Coronavirus Job Retention Scheme: key pensions issues for the LGPS - UK

• United Kingdom

• Coronavirus
• Coronavirus - Country overview
• Coronavirus - Workforce issues

06-04-2020

On Thursday 27 March, the UK Government released fuller details of the new Coronavirus Job Retention Scheme (or “Furlough Scheme”)  first announced on Friday 20 March, with guidance being published for both employers and employees. Further updates were subsequently made to the guidance on Saturday 4 April.

Whilst targeted primarily at private sector employers, the Furlough Scheme may also be relevant to some employers participating in the Local Government Pension Scheme (“LGPS”) and other public service pension schemes. However, the structure of the LGPS as a statutory scheme raises specific issues for LGPS employers seeking to make use of the Furlough Scheme.

How will the Furlough Scheme work?

In essence, employers who opt to keep staff on payroll but away from work (‘furloughed’) rather than making them redundant will be able to reclaim 80% of their wage costs from HMRC, up to a monthly cap of £2,500 per employee.

Full details of how the Furlough Scheme is anticipated to work can be found in our separate speedbrief.

Does the Furlough Scheme apply to the public sector?

Any UK organisation which was operating a PAYE payroll on 28 February can apply under the Furlough Scheme, including public authorities and charities.

However, the government has made it clear that it does not expect the Furlough  Scheme to be used by many public sector organisations, as the majority of public sector employees are continuing to provide essential public services or contribute to the response to the coronavirus outbreak.

Where employers receive public funding for staff costs, and that funding is continuing, the government expect employers to use that money to continue to pay staff as normal. This also applies to private sector employers who receive public funding for staff costs, which may include some LGPS admission bodies.

The government’s stated expectation is that the Furlough Scheme may be appropriate in respect of a small number of public sector employers that are not primarily funded by the government and whose staff cannot be redeployed to assist with the coronavirus response.

That said, the LGPS contains a wider range of employers than most other public service pension schemes.  Many of these employers may not be classed as public sector organisations and/or may not be primarily funded by the government. Some of these employers may therefore be considering using the Furlough Scheme

Can employer pension contributions be reclaimed?

Under the Furlough Scheme, HMRC will only reimburse “minimum” auto-enrolment employer pension contributions due on the amount claimed for wages. However, it appears that this “minimum” will be assessed purely by reference to the standard quality requirements for money purchase (DC) schemes – ie 3% of ‘qualifying earnings’, based on the gross amount of furlough pay.

Since the primary rate of employer contributions under the rates and adjustments certificate is typically at least 15% of pensionable pay for active members (and pensionable pay is based on all pay, not just on qualifying earnings), employers will therefore be unable to reclaim the majority of their LGPS contributions under the Furlough Scheme and will need to fund the difference.

Unlike some private sector employers, LGPS employers will have no ability to amend either LGPS contributions or benefits to make the Furlough Scheme totally cost-neutral. It remains to be seen whether there will be any amendments to the LGPS regulations in respect of the Furlough Scheme.

How will employee pension contributions be affected?

The guidance is clear that employee pension contributions can be deducted from furlough pay. However, unless employers pay a top-up so as to keep furloughed employees on full wages, the employees’ pensionable pay for LGPS purposes (and the resulting employee contribution) will be reduced.  Under the LGPS regulations, pensionable pay includes all the salary, wages, fees and other payments paid to the employee.

LGPS contribution bands are assessed on 1 April each year, and the employer also has a discretion to change the band where there is a material change which affects the member's pensionable pay in the course of a scheme year. In ordinary circumstances, a reduction of the order of 20% of pay would be one which would be likely to affect an employee’s contribution band: for example, a reduction from £23,000 to £18,400 would usually change the employee contribution rate from 6.5% to 5.8%.

However, the LGPS regulations provide that reductions in pensionable pay resulting from “leave of absence with permission” should be disregarded when identifying the applicable contribution rate. Given that the essence of furlough is that the employee and employer agree that the employee should be away from work, it can be argued that this provision will catch furlough leave, in which case the contribution band will not change. That said, it is unlikely that the LGPS regulations were drafted with this novel situation in mind, and it should be noted that the LGA’s FAQs on covid-19 suggest that the employer discretion to change bands could be deployed in present circumstances.

Will the calculation of employer contributions change?

Primary rate employer contributions for future service are typically expressed as a percentage of pensionable pay, and therefore if pensionable pay reduces, we would expect that employer primary rate contributions would reduce accordingly. However, employers should check their rates and adjustments certificates to confirm the details.

As with private sector schemes, deficit recovery (or secondary rate) contributions are often expressed as an annual cash amount. Where this is the case, the level of such contributions would not be affected by a reduction in pensionable pay. However, rates and adjustments certificates should be checked to confirm the precise payment terms for the secondary rate contributions.  It may also be that there is scope for some flexibility in the timing of payments, which are set by LGPS administering authorities.  LGPS employers may wish to contact their funds to discuss options in this respect.

What is the impact on LGPS benefits?

Where an employee’s pensionable pay is reduced, this will have an impact on LGPS benefits, which will need to be explained to the employee as part of the process of agreeing the move onto furlough.  In particular, because CARE benefits are based on actual pay, the reduction in pensionable pay as a result of furlough will impact on the CARE benefits accrued in that scheme year.

The impact on final pay for pre-2014 final salary benefits should be less acute, because final pay will be the pensionable pay earned in the year prior to leaving the LGPS or in one of the two previous years, if higher.

However, death in service and ill health benefits should not be affected by any reduction in pay. Although they are based in part on ‘assumed pensionable pay’, which is broadly calculated using the pensionable pay in the 12 weeks before death or ill health early retirement, there is a specific provision which ignores any reduction in pay resulting from absence from work where that absence is with the permission of the employer – as would arguably be the case for a furloughed employee – and in any event, as highlighted by the LGA’s FAQs on covid-19, the employer has power to substitute the employee’s normal pensionable pay figure in circumstances where the employee’s pay during that 12-week period is materially lower than normal.

Can the 50:50 Option be used?

Employees who are furloughed could use the 50:50 option to pay half of their normal contribution rate and build up half their normal pension (whilst retaining full life and ill-health cover). This option could be used to increase take home pay during a furlough period. However, it is an employee option and not something the employer can impose – though it may be appropriate in the circumstances to remind employees that the option exists.  It should also be noted that use of the 50:50 option would not reduce the employer’s primary rate contributions.  

Comments

It is clear that the government is not expecting large numbers of employers participating in public service pension schemes to participate in the Furlough Scheme.  Given that fact, it is unsurprising that the interaction of the Furlough Scheme with the LGPS does not appear to have been considered in any detail (if at all) by the government when designing the provisions which will apply. 

However, as indicated above, the LGPS is perhaps atypical in its employer profile, with a large number of private sector and not-for-profit entities participating in it.  Such LGPS employers, without recourse to public funding, may be hoping to make use of the Furlough Scheme to avoid the financial damage flowing from the coronavirus lockdown; but the limited scope either to recoup or to amend pension terms will necessarily reduce the effectiveness of the Furlough Scheme for these employers.