Rachel Meadows, Head of Proposition – Pensions and Savings, Broadstone, gives an update on furlough pay and pensions for employers
COVID-19 has already had huge implications on SMEs and their staff. The government has introduced myriad emergency measures over recent months to try to limit the damage to the UK economy with one key measure being the Coronavirus Job Protection Scheme, or furlough scheme.
In very welcome news for business owners, the scheme has recently been extended until the end of October 2020, with some increased flexibility coming in from July allowing staff to return to work on a part-time basis, albeit with employers starting to pick up some costs thereafter.
Until the end of July, in addition to 80% of wage costs, capped at £2,500 per month, employers can reclaim the employer National Insurance contributions and minimum automatic-enrolment employer pension contributions on the 80% wage. This combined amount is the maximum government grant available.
Of course, there was a good deal of confusion around the nuances of the scheme, yet many businesses needed to furlough staff in advance of full details being available around how the scheme would operate. Cashflow may have been an issue for some with salaries needing to be paid, and pension contributions made, before employers could be reimbursed by the grant.
Furlough Extension – more generous than anticipated
June & July
|Continues to provide 80% of staff salary (capped at £2,500 per month), plus employer NI costs and statutory minimum employer pension contributions||No change|
|Continues to provide 80% of staff salary (capped at £2,500 per month)||Employer pays employer NI costs and statutory minimum employer pension contributions|
|Government to pay 70% of staff salary (capped at £2,187.50)||Employer pays 10% of staff salary to make up pay to 80%, employer NI costs and statutory minimum employer pension contributions|
|Government to pay 60% of staff salary (capped at £1,875)||Employer pays 20% of staff salary to make up pay to 80%, employer NI costs and statutory minimum employer pension contributions|
Flexibility is to be built into the scheme with effect from 1st July, a month earlier than originally expected. This flexibility gives employers the ability to bring staff back on whatever part time basis the employer requires – essentially providing full flexibility to employers to determine what works for their own businesses.
The example cited by the Chancellor was that if an employee were brought back into work two days per week, the employer would pay them in full (as normal) for the two days, then the rest of the week would be covered by furlough grant provisions.
Furlough salaries are pensionable
Pensions are a particular area of complexity. Government guidance made clear immediately that furlough salaries are pensionable. Employers can reclaim the costs of pension contributions made until the end of July, but only to the extent of minimum automatic enrolment contributions (3% of qualifying earnings). For those paying more generous employer contributions into pensions, any additional amounts in excess of the minimums would not be reclaimable from the government.
Key areas of pensions’ complexity to be aware of:
- If you provide staff with top-up salary in addition to the 80% level, the whole salary is pensionable, not just the 80% furlough level. Costs of employer pension contributions made on top up salary amounts are not covered by the scheme, and are met by the employer.
- What is ‘pensionable’ pay for your staff? Whilst often ‘actual furlough pay’ is classed as pensionable, employers need to check 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 auto enrolment basis, i.e. Tier 1, 2 or 3 which are not based on qualifying earnings. Contractual commitments to staff will still stand through furlough.
- Auto-enrolment rules still apply, and businesses 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.
- Employees will still make their own pension contributions, based on ‘pensionable salary’ as above. Employees can 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 their pension scheme terms and rules).
- In some specific cases, employers might be paying less than statutory minimum levels – in any event, the maximum that businesses can reclaim under the government grant is the amount actually being contributed, i.e. they cannot claim grant reimbursement that is not covering a genuine cost.
- Salary sacrifice is especially complex, and businesses should certainly seek advice if they are operating such schemes. 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 businesses hadn’t initially factored this into their furlough cashflow planning. The process of calculating contributions is complex and varies from business to business, and additional calculations may need to be done in payroll compared to normal times. 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 employers utilise Flexible Furloughing to bring staff back into the business part time, or for some ad hoc shifts, then these working hours would not only attract full normal pay, but also full normal pension contributions. Clear records should therefore be kept of hours worked so that payroll and pension contributions can be correctly processed.
Last Window of Opportunity
In introducing flexibility into the Furlough Scheme, the government has also introduced a limited time frame in which employers are able to newly furlough staff.
From June 30th, the Furlough Scheme will be closed to new entrants. This means that newly furloughed employees must be on the system by June 10th at the latest to provide for the minimum furlough period to be satisfied.
Any employers considering any change to pension contributions during furlough should definitely seek pensions and legal advice before acting and should engage in writing with affected staff and their representatives providing as much consultation as possible. Businesses that are experiencing difficulty in paying contributions should proactively engage with the Pensions Regulator.
SMEs need to appreciate the costs associated with their pension schemes and understand the potential gap between costs and the amount that the government grant will reimburse. It’s also important to understand the impact that Flexible Furloughing will have on pensions. Failing to spot additional costs that the business will bear may cause financial difficulty and make a tricky situation even more problematic.