Guest comment: Reducing pension costs in uncertain times

We have all experienced precipitous changes as a result of the emergency measures recently launched to combat the rampant spread of coronavirus. In these unprecedented times, it is pretty clear that costs need to be cut by all.

Employers will want to reduce their wage bill to shore up their business, just as employees will want to reduce unnecessary costs to protect their take-home pay and employment future. In this arena, there are options open to employers and employees, but there are key considerations for both parties.

As we all know, events are moving at a staggeringly fast pace; however, at the time of writing, the government has not expressed any intention to relax the obligations on employers to automatically enrol employees into a qualifying pension scheme.

This means that for employers who only pay the statutory minimum contribution to their employees’ pensions, there is no option but to continue to do so.

However, those employers who make contributions beyond the statutory minimum may have some limited options to reduce contributions down to the statutory minimum level.

For example, if pension contributions made to a qualifying scheme are based on all pay, including overtime and commissions, the statutory minimum total contribution is 7 per cent of pay, of which the employer must contribute 3 per cent.

For those employers who make a more generous pension contribution, such as 5 per cent, there may be some leeway to reduce employer pension contributions.

However, there are various complexities to then navigate: the total minimum contribution to the pension scheme would need to be 7 per cent of pay, so if an employer had only required employees to make a 2 per cent percent contribution, there would be no scope to reduce employer contributions without a corresponding increase in employee contributions – this is likely to be unpalatable on all fronts.

But, if the employer and employee were making a 5 per cent contribution, then an employer could consider reducing their contribution to 3 per cent.

Yet, with pensions, nothing is simple. There is no exception here. An employer looking to reduce employer contributions (whilst remaining compliant with automatic enrolment minimum contribution requirements) would still need to consult employees about such changes if it had more than 50 employees.

It would also need employee consent to vary employment terms and conditions. A review of the pension provider’s rules or terms and conditions will also be necessary. And lastly, recent communications from The Pensions Regulator suggest it will take a dim view of this.

And then, what of employees? It remains open to employees to unilaterally decide to opt out of automatic enrolment. This may be particularly attractive at this time.

Markets are in free-fall and any boost to take home pay (by ceasing employee contributions to pension) may be particularly welcome. The advantage for employees is that generally they will have a right to opt back into their employer’s automatic enrolment pension scheme at a later date (although such right will not apply to any employee who opted into the employer’s pension scheme in the previous twelve months).

For employees, the analysis is almost the polar opposite to the above paragraphs. If an employer is more generous than simply providing the minimum contributions required under automatic enrolment, then opting out could involve missing out on considerable chunks of deferred pay.

On the other hand, if the employer is only paying statutory minimum, the employee is forfeiting a 3 per cent employer contribution in order to save themselves from having to contribute a greater sum.

This will not be an easy decision for employers or employees. A note of caution for employers – at no point should employers induce employees to opt out of an automatic enrolment pension scheme. This is an offence.

However, if employees, having taken their own financial advice, decide to opt out of their own volition, that is a different matter.

The reader will have grasped that this is not a quick fix. A cost-benefit analysis before embarking on the project would be essential for any employer, and a thorough assessment of your financial plans is equally important for an employee. But, in the current climate, it is certainly an interesting option to consider.

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