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Penny Cogher

Irwin Mitchell LLP


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Pensions, auto-enrolment and furloughing – an HR director’s guide

We tackle some of key areas of confusion for HR professionals regarding pensions for furloughed employees.

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

  • What do the pension terms of the employees’ contracts of employment currently say? Legal advice may be needed.

  • Are there some groups of employees with different pension terms than others, perhaps because of TUPE transfers? If so, deal with them separately.

  • Are there any agreements between the employer and trade unions or other representative groups over pensions? If so, take them into account, and consult with them as much as possible. 

  • The employer’s scheme rules and other governing scheme documentation should be reviewed to see how they can be changed and what is possible under the temporary absence rules if these apply –  legal advice may be needed here.

  • The employer has to go through a formal pension consultation for at least 60 days, if it has more than 49 employees, to reduce the employer contributions paid to a DC scheme however see the relaxations below.  This is just a consultation – individual consents are not required but The Pensions Regulator has, subject to its relaxation, the power to issue a £50k fine if the employer fails to satisfy these consultation obligations. This is also separately a change to an employee’s terms and conditions and so the employee could claim constructive dismissal if they do not agree to the change if there is the potential for a breach of contract claim and daily penalties. So HR teams must tread carefully and go through the right processes and, if necessary, take advice.

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:

  • The employer has furloughed employees for whom it has made a claim under the Coronavirus Job Retention Scheme.

  • The employer is proposing to reduce the employer contribution to the DC scheme solely for the furloughed employees – there is no change in contribution rate for the non-furloughed employees.

  • The reduced contribution rate for furloughed staff will only apply during the furlough period. After that, the employer will revert to the normal employer contribution rate.

  • The employer has written to all affected employees and their representatives to explain its proposed changes, their effects on the scheme and the furloughed employees.

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.

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Penny Cogher


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