April 2019 contributions increase
As you’ll no doubt already be aware, this April will see the second increase in pensions contributions for employers and their staff. The total minimum contribution will rise from 5% to 8%. The Pensions Regulator explains everything you need to know about the changes below.
Increasing minimum contributions should be a straight forward task for you or your clients to do but there are a number of checks they’ll need to make and we encourage them to start in good time. The Pensions Regulator has information alerting employers to what they need to do and pension providers are also providing employers and staff with information.
What are the new minimum contribution levels?
By law, on 6 April 2019, employers must have increased the amount of their minimum contributions into their staff's automatic enrolment pension to at least 3% of qualifying earnings. Members of staff will have to pay the shortfall needed to make the total minimum contribution up to 8%, including the employer contribution.
However, any employers who have workplace pension schemes in place which they self-certify for use with automatic enrolment will have different minimum contribution increases, depending on how pensionable pay is calculated. For example, if contributions are based on gross earnings but don’t include bonus, overtime, commission or certain staff allowances (such as shift pay or relocation allowance), the employer must pay a minimum of 4% towards the pension, and the total minimum contribution is 9%. However, if contributions are based on all elements of staff pay and all earnings, the employer need only pay a minimum of 3% towards the pension, and the total minimum contribution is only 7%. We provide more information about the alternative definitions ie Set 1, 2 and 3 and their contribution rates here.
Tell staff about the changes
While there is not a legal duty to tell staff about the increase, we encourage employers to have information they need about their staff’s workplace pension and how it is changing. The Pensions Regulator’s advertising campaigns have encouraged staff to get to know their pension and appreciate its benefits, and staff are likely to want to know about the changes. We provide letter templates that you can use to tell staff about the changes here.
It’s the law
Over 1.4 million employers have now enrolled more than ten million people and staff now expect a workplace pension. Automatic enrolment is creating a new savings culture and the increase in contributions is an important part of the policy to boost retirement outcomes. We know most employers want to do the right thing for their staff and we are here to help. However, we will take action if an employer is not meeting their responsibilities. Failing to make and maintain the correct pensions contributions could result in a fine or court action. It is not enough to just comply with automatic enrolment laws by putting staff into a scheme. Employers must also meet their duties to contribute into their employees’ pensions every month and they must ensure they are paying in at least the minimum. Pension providers have a duty to tell us if an employer is not maintaining the correct contributions and staff can also use our anonymous whistleblowing service if they are concerned the correct payments are not being made.
Three things for employers to check:
- Is their pension scheme making the changes needed to support the increases? Employers should check their pension scheme is making necessary changes to support the increases and ensure they are continuing to use a qualifying scheme and the right amount of pension contributions are deducted. If an employer’s chosen pension scheme doesn’t support the increases, then they will need to talk to them about their options. Employers also need to check if their pension scheme rules or terms and conditions provide for how contributions are deducted when minimum contributions increase and, if so, make sure their payroll can comply.
- Will their payroll deduct the increases? While many payroll providers may automate their software so contributions are increased automatically, employers should check if their payroll software will do this. Their payroll should be ready to deduct the increased contributions when they rise in April 2019, otherwise the right contributions might not be paid across to the scheme at the right time. If the contribution increases occur part way through a worker's pay period, most payroll software does not process pro-rated contributions, so the employer, pension provider and payroll provider should agree how best to deduct the amount due. For example, they may agree to apply the contribution rate applicable on the date earnings are paid, so if the pay date is on or after 6 April 2019, contributions for the full pay period are deducted at the increased rate.
- What are they currently contributing? They may not need to take action. Employers and their staff can also choose to pay in more than the minimum contributions if they want to and employers who are already paying above the increased total minimum amounts need not take any further action.
For information relating to specific scheme rules, contact the pension scheme provider.
The Pensions Regulator,
Practicewire, February 2019