Pension salary exchange arrangements for furloughed employees

07 May 2020

All employers who operate a pension salary sacrifice (exchange) arrangement for employees and who have furloughed employees for whom they are making claims through the Government’s Coronavirus Job Retention Scheme (CJRS) should check how they have dealt with deductions and payments.

New guidance

The Pensions Regulator (TPR), the main government body responsible for overseeing that employers comply with pension scheme requirements (e.g. pension auto enrolment), has recently issued a detailed guidance note on the way in which pensionable pay should be calculated where an employee participates in a pension salary exchange arrangement and receives a CJRS payment. While the guidance note is aimed at defined contribution pension schemes it is equally applicable to defined benefit pension schemes.

Key learning points

While the new TPR guidance covers many issues, there are two important learning points for employers with furloughed workers.

  1. An employee cannot salary exchange any element of a CJRS payment for pension contributions

    Employers have a legal requirement to pay the full amount of any CJRS payment as money to the employee. This means that the principle is similar to that which applies to an employee who participates in a pension salary exchange arrangement and is only in receipt of Statutory Maternity Pay (SMP). Under this principle, an employer is required to meet the full cost of the pension contributions made under the salary exchange arrangements as SMP cannot be salary exchanged. The same applies with a CJRS payment.

    In circumstances where an employer has chosen to “top-up” an employee’s pay above CJRS, they may still be able to operate the pension salary exchange arrangement by taking the deduction from the “top-up” only. However, as indicated below, care needs to be taken to ensure the correct level of pensionable pay is calculated for a given pay period while the employee is in receipt of a CJRS payment. 
  2. “Pensionable pay” calculations may change for employees in receipt of CJRS payments

    A CJRS payment is treated as a payment after salary exchange arrangements have been applied.

    TPR guidance confirms that where a salary exchange arrangement is in force, an employer may need to apply a complicated formula to “gross-up” the CJRS payment to get to pensionable pay amount (on which pension contributions may be based). The formula to be applied will depend on the type of pension scheme and associated definition of pensionable pay.

What should employers do now?

The first task is to double check whether salary exchange pension contributions have been calculated correctly for furloughed employees. This will involve deciding which formula needs to be applied to determine the correct amount of pensionable pay (if applicable).

Employers should salary exchange communication documents and pension scheme rules to check the options open to them. Then it would be sensible to evaluate whether the salary exchange arrangements can and should be temporarily postponed or cancelled (so that the employee reverts to a pay deduction arrangement and it is the employee, rather than the employer, that meets the cost of their pension contribution).

Note that if an employee opts out of a pension salary exchange arrangement now, this will have no bearing on the level of CJRS grant payment as it is referenced to the last pay period before 19 March 2020.

What are the main risks of not getting this right?

Getting it wrong could mean you have made illegal deductions from employees’ pay. TPR can issue financial fines in some cases where incorrect pension contributions are calculated. In addition, HMRC can seek financial penalties where the salary sacrifice arrangement has not been operated correctly or has been applied against CJRS payments.

This is a complicated area so please feel to reach out to your local BDO Employment Taxes contact for further information.

Learn how BDO can help you with CJRS claims

Read our FAQs of on the Coronavirus Job Retention Scheme

Read the TPR guidance

View our COVID-19 Hub