April 2019 will see the next increase to the minimum Automatic Enrolment contributions for employers and employees across the UK. The first step up in contributions in April 2018 went through without any major impact on employer processes or employee participation in Workplace Pensions. The Pension and Lifetime Savings Association reported in October 2018 a 0.2% increase in the number of people stopping contributions between Quarter 1 and 2 2018.
Alex McCallum, Workplace Pensions Specialist
This is an encouraging reaction to these increases which have seen contribution levels grow from the initial minimum of 2% to something a bit more meaningful. It also gives us reassurance that the forthcoming step up in April 2019 will also go smoothly.
Let’s remind ourselves of what is required in April 2019:
|Date effective||Qualifying Earnings Basis||Alternate Bases|
(% of pensionable pay. Where pensionable pay at least equals basic pay)
(% of pensionable pay. Where pensionable pay at least equals basic pay AND at least 85% of total earnings are pensionable)
(% of total earnings)
|Employer minimum||Total minimum contribution||Employer minimum||Total minimum contribution||Employer minimum||Total minimum contribution||Employer minimum||Total minimum contribution|
|6 April 2018 to 5 April 2019||2%||5%||3%||6%||2%||5%||2%||5%|
|From 6 April 2019||3%||8%||4%||9%||3%||8%||3%||7%|
For those Employers using Qualifying Earnings the next step up requires them to increase from 2% to 3% with their employees contributing 5% (1% will usually be funded by tax relief).
It is possible for Employer to pay more than 3% as long as the total going into the pension plan meets the new total required.
For those employers who do not use Qualifying Earnings to calculate pensionable pay you will be using an alternative contributions basis and need to follow the increases in line with the relevant ‘Set’ as outlined above. It is worth ensuring you are clear on what basis you are calculating contributions for your employees, and that you follow the certification rules that require them to certify every 18 months. Full information about this process can be found in our Automatic Enrolment Fact Sheet.
This is by far the most commonly asked question we saw from Employers in the run up to April 2018 and the first increase. One of the first areas to clarify is around the terminology.
‘Opting Out’ has a very specific meaning in relation to the Automatic Enrolment rules. Opt Out rights exist only when someone is enrolled into the scheme having been assessed as eligible. These rights give someone 30 days to formally come out of the scheme and receive a refund of any contributions that were deducted.
When an employer increases the minimum contributions for an employee these same Opt Out rights do not exist. If, after processing the increases, an employee does not want to pay at the new level and wants to either leave the scheme or reduce contributions to below the minimum the employer can use their discretion to allow this on a case by case basis. However, there is no entitlement to any refund of contributions paid at the higher rate and the individual would be classed as not being a member of a qualifying workplace pension scheme.
This would mean at the 3 year re-enrolment date the worker would need to be assessed again and, if eligible at that point, enrolled back into the scheme on the full contribution rate. This re-enrolment would then come with full Opt Out rights.
It is very important for employers to note that, like opt outs, they cannot incentivise staff not to take the increase in contributions and the Pensions Regulator has enforcement powers to act should they believe an employer us undertaking this kind of activity.
For many employers the cost of providing a pension scheme to staff has grown significantly since staging for Automatic Enrolment began and the increases to contributions will add to the expense of offering this employee benefit. It is therefore worth considering the impact of introducing Salary Exchange for your clients as a way of managing the costs.
By implementing Salary Exchange you can save your client National Insurance costs (currently 13.8%) on any employee contributions that are made. These savings can be used to manage increasing costs or to reinvest into the pension scheme on behalf of employees.
You can find out more about Salary Exchange in our handy Employer Guide.
There are no further mandated increases to minimum pension contributions planned at the moment. However, there is broad consensus in the pensions industry that 2019 steady state contribution rate will not be sufficient for many people in the UK to achieve the replacement income they need in retirement. In the December 2017 Automatic Enrolment review the Department of Work and Pensions (DWP) stopped short of confirming there will be future increases but intimated that it would be likely:
“…we recognise that contributions of 8 per cent are unlikely to give all individuals the retirement to which they aspire… We stand ready to learn from the contribution rate increases which will come in to effect in 2018 and 2019, and to carry out further work on the adequacy of retirement incomes.”ii
I started this article talking about a 0.2% increase in savers stopping pension contributions following the 2018 increases to contributions and if we see a similar acceptance of the next increase in April 2019 then it may embolden DWP to look at further increases at some point in the not so distant future.
Moving to the new increased minimums in April 2019 is a key milestone in the Automatic Enrolment journey as the near 10 million workers, who have been enrolled since 2012, start to save at rate that is going to have a greater impact on their outcome at retirement than the current levels.
You can visit The Pensions Regulator site www.tpr.gov.uk/increase for more detailed information and guidance or read our FAQ document. Your Employees can access further support online at pension payment changes.
Information correct as at February 2019