Pensions and the coronavirus - where employers stand on furlough and sick leave

Posted: 09/04/2020

Government advice is evolving swiftly during this time of crisis. As the “furlough” practice becomes more established, we discuss below some important considerations for businesses concerning employees who are members of the pension schemes they operate.

Please see the briefing papers on our coronavirus hub on furlough leave and the broader issues currently facing employers for more detailed information on these areas. Separately, we discuss implications for employers with defined benefit pension schemes in our briefing paper found here.

Automatic enrolment (AE) schemes and the implications of furlough leave

On 20 March 2020 the Government announced a temporary “Coronavirus Job Retention Scheme” for employees placed on furlough leave. The term “furlough leave” has no technical meaning under UK legislation but is the mechanism allowing employers to access financial support in respect of those employees who would otherwise be made redundant in the wake of the impact of the spreading virus on businesses.

Employers may claim a grant of 80% of the gross wages of employees on furlough leave (so, broadly, before employee National Insurance and pension contributions and any bonus/other incentive payments), up to a ceiling of £2,500 per month.

If an employer agrees with an employee that they will go on furlough leave, the employer must, in respect of building up their pension, treat the employee as any other employee on leave. That is to say that, in principle, AE contributions must continue throughout the period of furlough leave unless, theoretically, the 20% drop in salary takes the employee below the “qualifying earning” threshold for the relevant “pay reference period”, currently £10,000 for the 2020/21 tax year. We say theoretically because there is a protection of "listed changes" to occupational pension schemes so that an employer must consult with employees where, for instance and as could be relevant here, a reduction in pension contributions is envisaged. Although the Pensions Regulator is relaxing its stance on policing consultations, employers should nonetheless approach any reduction with caution and seek specialist advice where necessary.

We advise employers to assess their workforce on a “case by case” basis where their employees’ salaries are around the qualifying earning mark. If an employee appears to no longer qualify for AE, we recommend that the employer communicates this clearly before any furlough leave starts, retains full and accurate records for the relevant period and takes specialist advice as appropriate.

For any employee who falls within the three yearly re-enrolment requirement, and where this requirement arises during furlough leave, the employer must discharge this obligation notwithstanding the period of leave. The employee’s employment continues during furlough leave so AE requirements continue too.

AE schemes and workers on sick leave due to the coronavirus

In our briefing “Coronavirus – answers to (some of) the difficult questions”, we discuss the questions of sick leave and self-isolation due to the virus. To summarise key points here, an employee who is unwell and suffering with symptoms of the virus should take sick leave, as should any employee who is self-isolating in accordance with advice from Public Health England.

In these instances, employers should treat them as any other employee on sick leave and pay them according to their contract of employment; benefits including pensions should also continue for the period.

Where an employee is on “special leave” if, for example, the employer requires them to self-isolate, the employer should pay the employee as usual, whether or not they can work from home, and pension benefits should continue accordingly.

Similarly to an employee on furlough leave, an employee on sick (or special) leave remains in employment so benefits such as pensions, in principle, continue. Nonetheless, where an employee’s absence is such that they start to receive (statutory) sick pay, there may well be similar considerations to those mentioned above if the employee’s earnings drop below the qualifying threshold during a given pay reference period.

Again, we recommend that employers keep each case under review, ensure that they communicate openly with employees and keep a full record of all communications. Where an employee falls to be re-enrolled during a period of sick or special leave, the employer must undertake this requirement as a matter of course.

Occupational pension schemes and workers on furlough or sick leave

Largely the same principles discussed above apply for employers sponsoring occupational pension schemes for their employees. Where an employee takes sick (or special) leave or is on furlough leave, the employment continues. So the starting point is that pension contributions (employer and member) continue for the period.

In addition, the employee/member has the same rights regarding benefits that they would have while working. Depending on the type of pension scheme, examples of these are: requesting a “cash equivalent transfer value” with a view to transferring out benefits, requesting early retirement from age 55 and applying for ill-health retirement.

In particular for defined benefit schemes, and subject to the scheme rules, “pensionable service” and “qualifying service” will continue during any period of furlough or sick leave. There may well be listed changes as discussed above, if not to the rate of accrual of defined benefit pensions for the period, then perhaps to the employer contribution rate. Employers should therefore examine their scheme rules and definitions of "pensionable salary", "final pensionable salary" and/or the mechanism for determining a "career average" pension and seek specialist advice where appropriate.

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