The Pensions Regulator has emphasised it will continue to take its usual proportionate and risk-based approach when supporting employers and savers over furloughing. But what does this mean? An employer’s auto-enrolment obligations are set out in law, are inflexible, and fines are potentially payable if the law is breached.

To help HR professionals make sense of it all, we’ve answered key questions and outlined important steps to take below…

The starting point

An employer’s automatic enrolment (AE) duties continue as normal, whether employees are working or furloughed. Employers and employees must carry on paying contributions, and contributions must not be used for any other purpose.

Employees can opt out of being contributory scheme members, but employers must not encourage or induce them to do so as this is a statutory offence.

What is the auto enrolment process for new employees?

The AE rules apply if an employer has new employees – they must be assessed for AE. The three month postponement process can be used to delay this assessment and also, importantly, it delays the employer’s obligations to pay pension contributions for the new employee for this period. However the employer’s contracts of employment must be altered, taking legal advice if necessary, to reflect this.

What about auto-enrolment re-enrolment?

Employers must re-enrol when notified by the Pensions Regulator. Postponement is not possible but there is a three month period allowed for re-enrolment after the initial re-enrolment date which may be useful.

Given that the Coronavirus Job Retention Scheme only covers the statutory minimum employer contributions, but not any excess, the employer must cover these themselves and pay the correct contributions. 

What pension contributions need to be paid?

Under AE, an employee pays the minimum auto-enrolment contribution of 5% on qualifying earnings unless the employer pays this. This obligation is set out in law, in the pension scheme’s rules, contracts of employment, scheme guides and the payment schedules or schedules of contributions. 

The temporary absence provisions in a scheme’s rules are designed to cover temporary absence like furloughing, so employers are not likely to have to make formal changes to their scheme rules to allow for furloughing.

How do pension contributions work for furloughed employees?

Only the AE minimum employer pension contribution is paid – 3% on the 80% or £2.5k per month if that amount is lower than the employee’s regular monthly wage (no commission, fees or bonus). If the employer pays more, the Coronavirus Job Retention Scheme only covers 3%, no more. It does not cover the employees’ auto-enrolment pension contributions at all.

With a pension’s salary sacrifice scheme, the 80% pay is based on the employee’s reduced salary and the Coronavirus Job Retention Scheme covers 3% of the salary sacrificed amount, with no allowance for the amount the employee has salary sacrificed.

How should payroll processes for furloughed employees be managed?

Payroll should be run as usual with furloughing – no changes are necessary to the existing pension arrangements or payroll processes. The current scheme rules and contribution requirements still apply.

When the employer pays its employees, their pension contribution calculation should run as usual, with national insurance contributions and pension contributions being made from the furloughed employee’s wages and paid as usual.

Can an employer reduce its rate of employer contributions if they are higher than the statutory minimum contribution for auto-enrolment and, if so, how?

Given that the Coronavirus Job Retention Scheme only covers the statutory minimum employer contributions, but not any excess, the employer must cover these themselves and pay the correct contributions due under the scheme. However The Pensions Regulator accepts employers can reduce employer contributions to a defined contributions (DC) scheme to the statutory minimum, but not below it.

The HR team of any employer proposing to reduce its employer contribution rates under this relaxation should document the steps it has taken to implement the change.

Key considerations on reducing employer pension contribution rates to the statutory minimum

How should a 60 day pensions consultation be managed? What relaxations does The Pensions Regulator allow?

While this consultation is “policed” by the Pensions Regulator, it announced the following relaxations until 30 June 2020, when it will review its position. The Pensions Regulator will take no action if the employer fails to consult for the full 60 days if:

Even so, The Pensions Regulator encourages employers to consult as much as they can. 

A full 60 day consultation is still required if the employer wants to change employer contributions outside this relaxation.

The HR team of any employer proposing to reduce its employer contribution rates under this relaxation should document the steps it has taken to implement the change. This will help to ensure it has a paper trail if the Pensions Regulator subsequently starts to ask questions about the consultation, if there are employee complaints later, or if the scheme’s trustees or provider want confirmation that the consultation process has been run properly under the new relaxations.

Hopefully the above information has helped you gain a better understanding of the process to take regarding pensions and furloughed employees. But be mindful that as the situation evolves The Pensions Regulator will continue to add to or tweak its guidance on this difficult subject.

[cm_form form_id=’cm_65a14c3f5da64′]