What to do if your employer is skimping on pension contributions

As companies scramble to cut costs, they may consider employee pension contributions a tempting target. While the law requires employers to pay at least 3% of staff remuneration into their pension scheme, many contribute significantly more.

The accountancy giant Deloitte, for example, has begun consulting its 19,000-strong UK workforce on plans to reduce its contribution to their pension scheme from 12% of pay to just 4.5%, potentially for a period of 12 months. Other employers are likely to make similar proposals to staff.

However, employers can’t act unilaterally. Any firm with more than 50 employees has to consult the workforce for 60 days before making any changes to contributions (though this requirement has been dropped for furloughed staff). Employees will also have to give their consent to any variation in their terms of employment, which may include specific references to pension contribution levels. And many pension schemes are set up as trusts, in which case the trustees may also have to agree to any changes.

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Another potential complication is that most employers appoint third-party pension providers to run their schemes – typically a large insurer or fund manager. The company may have agreed with its provider that contributions will be maintained at set levels. There are also potential regulatory barriers to overcome.

Nevertheless, many employees are likely to find themselves in the same boat as Deloitte’s workforce in the weeks and months to come. And where they are asked to agree to reduced pension contributions, they will have to make a judgement. Is the employer making a reasonable request? Does it need this concession to continue trading without making significant job cuts, or even to survive?

A pay cut

These aren’t easy questions to answer. Trade unions and other employee groups may be able to offer some advice, but the choice is unpalatable. Pensions are deferred pay, so agreeing to a lower contribution from your employer is effectively accepting a pay cut. Equally, it is clearly in employees’ interests for their employer to get through this crisis without suffering irreversible damage.

If your employer does go ahead with reduced contributions, it should say how long it plans to do this for rather than impose an open-ended cut. You may have options of your own in response; you may be able to increase what you pay into the scheme, for example.

Meanwhile, employees in dire financial straits may be eyeing the cash they have amassed in pension savings. However, the government said last week it would not relax the rules that prevent people accessing their savings before the age of 55. Any adviser or advert that claims to help people unlock pension savings as a source of emergency cash should be ignored; the penalties and charges for doing so are huge.

Salary-sacrifice schemes struggle

Salary sacrifice schemes are a popular way for employees to make pension contributions tax-efficiently. Rather than making a direct pension contribution, the employee foregoes a portion of their pay, which the employer puts in the pension scheme instead. The reduced salary is then subject to less tax and national insurance for employee and employer alike. However, employees using salary sacrifice who have been furloughed under the government’s Coronavirus Job Retention Scheme are running into difficulties.

Under the scheme, the state is paying employers’ minimum pension contributions as well as staff salaries, but this doesn’t apply in the same way to salary sacrifice deals. State cash for wages is supposed to be paid directly to the employee, and the employer is not allowed to deduct the amount the employee would normally sacrifice.

Instead, the employer has to pay the total contribution due under the pension scheme rules. Check

how your employer is applying this arrangement. In certain cases, employers may seek to vary the terms of contractual pension obligations, though they will need employees’ permission to do so. The government has given the go-ahead to employers with salary sacrifice schemes in place to pursue such changes.