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Company Pension Minimum Contribution Increases planned by Law (phasing)

Do you know about the increases in minimum pension contributions?

Do you understand how these changes will apply to you and your employees, and are you prepared for the minimum contributions going up?

Key points

  • by law, minimum contribution amounts are required to increase at set times
  • increases from the current total minimum contribution of 2% of qualifying earnings take place on 6 April 2018, rising to 5%, and on 6 April 2019, reaching a total minimum amount of 8%. If you, as an employer have chosen to use certification, your total minimum contribution rates will also increase on these dates
  • Employers and employees can choose to pay more than the minimum contributions if they wish
  • Employers can decide to pay the total minimum contribution, which may mean their employees don’t have to make up any shortfall, and may not have to pay into the pension at all, depending on the scheme’s rules
  • to remain a qualifying scheme, all automatic enrolment pension schemes with contribution rates that would be below the minimum amount after the rate increases must apply the higher rates
  • If your company pension is a defined benefit (DB) scheme, these contribution increases don’t apply and you don’t need to take any action

What’s happening?

By law, on 6 April 2018, employers are required to increase the amount of their minimum contributions into their employees automatic enrolment pension to at least of 2% of qualifying earnings. Employees will have to pay the shortfall needed to make the total minimum contribution up to 5%, including the Employer contribution.

The minimum contribution levels will rise again on 6 April 2019, with Employers paying a minimum of 3% towards the pension, and the total minimum contribution reaching 8% – with employees making up the difference.

Employers don’t need to take any further action if they don’t have any employees in a pension scheme for automatic enrolment, or if they are already paying above the increased minimum amounts. These increases don’t apply to employees who asked to be put into a scheme that Employers doesn’t have to pay into.

Employers can choose to pay the full amount of the total minimum contribution. This may mean employees do not have to pay in at all, unless the scheme’s rules say that they have to make contributions.

Both Employers and employees can choose to contribute more than the minimum amounts to the pension if they want to.

If the Employer pays in more than their legal minimum contribution, but less than the total minimum contribution shown in the table below, then their employees will need to pay in at least enough to make up the shortfall between these amounts.

The table below shows the minimum contributions that employers who set up a defined contribution scheme for automatic enrolment must pay, and the date when they must increase. This is calculated based on earnings between £5,876 to £45,000 per year (£490 to £3,750 per month, or £113 to £866 per week), and including certain elements of pay.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 5% 8%

Employers may have agreed with their scheme provider to calculate minimum contributions in a different way. If this is the case you will need to apply different increases – details on the increases for these schemes can be found below.

Schemes with different rules on contributions

Employers who already have workplace pension schemes in place which they have self-certified for use with automatic enrolment, will have different minimum contribution increases to those set out above – depending on the type of scheme.

The new rates for these schemes can be found in the tables below.

Certification Criteria

There are three alternative sets of minimum contribution requirements when using an existing DC scheme for automatic enrolment.

Each set has its own minimum contribution levels based on how pensionable pay is calculated. If a company pension scheme doesn’t meet the criteria in any one of these sets, then it can’t be used for automatic enrolment.

The tables below show the stages of contribution increases for each of these sets:

Set 1: contributions calculated on gross earnings

The Employer calculates contributions based on gross earnings. They don’t include bonus, overtime, commission or certain staff allowances (such as shift pay or relocation allowance) in the calculation.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 2% 1% 3%
6 April 2018 to 5 April 2019 3% 3% 6%
6 April 2019 onwards 4% 5% 9%

Set 2: contributions calculated on gross earnings based on at least 85% of total earnings

The Employer calculates contributions based on gross earnings. They don’t include bonus, overtime, commission or certain staff allowances (such as shift pay or relocation allowance) in the calculation. The Employer will have checked that the gross earnings used to calculate contributions for all staff in the scheme when added together were at least 85% of their total earnings.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 5% 8%

Set 3: contributions calculated on all earnings

The Employer calculates contributions based on all elements of staff pay and all earnings.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 4% 7%

Considerations for self-certified schemes

If Employers have used certification to allow an existing scheme to be used for automatic enrolment, then it’s possible that the certification period may include one or both of the increases in the minimum contribution levels. If they still need help, the Employer should check their scheme rules and speak to their pension provider or payroll provider.

The scheme rules or terms and conditions will need to reflect the increases in the minimum contributions, and the payroll will need to be ready to calculate and deduct the increased amounts.

The Department for Work and Pensions has produced guidance for employers on the process of certification, including a template of the certificate. This template includes a statement that the employer certifies at the current minimum up to 5 April 2018, and then at the increased minimum rates from 6 April 2018 and 6 April 2019.

Alternatively, Employers could have chosen to certify at the higher increased amount for the whole certification period. In this case there will be no need for their payroll to make a change on 6 April 2018, as the contributions will already be being calculated and deducted over the increased minimum contribution rate.

If the Employer has not done either of these, then they may need to end the certification period early and re-certify from 6 April 2018 with the correct total minimum contribution.

So how do Employers deal with the increases?

The increase in minimum contributions should be simple to do, but Employers need to start thinking about the increases early, and plan ahead for when they come into effect from 6 April 2018 and 6 April 2019.

We recommend that Employers check with their payroll provider to make sure that they’re ready to calculate and deduct the increased contributions when they rise from 6 April 2018 and 6 April 2019 – if they’re not prepared for the increases, the right amount may not be paid across to the scheme on time.

It’s important that their workplace pension schemes and payroll software can support the contribution increases, otherwise the right contributions might not be deducted at the right time, and the schemes used by these Employers may no longer be qualifying schemes for automatic enrolment.

Pension schemes should already be making necessary changes to support the increases, and will communicate this, but it’s still the Employer’s responsibility to make sure they’re using a qualifying scheme for their automatic enrolment duties, and that the right amount of pension contributions are deducted.

There is no legal requirement for Employers to write to their staff, but this is good practice and something they may want to consider doing. SYLO Associates can help with this.

Employers with increases set up for October 2017

Originally the first phase of the increases was due to start from October 2017. However, in April 2015 these dates were changed by the government to start from 6 April 2018.

As an Employer you may have already made the increases from October 2017.

If you have already done so, then the next increase will be April 6th 2019.

For assistance with this and any information on other HR related issues contact SYLO Associates today.