Covid-19 and how it may impact your pension plan
If an employer cannot cover staff costs due to Covid-19, they may be able to access support to pay wages through the Coronavirus job retention scheme. This will entail classifying staff as ‘furloughed workers’ – that is, workers away from work due to exceptional economic conditions. It basically means that staff can be kept on the payroll rather than being laid off.
The Government intends the Coronavirus job retention scheme to run initially for 3 months from the 1st March 2020, but may extend if necessary.
Employers can claim a grant of up to 80% of the furloughed employees wages capped at £2,500 per month maximum per furloughed worker. Employers can pay the difference between this amount and the workers full pay, but they don’t have to.
The Government has provided welcome detail on how the furlough scheme will work in relation to pension contributions. On top of the 80% of pay up to £2,500 which has been widely publicised, the scheme will also pay employers NI and minimum autoenrolment pension contributions of 3% of Qualifying Earnings. This may not meet your full normal pension payments, depending on your pension structure, but the announcement does provide much needed certainty. Full detail is available at https://www.gov.uk/guidance/claim-for-wage-costs-through-the coronavirus-jobretention-scheme
It is important to note that at present there is no relaxation from the government of the need to pay employee pension contributions and ceasing payments will be a breach of auto-enrolment rules and there is no clear guidance that the Regulator will take a different approach to this breach during the current crisis.
Under Salary Sacrifice, sometimes referred to as Salary Exchange, an employee gives up a portion of their salary in exchange for an employer’s pension contribution into their pension. As a result of the reduction in pay, no deduction is made by the employee for pension contribution purposes.
The Government has confirmed that for furloughed employees it will meet the first 3% of employer pension contributions and this would apply to Salary Sacrifice payments too where all contributions are paid as employer contributions.
An employee may request to cease or change their contributions if they are made via Salary Exchange, but Salary Exchange rules set by HMRC stipulate that an employee has to give up the right to the salary for a minimum period of time to make this a valid agreement, usually 12 months.
However, where a ‘Lifestyle Event’ significantly alters an employee’s financial circumstances, then you may change the terms of their Salary Exchange arrangement i.e. the employee may cease their contributions if they note their financial situation as the reason.
Stopping or reducing pension contributions
As an employer you are not permitted to stop/reduce contributions if your employee is still paying contributions at the statutory minimum level (or the minimum as stipulated in their contract of employment).
It may be possible to change the definition of pensionable pay, but unless you are exempt from consultation requirements this will require formal 60 day consultation. We recommend that you seek legal advice before embarking on this course of action.
An employee may request to reduce their contributions. If their contribution falls below the statutory minimum contribution, then you are not obliged to continue employer contributions. However, you may do so if you wish. Suggesting or requesting an employee reduce payments below auto-enrolment minimums would be encouraging employees to opt-out for auto-enrolment purposes and would be a breach of auto-enrolment regulations. If an employee does opt-out then they can opt in again in the future providing they meet the auto-enrolment eligibility criteria at that point.
If an employee takes unpaid leave and does not have a salary, then you do not have to make an employer contribution as payments are based on pay in the pay period. However, you may continue to pay either the total pension (employer and employee) or simply continue with the employer contribution only at your discretion.
Market Volatility remains high, but we have always assessed funds based on volatility in high volatility markets. The moves we are seeing are not unexpected, but part of the normal investment cycle. The unique and unpredictable cause of the market volatility - Coronavirus combined with an initial oil price shock – just highlights that forecasting short term markets and avoiding drops is not a practical approach.
The long term nature of pensions means having a suitable asset allocation for long term growth is the key to returns over these very long time frames. We are on hand as always to answer any member concerns, but generally get few even in very volatile markets. We are not planning to communicate to members as highlighting a drop can cause more concern and encourage people to take action at what may not be a good time.
Although sharp market falls understandably cause concern, we would emphasise that investments should be viewed as long-term in nature and we would not recommend a short term change. The US Dow, the world’s largest stock market, has seen its 5 largest absolute falls in a single day in the last month. However it has seen the 5 largest rises too. Change would take time and change in volatile markets risks missing a market recovery as much as it limits a further fall. Employers should continue to review their default fund as part of a regular governance process, but from a long term viewpoint.
At times like this, many people can benefit from the reassurance provided by professional advice. If your employees would like to speak with an adviser we can put them in touch with our advice team.
Accessing pension funds
Individuals are currently only allowed to access their pension funds from age 55 onwards. Any promotion that your employees see offering to ‘unlock’ their pension is almost certainly a scam. Scams are generally more prevalent during uncertain times and employees should be wary of unsolicited offers. Johnson Fleming would recommend that anyone considering accessing their funds early seek professional advice.
Do you need help managing your pension scheme?
If you need help with your pension scheme in the current economic climate or have concerns about your pension scheme during the COVID-19 pandemic, get in touch with us to have a conversation about how we might be able to help your business.