Auto enrolment: planning for increases in minimum DC pension contributions
On and from 6 April 2018 employer contributions must be a minimum of 2% of ‘qualifying earnings’
What is happening?
On 6 April 2018, and again on 6 April 2019, minimum auto-enrolment contribution rates to defined contribution pension schemes will increase.
On and from 6 April 2018 employer contributions must be a minimum of 2% of ‘qualifying earnings’ (the band of earnings between £6,032 and £46,350 for the 2018/2019 tax year); and total employer and employee contributions must be a minimum of 5% of qualifying earnings.
On and from 6 April 2019, minimum employer contributions will increase to 3% of qualifying earnings, with minimum total employer and employee contributions increasing to 8% of qualifying earnings.
Employers also have the option to self certify a pension scheme as being auto-enrolment compliant on alternative bases to the above. There are three alternative self certification bases or sets, each set with its own minimum contribution levels based on how pensionable pay is calculated. Minimum self certification contribution levels will also increase on 6 April 2018, and again on 6 April 2019. If you have self-certified, different minimum contribution requirements may apply.
A large number of employers have self certified using Set 3, as contributions under this set are based on total earnings, and this is easier to administer from a payroll perspective.
Under Set 3, employer contributions must be a minimum of 2% of total earnings, and total employer and employee contributions must be a minimum of 5% of total earnings on and from 6 April 2018. Minimum employer contributions will then increase to 3% of total earnings, with minimum total employer and employee contributions increasing to 7% of total earnings on and from 6 April 2019.
Planning for the increases
Do you need to increase contributions?
If you have not already done so you should check your current pension contribution rates against the minimum requirements that will apply from 6 April 2018 and 6 April 2019 respectively. Increases will be required if you currently contribute the minimum.
Is consultation with affected employees necessary?
You will generally not need to consult over contributions increases if those increases match the statutory auto-enrolment minimum, or phased alternative self certification requirements (referred to above); or if the increases already form part of your scheme rules, contractual agreements or other governing documents.
However, if your planned contribution increases or changes fall outside of this, there may be an obligation under pensions legislation to consult affected employees over the proposed changes before they take effect. So, for example, consultation may be required if:
- You propose to increase the contribution rate above auto-enrolment requirements;
- You propose to switch from auto-enrolment minimum contributions to self certification; or
- You propose to switch to a different self certification set.
Whether there is an obligation to consult will depend on a range of factors including the nature of the proposed changes, previous communications about auto-enrolment and the wording of scheme rules and employment contracts. If associated changes need to be made to contracts of employment, employee consent may also be required.
This is a technical area of pension law, so please do ask for advice if you are unclear about consultation obligations or how to implement any required changes.
Are rule amendments required?
Rule amendments may be required if you have your own qualifying trust based occupational defined contribution scheme for auto-enrolment purposes. If scheme rules do not support the increased contribution rates, rule amendments will be required to ensure the scheme continues to meet the qualifying criteria. You should review your scheme rules to check whether any amendments are required, and if so consider any associated consultation obligations.
Should further information be given to employees?
When an employee is first automatically enrolled, the information given to them as part of that process should include information about future statutory increases in minimum contribution levels. If that was the case (subject to any consultation requirements discussed above), there are no additional information duties under the auto-enrolment regime obligating employers to advise employees about contribution increases at the time of the actual change. However, it would be good practice to do so, not least to help minimise queries.
Check that the correct contributions will be deducted
Finally, you should check with your payroll provider to make sure that they’re ready to calculate and deduct the increased contributions with effect from 6 April 2018.
We are happy to advise on your obligations under the auto-enrolment regime, and the best approach to implement any required changes.
Dei Harries (email@example.com) is an Associate in the Employment, Pensions and Immigration team and is based in Liverpool. If you require support with implementing the new auto-enrolment requirements or specialist advice on any other aspect of pension law, please do not hesitate to get in touch with Dei or speak to your usual Weightmans contact.