Two Small Steps for Workplace Pensions: The Increases to Minimum Pension Contributions.
Since October 2012 Automatic Enrolment (AE) has brought a seismic change to how employer’s provide Workplace Pensions to their employees and has seen over 9m workers starting to save for their retirement. The next major milestone for the AE journey is the increasing minimum contributions that take effect from April 2018.
Alex McCallum, Workplace Pensions Specialist
The minimum increases to pension contributions are mandatory for employers and happen on a phased basis between April 2018 and April 2019 as outlined below:
|Date effective||Employer minimum contribution||Employee contribution||Total minimum contribution|
|To 5 April 2018||1%||1%||2%|
|6 April 2018 to 5 April 2019||2%||3%||5%|
|6 April 2019 onwards||3%||5%||8%|
Here are some tips for implementing these changes:
Step 1: Identify the employees who are affected by the increases to understand the scale of the task. Some employees may already be above the new required minimum for April 2018.
Step 2: Understand how you have defined pensionable pay. AE compliance can be achieved by using different definitions of pensionable pay and the required increases may differ depending on which definition is used. Employers should be clear on how this works for them and it’s possible that they are using more than one definition across the workforce.
If you are using something other than the minimum qualifying earnings definition you will have certified the alternative contribution base. Double check your certificate factors in the increases in contributions.
More information on Certification can be found here.
Step 3: Discuss with your payroll provider to ensure that they can facilitate the increases to the relevant employees and that they do this for the first pay date after 6th April.
Step 4: Engage your people. There’s no obligation to tell employees about the increases but if you don’t then you risk payroll and HR being inundated with questions as the changes take effect and you may see requests for employees to come out of your scheme. By 2019 employees will be paying in a new minimum of 4% but this will be doubled to 8% through a combination of tax relief (1%) and employer contributions (3%). Good positive messaging on the benefit of staying in the scheme is important, and there are lots of resources available from Scottish Widows to support this.
These increases to pension contributions bring contribution rates to something more meaningful for employees from the 2% minimum that has been required to date. It is important to note, however, that the 8% total that is required by April 2019 will likely not be enough for many people to achieve the replacement income they need in retirement and so we welcome employers who offer schemes that go beyond 8%, and who engage their employees on the benefit of saving into a Workplace Pension over and above these new minimum levels.
Now that every employer has staged for AE it’s now an integrated part of UK business particularly within payroll, HR and Finance Teams. AE has been a success to date but its continued success will rely a lot on the implementation of the new increased minimum contributions and employees staying enrolled.
We look forward to continuing to support you and your business with these changes and contributing together to the continued success of Automatic Enrolment.
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 www.scottishwidows.co.uk/ae2018
For Employer use only
Information correct as at April 2018