- The minimum contributions for automatic enrolment were due to increase in October 2017 and October 2018.
- Regulations changed the dates for the contribution increases to 6 April 2018 and 6 April 2019, to align them with tax years.
- However, depending on scheme rules and / or employee communications, employers may still need to take action before October.
- Employee consultation may be required if employers want to do anything that involves going beyond the minimum changes required by legislation.
- Whilst ensuring continued compliance with their workplace pension duties, employers may want to use this opportunity to conduct a broader review of their arrangements.
CHANGES TO MINIMUM CONTRIBUTIONS FOR AUTOMATIC ENROLMENT (A-E)
It is well known that employers have to pay minimum contributions for jobholders who are automatically enrolled into their workplace pension plan and for those who opt-in to the plan. The jobholders usually have to contribute too.
The minimum contributions can be based on a band of ‘qualifying earnings’ (between, in 2017/18, £5,876 and £45,000) or employers can choose their own definition of pensionable earnings for contributions provided that, broadly speaking, it is at least as good as their employees’ basic pay.
Regardless of the earnings definition upon which contributions are based, the minimum level of contributions is increased on 6 April 2018 and again on 6 April 2019. Again, broadly speaking, current legislation specifies total minimum contributions are 2 or 3 per cent (depending on the earnings definition), of which at least 1 or 2 per cent
must come from the employer. This will rise to between 5 and 6 per cent from April 2018, of which at least 2 or 3 per cent must come from the employer. It will then rise to between 8 and 9 per cent from April 2019, of which at least 3 or 4 per cent must come from the employer.
Once fully implemented, DWP estimate that 10 million workers will be newly saving or saving more in a workplace pension as a result of automatic enrolment, and the annual saving in workplace pensions will increase by £17 billion by 2019/2020.
- Review your scheme provisions and employee communications to determine exactly what has already been said or promised to employees.
- Decide if or when changes to pension contributions are to be made.
- Determine prior amendments, consultations or member announcements are needed.
- Think about the changes holistically, and consider whether your current contribution structures, as well as your scheme constitution and design, remain fit for purpose
IMMEDIATE IMPLICATIONS OF THE CHANGES
What needs to be done will depend on:
- what has been said and done in connection with minimum contributions for A-E;
- what the plans are to meet A-E requirements; and
- whether that entails doing anything more than the minimum required by legislation.
In more detail:
- Scheme provisions, contracts of employment and member communications should be reviewed.
- Contribution levels may be such that the issue of A-E rates are not an issue and non action is needed.
- Employers may have already said that changes will take effect in October; so, at very least, employee expectations will need to be managed and, in some cases, formal amendments may be needed, if scheme rules or employment contracts provide for increases to contributions this year.
- Employers, if they do not want any increases until April, will need to decide whether to change pension contributions from 6 April or, perhaps to better fit with pay periods, 1 April. Depending on what they decide, contributions on part-period earnings may be required.
- There may need to be a 60 day consultation with employees (if an employer has more than 50 employees). Also, if changes are to be made to contracts then employee consent may be needed. (In our view, consultation may not be necessary where employers have previously communicated to staff that changes will be happening in October, and they still wish to proceed with the October date.)
- If consulting on changes for 2018, employers may want to encompass the 2019 changes too; otherwise, there will need to be two sets of consultation exercises.
- We recommend taking this opportunity to structure contributions such that you are ‘future proofed’ against the 2019 increases as well as benchmarking contributions against your industry sector to ensure competitiveness if a more strategic approach is deemed necessary.
- Whilst ensuring continued compliance with their workplace pension duties, employers may want to conduct a broader review of their pension arrangements to ensure that they continue to meet objectives in the context of wider reward strategy. A non-exhaustive list of issue that this could cover is included in the Appendix to this Alert.
- The direct and indirect costs of the A-E changes should be included in company budgeting for 2018 and 2019.
It should be clear from above that, even though the legislative changes are not effective until next year, action should be considered now.
JLT’s approach to the A-E contribution increases encompasses the legal/technical considerations, cost modelling, communications and financial education. We also offer contribution benchmarking and a workplace savings review service as additions to this service.
For further information, get in touch with your usual JLT Consultant, or contact John Wilson at email@example.com or Stephen Coates at Stephen_Coates@jltgroup.com.