Furlough: what counts as pensionable salary?

With almost a quarter of roles in the UK now accessing the government’s furlough scheme, many employers have raised questions around salary sacrifice and pensions contributions. Rachel Meadows outlines the additional costs and risks organisations could face.

The coronavirus has already had far-reaching implications on employers and their employees.

The UK government has introduced a multitude of emergency measures over recent weeks to try to limit the damage to the economy and to ease the immediate impact on businesses. One key measure is the Coronavirus Job Retention Scheme.

The furlough scheme is designed to support employers to retain employees wherever possible when their business operations have been severely impacted by Covid-19.

At the time of writing, employers can reclaim 80% of furloughed employees’ usual monthly wage costs, capped at £2,500 per month. They can also reclaim the employer national insurance contributions and minimum auto-enrolment employer pension contributions on the 80% wage. This combined amount is the maximum government grant available.

As with many schemes the devil lies in the detail, and what has been tricky for employers to deal with has been that many needed to furlough staff in advance of full detail around how the scheme would continue to be available.

Another consideration for employers is cashflow – salaries in many cases needed to be paid, and pension contributions made, before the government’s online application tool opened for employers to be reimbursed.

Pensions complexity

Pensions have been a particular area of complexity, however. The government guidance made clear immediately that furlough salaries are pensionable.

Employers can reclaim the costs of pension contributions made, but only to the extent of minimum automatic enrolment contributions, which are 3% of qualifying earnings.

For employers who pay more generous employer contributions into pensions, any additional amounts in excess of the minimums would not be reclaimable from the government.

Some employers might elect to provide staff with top-up salary in addition to the 80% government grant.

Where employers have chosen to do this, it is the actual salary that is pensionable, not just the 80% furlough level.

Costs of any employer pension contributions made on top-up salary amounts are not covered by the scheme, so these would have to be met by the employer.

Tread with care

Although in many cases the actual amount of pay being provided to staff during furlough will influence the amount of pay that is classed as ‘pensionable’, employers need to tread with particular care to ensure that they pay due regard to what is included within their own pension scheme rules around pensionable salary definition – it may be different.

This will especially apply where employees are members of defined benefit or hybrid pension schemes, or where employers with defined contribution schemes are certifying under a different basis (such as Tier 1, 2 or 3 – which refer to different pensionable salary definitions and contribution levels). Contractual commitments to staff will still stand through furlough.

Auto-enrolment rules still apply, and employers are not able to take ‘payment holidays’ in respect of pension contributions. The usual deadlines also apply in terms of paying over pension contributions deducted from employee pay.

As furlough pay is still pensionable, employees are still expected to continue to make their own pension contributions, normally based on their actual furlough salary (but the same ‘pensionable salary definition’ considerations apply as above).

Employees do continue to have the option to opt out, or cease contributing should they choose to, but this would mean they would then also potentially lose the right to receive employer pension contributions (depending upon the terms and rules of their employer’s pension scheme).

In some specific cases, employers might be paying less than statutory minimum levels – in any event, the maximum that employers can reclaim under the government grant is the amount actually being contributed – they cannot claim grant reimbursement that is not covering a genuine cost.

Salary sacrifice rules

Salary sacrifice has been a thorny issue throughout the crisis, and the Pensions Regulator has now issued clarification and examples to assist employers and their advisers. Furlough pay will be based on post-sacrifice pay and this is what the government grant will be based upon.

Should employers choose to top up furlough pay this would be at their own cost. However, employers should be aware when budgeting for furlough costs that they will need to continue to fund both employer and employee elements of pension contribution for those who were sacrificing, as the employee element has become a non-cash benefit (as will any other benefits provided via salary sacrifice).

Many employers had not initially factored this into their furlough cashflow planning.

How the amount of pension contributions subject to salary sacrifice will be calculated through furlough is complex and will vary depending upon the rules of each employers’ salary sacrifice arrangement.

Although staff can opt out of salary sacrifice through Covid-19 as a lifestyle event, as this would not increase their furlough pay it is unclear what advantage they would personally gain from doing so.

If sacrifice arrangements are in place, employers can still only recoup under the government grant the costs of the employer element of pension contributions based on statutory minimums.

In order to know the amount to reclaim, employers might need their payroll to carry out multiple calculations within each furlough payroll – the contributions being made and the statutory minimum levels that can be reclaimed.

This double calculation impact also applies where employers are paying more than the statutory minimums for other reasons.

Employees and unions could potentially agree to reduce pension contributions as part of the furlough arrangements but statutory requirements around conducting consultation could still apply.

Flexibility

Some leeway has been provided by the Pensions Regulator in relaxing some of the requirements to conduct lengthier consultation processes. This is providing that employers adhere to strict criteria, including that any reduction in contribution levels must be temporary and not outlast the period of furlough and that reductions should not take levels below statutory minimums.

Any employers considering such a move should definitely seek pensions and legal advice and should write to affected staff and their representatives, offering as much consultation as possible. Employers that are experiencing difficulty in paying contributions should proactively engage with the Pensions Regulator.

Employers need to fully understand the costs associated with their pension schemes as well as understanding the potential gap between these costs and the amount that the government grant will reimburse to ensure that their cashflow and contingency planning is right.

Failing to spot additional costs that the employer will need to meet may cause financial difficulty and add extra stress at an already difficult time for many businesses.

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Rachel Meadows

About Rachel Meadows

Rachel Meadows is head of proposition - pensions and savings, at Broadstone

One Response to Furlough: what counts as pensionable salary?

  1. Avatar
    grant hughes 13 May 2020 at 2:15 pm #

    can I make a personal contribution based on my furlough pay…i.e 100% of it?

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