Reducing pension costs in the face of COVID-19

Reducing pension costs in the face of COVID-19

What help is available for start-ups and SMEs whilst the world is on hold tackling COVID-19?

By now the extreme measures introduced to slow the spread of COVID-19 are beginning to sink in, as is the uncertainty over how long these disruptions will continue. With the disruption to our global economy, it is pretty clear that costs need to be cut by all. Employers will want to reduce their wage bill to shore up their business, just as employees will want to reduce unnecessary costs to protect their take-home pay and employment future.

In this arena, the Government has introduced various measures to support struggling employers: the most widely publicised being the Coronavirus Job Retention Scheme whereby employees can be “furloughed” and a grant paid to employers to cover, in many cases, a large proportion of the wage costs. We have written in detail about this here. These measures are currently in place until the end of June but the Scheme may be extended.

Alongside the possibility of furloughing staff, employers and very likely their staff are looking at other options open to reduce costs going forwards. Below we briefly explore key considerations for both parties, where furlough does not apply.

A key point to note is that since the crisis began, the Government has never expressed any intention to relax the obligations on employers to automatically enrol employees into a qualifying pension scheme. Indeed this is supported by recent guidance produced by the Pensions Regulator: Automatic enrolment and DC pension contributions: COVID-19 guidance for employers which can be found here.

This means that, for employers who only pay the statutory minimum contribution to their employees’ pensions, there is no option but to continue to do so. However, those employers who make contributions beyond the statutory minimum may have some limited options to reduce contributions down to the statutory minimum level. This is recognised in the Pensions Regulator’s guidance referenced above. For example, for pension contributions made to a qualifying scheme (which are based on statutory “qualifying earnings”) the legal minimum total contribution is 8% of qualifying earnings, of which the employer must contribute 3%. However, those employers that make contributions in excess of this (such as 5%) could decrease employer contributions.

There remain various complexities to then navigate: the total minimum contribution to the pension scheme would need to be 8% of pay, so if an employer had only required employees to make a 3% contribution there would be no room to reduce employer contributions without a corresponding increase in employee contributions – this is unlikely to be attractive. But, if both employer and employee were making a 5% contribution under the pension arrangements, then an employer could consider reducing their contribution to 3%.

Sadly the complexities don’t end there. An employer looking to reduce employer contributions (whilst remaining compliant with automatic enrolment minimum contribution requirements) would still need to consult employees about such changes if it had more than 50 employees. Interestingly if all affected employees were being furloughed then the Pensions Regulator has explicitly set out the conditions on which it would relax the consultation duties. By implication there is no relaxation of the rules if pension contribution reductions sit outside that regime. Employers would also need employee consent to vary employment terms and conditions. A review of the pension provider’s rules or terms and conditions will also be necessary.

And then, what of employees? It remains open to employees to unilaterally decide to opt out of automatic enrolment. This may be particularly attractive at this time. The advantage for employees is that generally they will have a right to opt back into their employer’s automatic enrolment pension scheme at a later date. For employees, this may be more attractive if their employer only pays statutory minimum contributions, the employee would only be forfeiting a 3% employer contribution and saving themselves a larger contribution. Whereas if their employer is more generous than simply providing the minimum contribution, then opting out could involve missing out on considerable chunks of deferred pay.

This will not be an easy decision for employers or employees. There is also a health-warning for employers – at no point should employers induce employees to opt out of an automatic enrolment pension scheme. This is an offence. However, if employees, having taken their own financial advice, decide of their own accord to opt out, that is a different matter. This is not a quick fix. A cost-benefit analysis before embarking on any such project would be essential for any employer, and a thorough assessment of financial plans equally important for an employee. But, in given current uncertainties about the economy, it is certainly an interesting option to consider.

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