The devil in the detail – furlough payments and pension contributions

The Chancellor’s introduction of furlough provisions in March was generally well received. However, many employers are now regretting embracing the provisions as they learn that the devil was in the detail, and they have inadvertently paid the incorrect amounts to their staff. This is likely to be exacerbated by the changes to arrangements announced recently.

The penalties for getting the salary calculations wrong are potentially large – 100% of the furlough grant, plus the return of the grant can be charged by HMRC, and other fines may apply in other sectors. The current stance is that where it is an honest mistake, and steps are taken to rectify errors, penalties should not apply. However, this will not be a long-term view. Some employers have taken the step of returning their furlough grant in full rather than be exposed to the risk of misinterpretation or misallocation of the rules.

Pitfalls range from coping with variable hours, including the correct payment for holidays, to recognising that 2020 is a leap year when looking at calculations based on days. If the calculation of salary is incorrect, it follows that contributions to pension schemes are also likely to be incorrect. It is complicated and thousands of employers are being invited to correct their claims. Employees are being encouraged to report incorrect application and there have been around 8000 anonymous reports of furlough fraud reported to HMRC already.

The trustees have a duty to ensure the contributions received are in accordance with their governing documents. The impact of this is amplified in DC schemes when investment timing is considered. In addition, many pension trustees will have experienced first-hand the difficulties of fixing incorrect contribution payments, and the passage of time makes any rectification project more difficult. GMP equalisation is a case in point. There are also deadlines for employers for reporting errors to HMRC.

So, what should trustees do to reduce the risk of incorrect payments?

There will already be a process during the annual audit after year-end to investigate whether the contribution rates are as required, for both defined benefit and defined contribution schemes. However, this is retrospective, and it may be more than a year since the errors first arose.

A more constructive approach would be to do more detailed checks now and continue to do them on a more regular basis – monthly or at least quarterly – thereby bringing forward and potentially reducing the work that would be required for the audit. The extent of such checks depends upon the membership size. However, a discussion with the scheme administrator to determine a suitable level of sampling/reconciliation in respect of Q2 2020 contributions should highlight any areas of concern that could be raised with the employer now.

This a welcome opportunity for pension trustees to do something positive to help the employer prevent an issue, simply by bringing forward some routine processes.

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