The Pensions Regulator’s updated guidance on auto-enrolment and defined contribution schemes is likely to lead to large numbers of mistakes being made, some experts predict, as employers have to grapple with the bifurcated system resulting from the slow death of furlough.
The guidance, published on Monday, sets out the terms by which employer contributions must be calculated as employees begin to take on more part-time work. Employers are left with the unenviable task of having to account separately for contributions payable for the hours spent working, on top of those spent furloughed.
In those cases where employees return to work on a part-time basis, the guidance covers how that will impact the grant currently available – until August 1 – to employers to meet their auto-enrolment contributions.
“From July 1 2020, staff on furlough will be able to work for you for part of the furlough period,” the guidance explains, adding that hours and pay must be agreed in advance for the purposes of future calculations.
“In each pay period, you need to calculate the total pay (pay for hours worked plus adjusted furlough pay) and pay this through your normal payroll process using this total amount of pay. You should calculate staff and employer pension contributions as normal on this amount of pay.”
These rules are going to make it very complex over the coming months for employers with partially furloughed employees to work out pension contributions
Tim Smith, Herbert Smith Freehills
It continues: “You will need to know the amount of furlough pay included in the total pay for the pay period as it is only on this amount that you may claim a grant for up to the statutory minimum employer pension contribution.”
The guidance also contains provisions for calculating the impact of part-time work on salary sacrifice arrangements, stipulating that for hours spent working the employee will contribute according to the pre-furlough salary sacrifice arrangement, while for hours spent not working – spent furloughed – the employer may have to cover some or all of those contributions.
In part to account for the new measures, additional guidance was issued on the making of claims, which employers will now have to do for each calendar month until the end of the furlough scheme in October.
Commenting on the updated guidance, Kate Smith, head of pensions at Aegon, said: “Significant changes to the government’s job retention scheme for the period from July to the end of October, when it’s then expected to close, mean employers with furloughed workers will need to keep on top of these.
“It’s likely that employers will find this an extremely challenging time, as they will have to grapple will a new change to payroll processes each month from July and it will be easy to get it wrong.”
Mistakes will be made.
Given the difficult task of translating the guidance into English, Herbert Smith Freehills professional support lawyer Tim Smith told Pensions Expert that “the starting point is to say this is horrendously complex”.
“From August 1, employers will not be able to cover the cost of employer pension contributions under the job retention scheme any more,” he said.
“There are also changes to how employers make a claim under the job retention scheme after August 1. Those changes combined mean there’s a significant amount of new complexity in how contributions should be calculated where employees are on furlough.”
Things begin getting complicated from July 1, when workers will be allowed to go back to work on a part-time basis.
While until this point employers had the right to reduce contributions to the auto-enrolment minimum under the terms of the furlough agreement, from the moment employees begin to work part-time they will need to be paid both their normal salary and their normal rate of pension contributions for the hours they spend working, Mr Smith explained.
For the rest of the time spent furloughed, they will continue to be paid their furlough-level salary and pension contributions.
“Effectively, there will be two different rates of pay and two different rates of pension contributions that employers will need to be applying,” Mr Smith said.
“So that’s more complex than it would normally be.”
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He added that things become even more complicated when accounting for salary sacrifice arrangements, because in those cases yet more additional calculations must be made.
“One of the key things is that under the job retention scheme, all of the money the employer received from the scheme had to be paid to the employee,” Mr Smith explained.
But when those workers begin to work part-time, the old salary sacrifice arrangement will apply to the salary earned while working.
“Not only are you going to have a different rate of employer contributions, but they may have to work out the employee contributions that the employee pays, and the employee contributions that the employer has to pay as it relates to furlough hours,” he added.
Add to that the fact that employers will continue to be able to reclaim up to 3 per cent of qualified earnings until August 1, but only for hours spent on furlough, and the result is a highly complex dual system of calculations employers must make for each month until the final closure of the furlough scheme in October.
“One consequence is that I suspect there will be a lot of mistakes made, both in terms of the amount of contribution paid to schemes and also potentially the amount reclaimed under the job retention scheme,” Mr Smith said.
“These rules are going to make it very complex over the coming months for employers with partially furloughed employees to work out pension contributions.”
Regulator to "monitor the situation closely"
Asked to respond to the suggestion that its guidance will lead to mistakes, a tPR spokesperson told Pensions Expert: "We are weaving in as much flexibility as possible to help employers meet their automatic enrolment duties and continually reviewing and updating our COVID-19 information, in line with Government guidance, as events unfold."
"We are clear that employers continue to have pensions duties towards their staff, including making the correct contributions," they said. "This includes employers accessing Government support through the Coronavirus Job Retention Scheme."
"We are monitoring the situation closely and will continue to take a proportionate approach. Where necessary we will take action to ensure employers meet their AE duties and savers continue to have the opportunity to save for their retirement."
