The first step to mitigating pension costs might be a simple one: surprisingly, according to government figures published in May 2020, 40% of employers have not claimed for the national insurance and pension contributions elements available under the Coronavirus Job Retention Scheme (CJRS).
If an employer is concerned about their pension costs, then checking whether they have done this should be a priority action, because any claims in respect of the period to 30 June 2020 must be made by 31 July 2020.
Under the CJRS, employers have had to continue to make any agreed salary sacrifice contributions. Under the new flexible furlough arrangements, they may be able to operate the sacrifice against pay for hours worked, if the excess over furlough pay is sufficient to cover this, or if a partial sacrifice is permitted. From an employee’s perspective, that is unlikely to be welcome, but they do have the option of switching out of the salary sacrifice arrangement; HM Revenue and Customs has agreed that Covid-19 counts as a life event that could warrant this, if the employment contract is updated accordingly.
There is a floor in terms of defined contribution (DC) pension costs, set by the auto-enrolment regime. If pension contributions are currently higher than the statutory minimum requirements, employers may be able to reduce them to that minimum. For employers with more than 50 employees, making that change would normally require a 60-day consultation process, but a limited relaxation of the consultation requirement applies until 30 September 2020, provided that the reduction only applies to furloughed staff and only for the furlough period.
As employers also need to consider employment contracts, scheme rules, trade union agreements and so on, it is not always straightforward to make a direct reduction in contribution rates. Instead, it may be easier to add more flexibility to contribution structure so that members have greater optionality about their own contribution levels, linked to associated lower employer contribution rates. Employers can add this flexibility without consultation, effectively giving members options to increase their take-home pay while still contributing at or above the auto enrolment minimum.
It is important, though, to remember that the auto-enrolment regime prohibits employers from encouraging or inducing workers to opt out or cease active membership of a scheme. Employers should review any member communications carefully to ensure that cost-cutting now does not land them with penalties further down the line.
Neil Bowden is partner at Allen and Overy.