contributions for a furloughed employee could either be based on their full salary (if the employer is topping up their salary to the ‘pre-furloughed’ level) or a reduced salary (if their salary is now reduced to the lower of 80% of the earnings or £2,500 per month).

Q: As only the minimum employer contributions under auto-enrolment are covered under the CJRS, can pension contributions be reduced to a lower level?

A: The CJRS will cover an employer contribution of 3% of ‘qualifying earnings’ based on an employee’s furloughed earnings. However, many employers have provided a more generous contribution structure, which would mean that they could not claim their full pension contribution costs from the scheme.

While TPR expects employers to continue to make contributions at the agreed scheme level, an employer paying a more generous contribution could consider reducing contribution levels. Any reduction in contribution level should still meet the minimum requirements under auto-enrolment (i.e. a total contribution of 8% of qualifying earnings of which at least 3% needs to come from the employer). It would also be important to discuss any changes with the pension scheme provider, as these may affect the terms of the scheme.

If you are considering making this change, we would strongly recommend that you seek employment advice to ensure that there are no contractual issues with reducing contribution levels and whether a formal consultation with employees will be needed before any changes are implemented.

Our colleagues in the HR Consultancy team would be happy to assist if you do not already have this resource in-house or would like an external opinion.

Q: Can an employee decide that they no longer wish to contribute to the pension scheme and cease contributions?

A: Yes. A newly enrolled employee can opt out of the pension scheme within 30 days of joining the scheme and in doing so, they will receive a full refund of their personal contributions. Members will need to opt out directly with the pension provider and details of how to opt out will be contained within a member’s new joiner pack. After the 30 day opt out window has lapsed, employees can cease active membership of the scheme by notifying their employer. However, past contributions cannot be refunded in this case. Whether an employee opts out or ceases active membership, they can recommence their contributions at a later date.

The auto-enrolment safeguarding rules would continue to apply here, so an employer is prohibited from encouraging an employee to leave the scheme. While many employers may wish to provide some kind of communication to staff, this communication must be purely factual and must not contain any opinion or be considered to be an inducement to opt out or cease membership.

The information contained is based on Buzzacott Financial Planning’s current understanding of the legislation and was last updated on 17 April 2020. As developments come to light, we will update this article.

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