Unfurling Furloughing, Pensions Issues and Smart Solutions

August sees the first month of change in the furloughing provisions which have been in place since March 2020. Employers are now responsible for both National Insurance and pension contributions for their furloughed employees, with further reductions in the amount of government aid coming in the next two months. In the rush to implement furloughing, many employers furloughed HR and payroll team members, ahead of the government issuing formal guidance, so now is a good time to double-check whether what you did in relation to pensions furloughing was right, reflected the guidance correctly, and if it is not right, you must deal with any knock on effects. 

Spring lockdown

As part of the package of support for employers the government offered to provide support of up to 80% of the costs for furloughed employees' wages, subject to a cap of £2,500 per month. This included pension costs but, unfortunately, the pension details came out weeks after the main furloughing guidance and, in some cases, weeks after businesses had furloughed their workforces. Given the speed at which guidance had to be provided, it could not possibly cover all of the varied employment and pensions structures used throughout the UK. Many employers will find that the obligations which they have to their employees, both contractually and on a statutory basis, may not fit completely with the structures put in place around furloughing. Since this rush it has become apparent that some employers have not dealt with their pension obligations correctly which, if left unaddressed, could lead to fines, employee complaints and/or Employment Tribunal claims. Below we have set out the four main areas which employers should be addressing as furloughing is unfurled and a return to the workplace (virtual or real) continues. 

Summer unlocking

  1. Pensions - The first areas for all businesses to check is whether you furloughed correctly. Did you pay the statutory levels of pension contributions? If, as a business, you were more generous than the statutory minimums, did you make any reductions in the correct way? Were the necessary consultations undertaken in relation to contracts of employment and/or amendments (however temporary) made to the governing Trust Deed and Rules for your pension scheme? For some employers stopping contributions (if there was no income), simply reducing contributions to the minimum level, with no discussion with their employees or the trustees of the pension scheme, or simply misunderstanding how to calculate the level of contributions according to legislation, could lead to the employer being in breach of its obligations and vulnerable to future claims.
  2. Salary sacrifice - Salary sacrifice as a whole was excluded from the payment element of the furloughing provisions, although HMRC have recognised the use of furloughing as a lifestyle event and allowed the opportunity for employees to opt-out of their automatic enrolment pension arrangement, the guidance made no account of the existence of salary sacrifice, therefore employers who have used salary sacrifice will have found themselves obliged to continue to make full pension contributions. Some employers may have tried to cease salary sacrifice retrospectively, while some have denied its existence, but understanding how salary sacrifice arrangements worked in relation to furloughed employees and their benefits is key to getting the calculations right.
  3.  The end of furloughing - Employers now face, not just the prospect of having to ensure what they have done for the last six months is correct, but also how they are going to structure their benefits in the recessionary economy going forward. This includes key strategic considerations, any employer who took advantage of any of the exemptions to avoid pensions consultations due to temporary changes must ensure those changes are reversed, otherwise they will be in breach of the temporary allowances. Costs, in such an environment, is crucial with all businesses looking to conserve cash flow, therefore how can employers unfurl furloughing and avoid creating new problems for themselves? For example, how is salary sacrifice for pensions contributions dealt with after 1st August and how does this treatment differ?
  4. Legal issues on unfurling furloughing Just as employers had to consider the contractual position of their employees and the legal position under their pension arrangements - including automatic enrolment compliance - at the start of furloughing, employers looking to restructure their benefits going forward will need to consider all of the same issues. If they come out of furloughing they may wish to make temporary changes more permanent to ensure the viability of the business in the long run.For more information please contact Kim Jones.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.