Auto Enrolment Pensions – COVID-19

Update: 12.00 on 27/03/2020

The current coronavirus crisis has inevitably placed a lot of financial pressures on employers and the topic of pension contributions has been mentioned.

In October 2012 laws requiring all employers to implement a workplace pension scheme and make a minimum level of contributions into the scheme came into force. Since April 2019 employers have been required to make a contribution of at least 3% with employees making up the balance to at least a total contribution of 8%. This is based on an employee’s ‘Qualifying Earnings’, not their total earnings.

Many employers have chosen to adopt an alternative definition of earnings such as ‘Basic Salary’ which may have a different requirement for minimum contribution levels.

Pension scheme legislation is written into law and is monitored by The Pensions Regulator (TPR). Whilst the Chancellor of the exchequer has pledged, he would do “whatever it takes” to support the economy through the current crisis and announced a £330bn war chest of loans to protect businesses against the financial difficulties caused by the coronavirus.

Details are just beginning to emerge on what this will mean for pension contributions and auto enrolment.

So what options do employers have? Here are some typical questions that have arisen:

Can I stop or suspend pension contributions?

No. The requirement for employers to make pension contributions is written in law so employers cannot choose to stop paying. The TPR has said that they expect employers to continue to make pension contributions. If they have difficulties, they should contact them, however, at this time TPR is not taking any calls.

Can I reduce my contributions?

This may be an option, but it would depend very much on what your contribution basis is now. If you are paying the minimum requirements you wouldn’t be able to, however, if you have a more generous contribution level or are using an alternative definition of salary (such as basic salary) there could be scope to review this.

You would need to be aware that changing a benefit such as pension contributions would require you to consult with your employees. In the current circumstances they may agree to a change, but you should seek advice from you HR or Employment Law specialists.

Do I need to carry on paying contributions when someone is off sick?

Yes. The amount will very much depend on your employment contracts and terms and conditions. Statutory Sick Pay (SSP) is considered an earning for auto enrolment purposes so contributions should be calculated on this at the least. If employment contracts provide continued salary during sick leave, your pension contributions will likely need to reflect the income they are being paid.

My contributions are deducted using salary sacrifice, how does that affect me?

Salary sacrifice is an agreement between the employer and employee, where the employee gives up some of their salary in exchange for a higher employer pension contribution. Where someone is off sick the employer is still required to pay the higher contribution but based on their actual earnings. Where you are paying enhanced sick pay, the pay can still be reduced, but employers need to be mindful that you cannot pay less than SSP. This could mean that employers would be required to pay the higher contribution level, but not be able to recover anything from the employee.

What about unpaid leave?

If employees are not being paid there are no earnings and therefore employers are not obliged to make any contributions whilst an employee is on unpaid leave.

What about the Coronavirus Job Retention Scheme?

The Coronavirus Job Retention Scheme is designed to help employers continue to pay employees during the Coronavirus outbreak and hopefully reduce the need for employers to let staff go. This scheme is still being implemented and we are still receiving details on how this will work in practice. The current understanding is that payments will be made to employers to support them, up to a maximum amount.

We now understand, as at 27 March 2020, that the amount that can be reclaimed will also include the associated Employers National Insurance Contributions and minimum automatic enrolment pension contributions. We believe that this means that only the minimum legal required amount will be claimable (3% of Qualifying Earnings) regardless of the definition of pay that you have your scheme set up on. We would therefore expect employers to either top up the difference, or temporarily amend the pensionable pay definition used to calculate pension contributions, if, for example, contributions are ordinarily based on basic salary. We would also recommend that tax and/or legal advice is taken on whether contributions can continue to be made via salary exchange/salary sacrifice. If more information on this becomes available, we will share this with you.

What happens if we reduce people’s salaries?

If you reduce someone salary, both yours and your employee’s contribution would be based on the new salary. If you are using salary sacrifice however, you must ensure your employees do not sacrifice their pay below the National Minimum Wage.

What if an employee wants to stop their contributions?

Employees can choose to opt out of a pension scheme if they wish to. If they do, all contributions (including employer contributions) would stop. Employees could opt back in again at a later date. The employer could limit opt-ins to once a year if they wanted to, to avoid repeated opt-outs. Also, employers may be required to re-enrol individuals at the next 3 year enrolment window.

It is important that employees are free to make their own decisions. Employers cannot be seen to encourage or incentivise employees to opt out of a pension scheme. Legislation is in place to prevent this.

This is based on our current understanding as at 12 noon on 27 March 2020. The situation is constantly evolving with bulletins being made constantly. It is possible that the rules surrounding pension contributions could change and we will update our information as soon as we aware of any changes.