Furloughed or reduced hours? What happens to pensions?

Written on 13 May 2020

With the furlough scheme for UK employees extended to the end of October, employers will want to consider how this and other employment preservation measures fit with their pensions and death-in-service schemes.

The Chancellor of the Exchequer has reported that 935,000 UK employers have made use of the government’s Coronavirus Job Retention Scheme – or furlough – amounting to more than 7.5 million staff, which raises questions for businesses about what this means for pension and death-in-service schemes as part of their approach to cost management during the emergency response.

Some employers have agreed to top up the furlough payments to 80% of full wages rather than applying the cap of £2,500 per month or to pay higher than 80%. Others are running furloughing schemes in parallel with other measures to preserve employment and cash in the business, for example, by inviting some employees to volunteer for reduced hours or pay or to take unpaid leave for a temporary period, potentially with the offer of a cash incentive. As furlough is reduced in scope or ended, this variety of approach is likely to continue.

Due to the success of the automatic enrolment regime, most employees affected by such cost-savings initiatives will have access to a workplace pension scheme, entitling them to employer pension contributions. The impact on the pension contributions payable therefore needs to be assessed.

We have summarised in a table the employer contributions payable, depending on the chosen approach and the nature of the workplace pension scheme. In the case of furloughed staff, the amount the employer is able to reclaim from the government is the same in each case; that is, 3% of the sum of the calculation of the furlough pay minus the lower-earnings level for qualifying earnings. Since 6 April 2020, qualifying earnings have been earnings between £6,240 and £50,000.

For a monthly paid employee receiving furlough pay of £2500, therefore, the amount is 3% of the result of £2,500 minus £520, which is £59.40 – all of which must be paid into the pension scheme. Pensions differ and the rebate may not cover the employer’s pension costs.

The impact of reduced pay on death-in-service benefits should also be considered. Is there an option to continue to base these on full pay? Will the underlying insurance policy cover those absent from work? Is there a cap on the benefits payable in the event of multiple claims? Employers should check.

This note gives general guidance only and pension schemes vary widely. For assistance, please contact our pensions team.