More than 9m workers are expected to be furloughed in the UK this year as the country grapples with the economic shock posed by the coronavirus crisis. Under the government’s Job Retention Scheme, which launched on 20 April, companies that have been forced to close or are experiencing reduced activity can claim 80 per cent of their wages, or £2,500 per employee per month – whichever is lower – to keep people employed over the crisis. The scheme is in place until the end of June and chancellor Rishi Sunak has indicated it may be extended into July. A survey by the British Chamber of Commerce has found that two-thirds of UK businesses have already used the government's scheme since it was announced in March and one in three companies have put at least 75 per cent of their workforce on furlough.
But while the furlough scheme has provided a lifeline to millions of jobs, the speed at which the package was announced and its complexity has led to confusion, including over what will happen to the pensions of those involved. So we have set out how it might affect different types of pension schemes and employees.
Defined-contribution schemes
If you have been furloughed your employer will continue paying into your pension, as it will continue to pay your salary each month. However, if your company is paying you a reduced salary while you are on furlough, your pension contribution is likely to be calculated as a proportion of this reduced salary because most pension scheme contracts specify a percentage of salary for contributions. Ronnie Morgan, proposition strategy and insight manager at Royal London, says that employers “may decide to continue to pay based on the previous salary but this is not likely to be done often”.
The amount that is paid into your pension may be significantly lower than under normal circumstances. Companies are placing people on furlough because they are in a very strained cash position, so if they have a generous pension arrangement this may be reduced. To change the terms of your pension arrangement, your employer would usually have to do a consultation first. But because of the current unprecedented circumstances, The Pensions Regulator has waived the consultation period, as long as companies write to employees to notify them of reduced pension contribution payments during furlough.
The government will only cover the auto-enrolment minimum pension contribution of 3 per cent for furloughed staff, at the lower of 80 per cent of their salary or £2,500 per month. The 3 per cent is based on earnings above the lower qualifying earnings threshold of £520 for this tax year. Many companies pay more than 3 per cent in contributions and it will be up to them whether they make up the shortfall.
“If, for example, an employee usually earned £2,500 a month and received a 5 per cent employer pension contribution on their full wage – ie, £125 – the government via the Job Retention Scheme would pay £2,000 in respect of the salary and 3 per cent of £2,000 – £520, so £44.40 in respect of the employer pension contribution," says Nigel Hatt, pensions technical specialist at Tilney. "Employer National Insurance Contribution of 13.8 per cent times £174.98 (£2,000 – £732, the secondary threshold) would also be covered.”
The Job Retention Scheme does not cover any of your own contributions. Since April 2019, auto-enrolment rules require a total minimum pension contribution of 8 per cent per annum, so if your employer only pays 3 per cent, you will have to pay 4 per cent (with the final 1 per cent coming from the taxman). If you are struggling for cash you could opt out of auto-enrolment and be automatically re-enrolled in three years’ time. However, think very carefully before doing this because you will lose your employer’s contribution, and to benefit from the effect of compounding it is best to pay continuously into your pension. Mr Hatt adds that it is a statutory offence for your employer to encourage you to opt out of your workplace pension scheme.
Salary sacrifice schemes
If you are in a pensions salary sacrifice scheme, your employer will typically pay more towards your pension contributions in exchange for a lower salary, to lower the value of your National Insurance payments. However, for furloughed staff, the 80 per cent pay is based on your reduced salary, and the Job Retention Scheme will only cover 3 per cent of qualifying earnings.
Mr Hatt says that although employees should be able to switch freely out of a salary sacrifice scheme as coronavirus counts as a ‘life event’, they will not gain from this as the amount an employer can recover under the Job Retention Scheme will not change. This is because the salary used to determine the furlough salary is what was being earned in the pay period before 19 March 2020.
“Employees are likely to expect their employer to pay the ‘sacrifice contributions’ over in full and may not look on it kindly if this does not happen,” explains Mr Hatt. “The problem is that employers are not permitted to use the government grant to pay for benefits under a salary sacrifice scheme.”
Because cash flow is likely to be a problem for companies, The Pensions Regulator has extended the deadline for making pension contribution payments. Mr Hatt says that if you are in a salary sacrifice scheme and losing benefits the best course of action “is probably to put the matter in abeyance pending a return to work and set up a meeting to plan how the contribution deficit will be made up”.
Where pensions are in shortfall due to the implications of furloughing staff in defined-contribution schemes, companies are not legally obliged to make up the deficit. However, you might be able to have a meeting with your employer and pension trustees when you return to work to discuss the value of your pension and whether there is any way to make up shortfalls in contributions.
Nathan Long, senior analyst at Hargreaves Lansdown, says that from a pensions perspective being furloughed will have little impact on your retirement prospects over the long term. “If it is just a three-month blip during which contributions are reduced it is really nothing to worry about," he says. "The bigger issue is when you have an employment gap of two to three years.”
Defined-benefit schemes
The government’s announcements on furloughing do not specifically mention defined benefit schemes, so it is unclear what impact furloughing will have on them. If no change is made to pay and benefit terms, the impact on defined-benefit accrual may be minimal.
But “if the employee's pay is being reduced in the furlough period, it may prove necessary to suspend pensionable service and recommence it when the furlough period is over," says Mr Hatt. "In this instance, the employer would have to enrol the employees into a defined-contribution scheme into which statutory minimum contributions can be paid. Or the employer can adjust the benefit accrual to take account of the furlough period, but this is likely to require a lot of professional advice so could be costly to implement.”
Mr Morgan says that individual scheme rules differ, but the definition of final remuneration is important as it could affect your pension if you are on furlough and approaching retirement.
“If the definition is pensionable pay in the last 12 months to retirement, a significant period of furlough could have a very detrimental impact on the member’s benefits after many years of service," he explains. "There may be scope in some defined-benefit scheme rules to provide some discretion in the level of benefit paid. Again, the scheme rules, valuation position and any impact on employer covenant would need to be carefully considered by the trustees.”
The Pensions Regulator is allowing companies to delay payments into defined-benefit schemes by up to three months. Mr Long says that this should not have implications for the value of your pension over the long term. However, there is a risk that you will have reduced pension benefits if the company backing your final-salary scheme goes bust. If that happens, your pension payments are covered by the Pension Protection Fund and if you have not yet reached the scheme's normal retirement date you are likely to have a 10 per cent fall in value of your pension income.
Self-employed
If you are self-employed and have a personal rather than workplace pension, the Job Retention Scheme will not offer employer contribution relief. But you should continue to pay into your pension if you can because you still get tax relief on your contributions.
If you're self-employed or a member of a partnership in the UK and have lost income due to the consequences of the coronavirus outbreak, you can apply for taxable grants under the new Self-Employment Income Support Scheme. The grants are worth up to 80 per cent of your profits, capped at £2,500 per month, and are taxable. The size of the grants you get is based on your profits over the past three years. To be eligible you must earn more than 50 per cent of your total income from self-employment and your average trading profit must be less than £50,000 per year.
Mr Long says that if you are self-employed you should aim to keep making a contribution to a personal pension or self-invested personal pension (Sipp) each month, if you can. “It is important not to give up on your long-term retirement plan, even if you have to reduce the contributions to something like £20 a month,” he says. “There is a worry that not enough self-employed people are saving for their retirement.”
