Sponsors facing perfect storm as furlough nears its end

With the government set to issue a further update on the move out of the furlough scheme later this week, responsibility for wages and auto-enrolment minimum contributions are expected to gradually move back to employers.

Combined with the raising of the minimum wage in April, experts predict some scheme sponsors in particular will find life especially tough in the coming months. A three-year low in the numbers of vacancies in the UK, as reported by the Financial Times on Sunday, has compounded fears in some corners of a wave of redundancies, as employers struggle to justify their payrolls once government support is eroded.

“They’re saying that it’s going to be a modest change, and therefore it should be fairly straightforward for employers to be able to shoulder the additional cost from August 1,” said Jeremy Goodwin, partner at law firm Eversheds Sutherland. 

It’ll be interesting to see, for employers with open DB schemes and very generous DC schemes, whether those costs continue to be sustainable

Jeremy Goodwin, Eversheds Sutherland

“That might be right in some industries; but for others, this is a potentially significant increase in costs compared with what they had in the furlough period.”

Of particular note will be the provisions for part-time working, he said, with the expectation being that the employer will have to shoulder 100 per cent of wages for the period spent working while the 80 per cent furlough payment will continue for the time spent off work.

However, this impacts the way in which pension contributions are calculated. “It looks like your contributions will need to be calculated on that 100 per cent, not the 80 per cent,” said Mr Goodwin.

A further employer stress is set to be delivered by the 6 per cent increase to the minimum wage, which came into force on April 1. 

“The potential for substantially increased costs is definitely there,” Mr Goodwin said.

“How employers respond to that is going to depend on their individual situation. But clearly, come the summer and moving into the autumn, that’s going to be a time of real challenge for those businesses.

"It’ll be interesting to see, for employers with open DB schemes and very generous DC schemes, whether those costs continue to be sustainable. There’s a challenging time to come.”

‘There’s very little they can do’ to cut costs

Employers looking to manage costs by decreasing pension contributions above the auto-enrolment minimums may have welcomed the Pensions Regulator’s temporary relaxation of the rules surrounding consultations, with the normal 60-day requirement being effectively suspended from TPR’s perspective.

However, for those schemes that have contribution levels set in their rules, or which may have inferred those levels in offer letters, TPR’s relaxation will not absolve employers of their obligations, according to Sue Pemberton, head of employer services at Premier Pensions.

“What [TPR] said in effect is that they will relax that rule,” she explained. “But you have to be mindful, if you’ve got union involvement or if it’s written into your employment contract, it doesn’t release you from the contractually required consultations.”

Those bound by their contracts may find their ability to cut costs is limited. “There’s very little they can do,” Ms Pemberton said.

With the second quarter drawing to a close, all eyes are now on the regulator, and whether it will extend its relaxation to the 60-day rule.

In the end, how sponsors cope with the increasing costs as the furlough scheme retreats will depend on a great many factors outside their control, she said. “There’s quite a polarised view out there. For retailers, it’s disastrous. They’re not getting any income, or if they are it’s a very small percentage.

“It’s going to be very difficult for them to manage through this period. The strong ones will be all right, but the weaker ones will really suffer."

Cost control may require redundancies.

With the burden of wages, pension contributions and the end of reimbursements for national insurance contributions, employers in the industries hardest hit by the crisis may have to take drastic steps to keep costs under control.

Richard Lee, pensions partner at Gowling WLG, told Pensions Expert: “Employers continuing to provide more generous contributions than auto-enrolment minimums may well now take another look at pension provision and reduce it to minimum levels as they lose the reimbursement even for the minimum contribution costs under the [furlough scheme].

“Salary sacrifice arrangements will also need reviewing again as employers will no longer be reimbursed for national insurance contributions,” he said.

Moving forward, as they begin to look at the bleak post-furlough world, “employers will also be looking from furlough to ongoing cost controls, including redundancies, which will also have short-term cost consequences if enhanced benefits are payable on early retirement, for example”, Mr Lee added.