04 May 2020

The Pensions Regulator (TPR) has updated its guidance on Automatic Enrolment and DC Pension Contributions to provide further guidance on the effect of the Coronavirus Job Retention Scheme (‘CJRS’), often known as the ‘furlough’ scheme. This needs to be read alongside the main Government guidance for employers on CJRS, and most importantly the legal framework. As David Fairs of TPR acknowledged on a Pensions and Lifetime Savings Association (PLSA) webinar on 28 April, the interaction of pensions arrangements and the furlough scheme can be complicated.

The default position is that where furlough pay is topped up to normal at work levels and the employer is content to pay normal pension contributions, the payroll process and pension scheme arrangements will continue as normal. Where furlough pay is reduced compared to normal pay and/or any different arrangements for pension contributions are desired, additional care needs to be taken to ensure that legal obligations are met.

The key areas to consider are:

  • The potential difference between what can be claimed under the CJRS and the legal obligations of the employer to contribute to the pension scheme;
  • Salary sacrifice arrangements;
  • The effect of the pension scheme rules; and
  • The available options to alter the default arrangements.

Calculating a claim

The Treasury Direction of 15 April 2020 (the legal framework for the CJRS) allows employers to claim back pension contributions of 3 percent of qualifying earnings (based on auto enrolment thresholds) from the government for furloughed employees. The £2,500 monthly earnings cap is also relevant to the maximum pension contribution that can be claimed. A claim can be made for any non-discretionary pension contribution made to any UK registered pension scheme in respect of gross earnings that are within the CJRS scope.

However, if the employer does not normally calculate contributions by reference to 3 percent of banded qualifying earnings, a separate, additional calculation will need to be made on this basis in order to establish what the amount that can be claimed is for each furloughed employee.

The pensions minister, Guy Opperman, confirmed in a ministerial statement on 27 April that the pension scheme does not need to be an auto enrolment scheme for a claim to be made for pension contributions, as had been implied in some guidance. This is consistent with the Treasury Direction wording.

Pension contributions may have to be higher than can be claimed under CJRS.

If employers are required to make contributions in excess of the CJRS claim for an employee (the minimum possible), the excess contributions will not be refunded under CJRS. The excess may be because they are topping up wages or because they are bound by scheme rules, a salary sacrifice or other contractual agreement. Such pension contributions must still be paid as a default.

Amending the default position

For DC schemes whose rules set an employer contribution rate in excess of the statutory minimum, it may be possible to reduce the contribution rate under the rules or to amend the rules to permit this. This will depend on what the pension scheme rules say and may also be restricted by provisions in employment contracts and collective agreements.

In addition, employers with 50 or more members are required to consult before reducing employer contributions to a DC scheme or accrual rates in a DB scheme. The statutory minimum consultation period is 60 days. However, TPR has said that for a temporary period it will not take enforcement action if consultation takes place for a shorter period, providing certain conditions are met. Essentially, the reduced contribution rate must apply to furloughed staff only and must last only for the duration of the furlough period. Staff and their representatives must have been informed in writing. Legal advice should be sought before any decisions are made to reduce contribution rates and there may be alternative options through agreements with employees.

Some employees may wish to opt out or (if such option exists) suspend contributions at the current time. Employers and trustees should ensure there are clear communications about the implications of this are (including for re-joining later and / or any linked death benefits). Care should be taken by employers in particular not to encourage or incentivise members to opt out of scheme membership.

Salary sacrifice

The Regulator has also provided helpful guidance on how salary sacrifice agreements will operate for furloughed employees, including examples. Importantly, the procedures set out in the guidance only apply when employers are reducing salaries – if wages are being topped up to pre-furlough levels then salary sacrifice will continue to operate as usual.

The furlough rules only allow the claim to be calculated with reference to employees’ post-sacrifice salary and require all of the claimed amount to be paid to employees as cash.

Under most salary sacrifice arrangements, the employee effectively agrees to give up some of their wages to cover some of the total pension contribution due from the employer to the scheme under the scheme rules. This total contribution will usually be calculated as a percentage of ‘pre-sacrifice pay’. Importantly, the employer is responsible for paying the whole of this amount into the scheme – the employee has no direct responsibility to make the sacrificed contributions to the scheme.

Whilst on furlough, the employee cannot sacrifice any of their furlough pay but employers must still pay their full contribution based on ‘pre-sacrifice pay’ under the rules. The exception is to the extent that the furlough pay received is in excess of the amount claimed (but no more).

How is ‘pre-sacrifice pay’ to be worked out when no sacrifice is actually being made during furlough? The guidance says employers should take the employee’s notional ‘post-salary pay’ (i.e. their furlough pay) and work backwards, using the percentage of the employee’s salary to be sacrificed under their contractual salary sacrifice agreement to arrive at a figure for notional ‘pre-sacrifice’ pay. The guidance provides a number of worked examples for making the necessary calculations.

It may be possible to end or alter salary sacrifice arrangements, with the agreement of the employee, because HMRC has confirmed that COVID-19 counts as a ‘life event’ for salary sacrifice arrangements. However, the guidance recognises that this will not alter the pension scheme rules and in any event may not work as expected because the reference pay for the CJRS claim is based on the pay leading up to 19 March. As discussed above, changes to the scheme rules which reduce employer contributions may require consultation.

Pension scheme rules

Areas of scheme rules to consider include the definition of pensionable pay according to which pension contributions are calculated, how salary sacrifice schemes are incorporated, whether employer contribution rates are specified in the scheme rules or flexible, and how the absence rule operates (including for death benefits). Some absence rules require a positive decision to be made in order for active membership to continue, so the relevant governance process has to be followed. Is there any option to suspend rather than opt out of membership, or to opt to change membership tier?

For defined benefit schemes, will a drop in pay affect final pensionable salary for anyone leaving or retiring in the next few years (including by redundancy)? How does the absence rule treat periods of absence? Where a scheme is closed to new members, will members who opt out during furlough be permitted to re-join?

If amendments to contribution rates / accrual are proposed, what are the formalities for agreeing these? As above, there may be options to make amendments without amending the pension scheme rules.

These considerations may affect member contributions too, if salary sacrifice does not apply.

The details of the CJRS scheme and its interaction with pensions arrangements are now much clearer, but in many cases there is detail to be worked through. Legal advice should be sought if seeking to amend the default position, and if there is any doubt about how the pension scheme rules interact with an employer’s furlough arrangements.


If you require assistance with any of the issues discussed above, Burges Salmon’s pension team is ready to assist. Please contact me or your usual Burges Salmon contact. You can also email our exclusive Pensions COVID-19 helpline at: covid-19pensionssupport@burges-salmon.com. For related content, you may be interested in our pensions and COVID-19 blogs.

Key contact

Alice Honeywill

Alice Honeywill Partner

  • Pensions Services
  • Public Sector Pension Schemes
  • Life and Pensions

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