What Happens To Pensions While Workers Are Furloughed?

Lisa Smith, BA (Hons), CeFA
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Savers placed on furlough by their bosses could see their pensions hit when they come to retire.

Hundreds of thousands of workers are on furlough to take advantage of the government’s Coronavirus Job Retention Scheme.

Furlough is a temporary, forced period of unpaid leave when a business has no work for staff or if a business is forced to close.

Unlike redundancy, employees remain on the payroll during the absence.

The aim is to help staff pay their bills while on furlough rather than face a struggle with their finances.

State pension qualifying years

Although employees and their employer still pay national insurance contributions at the normal rate, staff paying contributions of more than the minimum level of auto-enrolment will not have all their savings covered.

This should mean furloughed workers will not lose state pension qualifying years that will reduce their retirement income.

Employers can also decide whether to top up the 80% furlough wage payment to full pay.

The CJRS runs until June 1 but can be extended if ministers take up the option.

To qualify, staff must have been on a payroll before March 1.

Retirement savers will have to agree terms with their bosses if they wish to make above minimum payments into their pensions – which could take up to 60 days to thrash out, according to pension rules.

Salary sacrifice quandary

Those on salary sacrifice packages are likely to be the hardest hit as official guidance offers no explanation of how CJRS should treat these contributions.

The suggestion is most employers will only be able to cover 3% of qualifying earnings based on 80% of furloughed pay for pension contributions.

Other pension questions unresolved by CJRS include what happens to death in service benefits? These are generally covered by insurance, and each company will offer a different interpretation of the terms under furlough.

Retirement savers should speak to their employers about what is happening to their pension contributions while they are off work to avoid an income shock on retirement.

Employers looking to make CJRS cost-neutral need to discuss furlough pay arrangements with staff or their unions, if there is one, as their agreement is required to any alteration to pension contribution terms.

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