How to meet AE duties for furloughed workers

While furloughed workers are still entitled to pension contributions, Justin Corliss says employers must consider the impact of Covid-19 on their duties

Coronavirus has had a significant impact on the UK and global economies, one which is likely to be felt for months and possibly years to come. Employers are facing many challenges just to keep businesses afloat, but amid this turbulence, employers also need to remain mindful of their workplace pension commitments and any help available to meet these.

The UK government has introduced a number of measures to minimise the negative impact of this crisis, one of which is the Coronavirus Job Retention Scheme (CJRS) to provide 80% of a furloughed employee’s salary up to £2,500 per month plus the statutory minimum employer pension and National Insurance contribution on those wages.

Employers have been able to claim since 20 April 2020; however, claims can be backdated to 1 March 2020. Let’s take a closer look at the impact furloughing employees has on the employer’s workplace pension duties.

Furloughed workers

To begin, let’s look at The Pension Regulator’s (TPR) current auto-enrolment (AE) Covid-19 guidance for employers which states: “Your AE duties continue to apply as normal, including your re-enrolment and re-declaration duties. This is the case whether your staff are still working or are being furloughed as part of the CJRS.”

While not applicable for employees still working, even on reduced hours, employers can claim for furloughed employees. Part of this claim will include a sum equal to the statutory minimum employer pension contribution which is 3% on the band of earnings between £6,240 and £30,000 p.a.[i]  for the 2020/21 tax year, or the equivalent for the pay reference period (e.g. £520 to £2,500 if paid monthly).

If the employer currently pays a contribution higher than this minimum, they either have to make up the difference themselves or reduce their contribution. Reducing an employer contribution to the statutory minimum covered by the CJRS may not always be straight-forward, particularly for employers running defined benefit or hybrid models, or in defined contribution schemes where scheme rules or contracts of employment commit the employer to a higher contribution rate.

Consultation may be required where the workforce exceeds 50 individuals, although TPR has indicated some flexibility on the standard 60-day consultation period given the current circumstances.

Salary exchange

The use of salary exchange can also complicate matters. The CJRS states furlough pay must all be money and not reduced to cover other benefits. Furthermore, the salary used to calculate the grant should be the post-exchange salary. Schemes that operate on a salary exchange basis will, therefore, get back less from the CJRS than if they didn’t have the arrangement, as the salary used for the 80% grant and the minimum employer contribution will be reduced as part of the salary exchange agreement.

Although HM Revenue & Customs (HMRC) has confirmed that coronavirus would qualify as a life event, and therefore an acceptable instance where salary exchange arrangements could be modified, this is unlikely to be of significant benefit to employers looking to maximise CJRS funding. This is because the reference salary to be used for calculating the grant is as at 19 March 2020 or earlier date defined in the rules, all of which relate to the previous tax year. Therefore choosing to alter the agreement after the event would not change the grant.

HMRC and TPR are updating guidance regularly on matters relating to workplace pensions and employer’s duties, so advisers and employers should regularly monitor these websites for the most up to date information. See below links to relevant websites including detailed guidance from TPR on the interaction of the CJRS and salary exchange in the guidance for large employers.

Justin Corliss is senior pensions development and technical manager at Royal London

HMRC link for claiming the CJRS

HMRC link for CJRS step-by-step guidance for employers

HMRC link for CJRS guidance

Automatic enrolment and DC pension contributions: Covid-19 guidance for employers

TPR Covid-19 technical guidance for large employers

Royal London guidance

 


[i] This would normally be 3% on the band of earnings between £6,240 – £50,000, (2020/21 tax year) but as the CJRS caps out at £2,500 per month (£30,000p.a.) we have used this figure.