Managing company pension costs in the coronavirus crisis

Philip Woolham, Senior Associate, Bevan Brittan LLP

The coronavirus pandemic is having significant effects on companies across sectors as whole swathes of the economy are effectively shut down and cash flows are heavily disrupted.

Many companies need to find ways to manage their cost bases during these highly uncertain times. So what leeway is there to manage down the costs of pension scheme contributions?

The good news is that there are possibilities open to employers. For example, many companies may be taking advantage of the Coronavirus Job Retention Scheme (CJRS) where the government will pay 80% of the salaries of staff up to a maximum of £2,500 a month. Where this is the case, company pension contributions will also fall (unless a specified employer contribution amount per month is written into an employee’s contract, but this is relatively rare).

There has recently been clarification that the scheme works by the employer paying employees’ salaries and then claiming reimbursement via the HMRC portal. With respect to pension contributions, this means that the employer should pay the relevant reduced proportion of pay as an employer contribution to the pension scheme. This is still the full contractual percentage, as pay has effectively been cut. The employee would also pay a reduced amount at the same percentage of pay. This would apply to public service pension arrangements too. The employee would pay the relevant proportion of their income as well. This means that final pension benefits being built up would reduce.

Some employers have raised the question of whether they would be able to halt pension contribution payments altogether. Unfortunately, this is not the case.

However, HMRC has recently clarified that the reimbursements they will pay to employers do include pension contributions up to the auto-enrolment minimum requirement – which is 3% of qualifying earnings. So this 3%, plus employers’ National Insurance contributions amongst other elements, will be included in the amounts HMRC reimburses to employers.

Some companies pay above the 3% minimum – 8% or more is not unusual – but these extra amounts will not be reimbursed as things stand.

The possibility of reducing pension contributions is not only open to those employers taking part in the CJRS, however. Even where a company is operating and paying its staff normally, it may be possible to agree a reduction in both employer and employee contribution rates to reduce the impact on actual incomes over the period for private and third sector clients whose employees are not in a public sector scheme. That will not apply for public sector pension schemes whose contributions are fixed by regulation.

There are two ways in which such a change could be made. If there is a clause in employees’ contracts which allows an employer to alter its contribution rate, then this could be activated. However, such clauses are not common, and a wider power to make changes, perhaps with notice, probably wouldn’t be enough in itself. It would be advisable to seek legal advice even if such a clause does exist to ensure that such a step is permissible.

Whether or not there is such a clause, then an employer could seek the agreement of employees to do so – perhaps on condition that it will make good the reduction in contributions once the crisis is over and things have returned to a more stable footing. The agreement could be made with employees directly or via a trade union or works council if the company has one.

However, once again, any company contemplating this would be strongly advised to take expert advice first to explore the options and ensure that they are proceeding appropriately.

In difficult times, as well as the support available under the CJRS, there are avenues through which company pension costs can be temporarily reduced. It needs very careful thought and evaluation, but is an area that some businesses may want to consider if the cash flow pressure is rising.