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  • Statutory auto-enrolment pension contributions are increasing

Statutory auto-enrolment pension contributions are increasing

The statutory minimum auto-enrolment pension contributions, and the statutory alternatives for these, are subject to two sets of statutory increases. 

Currently, the standard approach is for employers and staff each to pay pension contributions of 1%, making a total minimum contribution of 2%. This increases:
• From 6 April 2018 to 5 April 2019, so the minimum employer contribution is 2%, with a staff contribution of 3%, making the total minimum contribution 5%
• From 6 April 2019, the minimum employer contribution is 3%, with a staff contribution of 5% making the total contribution 8%. 

These contribution rates are calculated in relation to ‘qualifying earnings’. This term has its own particular statutory meaning and relates to an individual’s gross annual earnings – not just basic pay. As a reminder, qualifying earnings are subject to a maximum, they need to be calculated for a pay period and they must include salary, overtime, bonuses,  commission, statutory sick pay, statutory pay received during paternity, maternity or any other kind of family leave and adoption pay. There are two statutory variations that can apply to the level of pension contributions, set 2 and set 3, and each of these also increases from April 2018 and April 2019 in a slightly different way. 

These increases have been known about for a long time, so some employers have already factored them in, to a certain extent, to their pension arrangements. A key question is whether they have been sufficiently factored in that there is no need for the employer to go through a formal pension consultation when it implements the first pension changes next year. The position will partly depend on each worker’s contract of employment, but it also depends on what employer communications there have been about the auto-enrolment pension contributions. 

It is possible for the employer to contribute more than their required minimum amount but less than the total minimum amount. If this occurs then the staff member only needs to make up the shortfall between the total minimum and the employer contribution. If the scheme’s minimum contribution levels are not increased in line with the legal requirements, it will no longer be a qualifying scheme for existing members and cannot be used for automatic enrolment. 

It is worth employers considering whether to use salary sacrifice (also called salary exchange) to help mitigate the costs of these increases.

Changing a pension scheme’s terms and conditions to increase member contributions normally requires employers to consult with the scheme members under a minimum 60-day consultation, as long as the employer has sufficient employees, currently 50 or more. The Pensions Regulator has given various examples of what changes do and do not require a full pension consultation exercise. Generally no consultation is needed where:
• The scheme rules or terms and conditions are already set to increase contributions to the minimum levels, either in April 2018 and 2019 (or earlier as originally these statutory increases were to occur earlier), but even then the employer should still notify employees that increased contributions are due to be taken
• If the change is being made to ensure the scheme remains qualifying – that the terms and conditions are being amended purely to reflect the minimum increases set out in law – this is potentially helpful to an employer, but potentially an employer may be doing more than making the bare minimum legal change

There is a general rule that if the employer wishes to amend the scheme rules or terms and conditions to increase member contributions at a different time or by a different rate than that set out by legislation, they need to consult members. But there are no additional information duties under automatic enrolment for employers to advise members about the increases at the time of the actual change. When an employer automatically enrolled, opted in or automatically re-enrolled before 1 October 2016, its workers should have been told in the enrolment information that statutory increases to their contributions rates would take place on 1 October 2017 and 1 October 2018. However they are unlikely to have been given, in this document, full details of what this change would mean for them, so potentially they may not have been given sufficient information about the change in contribution rates for an employer not to have to go through a pension consultation exercise. 

Any scheme rules, agreements and other governing documentation like scheme booklets and employee handbooks should be reviewed when considering changes to the member contribution rate, and then updated to reflect the new contribution rates once the change can be legally made. Some scheme agreements, for example, may allow a member to remain at the lower contribution rate, or to reduce their contributions again after the increase, which is a further oddity.

The scheme’s trustees or scheme provider needs to be satisfied that the employer has gone through the necessary pension consultation before they implement any pension change. The Pension’s Regulator is mainly responsible for ensuring that the right consultation processes have been gone through, but employment tribunals can be involved if, in employment law terms, the changes have not been properly made in accordance with workers’ rights under employment law.  

It is also worth noting that scheme providers, and any of an employer’s payroll and software providers, must ensure their products support this legal requirement of automatic enrolment. 

There are two separate processes that an employer has to go through as regards the changes in contributions rates. These are (i) certifying the scheme as a qualifying scheme and (ii) increasing the minimum contributions. Essentially certifying the scheme as a qualifying scheme requires the employer to certify at the current minimum up to 5 April 2018 and then at the increased minimum from 6 April 2019. But there are, in practice, various ways in which this should be done. The method chosen may have to be reflected in the consultation process.  

Finally an employer should:
• Not lose sight of those workers who fall outside the automatic enrolment criteria, but who have a right to be enrolled into a pension scheme if they ask, as regards any consultation
• Bear in mind that it cannot encourage workers to opt out of auto-enrolment, so member communications must be carefully drafted – particularly as employees will be required to contribute for the first time and this might cause some employees to opt out, if not in 2018 then in 2019

This is a highly technical area of pension law, so please do ask for advice if you are unclear as to how to implement the changes.

Published:26 October 2017


Pensions Law Update - October 2017

  • Are you ready for Brexit and the potential impact on the derivatives market?
  • Shockwaves from infrastructure regulation being felt by investors
  • Getting ready for the new financial instruments directive
  • New scheme return information needed from January 2018
  • Statutory auto-enrolment pension contributions are increasing
  • New pension VAT rules coming next year

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