Automatic enrolment

Steve WrightUncategorizedLeave a Comment

Minimum contributions to increase from 6 April 2019

For defined contribution (DC) pension schemes being used to meet an employer’s automatic enrolment requirements, both minimum employer and overall contribution rates are set to rise from 6 April 2019. This is the second successive annual increase in minimum contributions and the last one which 
is currently scheduled to take place under legislation.

The final round of increases in minimum contributions payable to DC qualifying schemes was originally scheduled to come into force with effect from 1 October 2018. However, with the aim of easing the burden on employers (particularly smaller ones), the Government revised its statutory timetable. Planned increases in minimum DC contributions were therefore pushed back from 1 October 2017 and 1 October 2018, to 6 April 2018 and 6 April 2019 respectively (coinciding with the tax year).

Effect of the 
new minimum contributions
The table below sets out how minimum contributions have evolved since automatic enrolment came into force in 2012, as well as the rates which will apply from April 2019, assuming the statutory default mechanism of ‘qualifying earnings’ (earnings between £6,032 and £46,350 for 2018/19) is used to calculate contributions.

However, many employers do not use the statutory default mechanism to meet minimum contribution requirements, preferring instead to use one of the permitted alternatives. Therefore, the actual percentage increase which will apply in a particular DC arrangement will be dictated by the elements of income which are pensionable.

Phasing period

Employer minimum contribution

Total minimum contribution

Before 5 April 2018

1%

2%

April 2018 to 5 April 2019

2%

5%

6 April 2019 onwards

3%

8%

Key points

  • Where an employer is contributing more than 3%, the employee can contribute less than 5%, providing the total is at least 8%
  • 
A contribution of 8% will meet the Government’s minimum requirement 
but will not result in an adequate pension in retirement
  • 
A ‘rule of thumb’ to aim for is half of one’s age as a percentage of one’s earnings, including the employer’s contribution. An example of this as follows:
  • 
A 30 year old employee earning £30,000 per annum with an employer contribution of 5%
  • 
½ x age 30 = 15% target contribution
  • 
Less 5% employer contribution = 10% for employee to achieve
  • 
£30,000 x 10% = £3,000 or £250.00 per month
  • 
Less 20% basic rate tax relief given at source = £2,400 or £200 per month from net salary.

Please note that higher rate taxpayers can claim further tax relief, and the above example assumes salary exchange is not being used.

Actions for employers and trustees

Check current rules
As a first step, employers should check what their scheme rules currently say about minimum compulsory contributions, as some DC arrangements may already meet the legislative standard applicable from 6 April 2019 onwards. If not, an employer should consider its options.

Options for meeting 
the rise in contributions
As the automatic enrolment legislation does not require minimum employee contributions as such, it is up to the employer to decide how to bridge the gap between its minimum contributions and the total minimum contribution requirements. For example, looking at both ends of the spectrum, the employee could be asked to make up the difference between the two amounts, or alternatively the employer could bear the entire cost. There are also several variations in between.

Requirement to consult
Where an employer is considering introducing or increasing member contributions to a DC arrangement, it will generally need to consult with affected members for a minimum of 60 days. Employers looking to adjust member contributions to meet the new minimum requirements from 6 April 2019 will therefore need to bear these requirements in mind.

Documentation
It may be necessary for the pension scheme’s governing documentation to be amended to deal with the increase in minimum contributions. In addition, the scheme’s trustees will have to revise their payment schedule which, among other matters, sets out the rates of contributions payable towards the scheme by or on behalf of the employer(s) and the active members.

Other checks to consider
Employers must ensure that their payroll systems are prepared to calculate and deduct any change in contributions. If there is a third-party provider, employers should liaise with them as soon as practicable to ensure that they will be ready for any changes.

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