Auto-enrolment was introduced in 2012 and it’s redefined the approach to pension contributions for numerous employees. Data from the Pensions Regulator calculates almost ten million people have been auto-enrolled into workplace pension schemes since they began. But with minimum contribution rates about to rise in April 2019, there is some speculation whether it could have an impact on the number of people who decide to stay with their scheme. Are you prepared for the change in contribution levels – and might you be about to have to deal with increased levels of opt outs too?
A reminder of who qualifies for auto enrolment
Employees who work in the UK and are aged between 22 and state pension age must be auto-enrolled into a pension scheme subject to earning over a certain level (currently £10,000). Usually, employers and employees will both make pension contributions to the scheme unless the employer chooses to contribute the total amount. In most schemes, the contribution is only made on what’s known as the employee’s qualifying earnings.
Everyone has the choice to be in such a scheme and some employees will have chosen to opt out. Even for those who do, the system is set up to require them to be re-enrolled every three years to ensure no-one ‘disappears’. They then have the choice to opt out again.
Phasing of pension contributions
Before 6th April 2018, the total contribution into the scheme was set at 2%: 1% came from the employer and 1% from the employee (unless the employer chose to pay more). Total minimum pension contributions then increased from 2% to 5% with the employee contribution element comprising 3%.
On 6th April 2019 the minimum contribution levels will rise again. Employers must pay a minimum of 3% of qualifying earnings towards the pension with employees having to make up the balance of the new total minimum contribution of 8%. So if the employer is only paying the minimum amount, that could mean contributions of 5% are required from the employee.
What will be the impact?
There’s no doubt that auto enrolment is helping more employees save towards their retirement. But there are concerns that these increased contributions could lead to more employees choosing to opt out.
It’s a delicate balancing act when it comes to setting the contribution levels. Make the contributions too low and realistically the employee will not be putting enough away to enjoy a comfortable retirement. But if employees feel their contributions are increasing by too much, and they start to feel the impact in their take home pay, it could mean some employees decide to opt out completely.
What happened after the April 2018 increases?
Prior to the increases in 2018, there had been concerns over a large spike of people deciding to opt out. The Department for Work and Pensions was initially projecting rates as high as 28%. But analysis of the impact was more encouraging with many pension providers noting they saw a limited increase in opt-out rates.
For those who were fortunate enough to get a pay increase during 2018, this may have helped lessen the impact of increased contributions. Other factors like the annual increase to tax thresholds and increases in the living wage can help cushion the effect too and that could be the case this time round too.
But for those at the lower end of the income scale who haven’t had any pay increases, or who are already treading a fine line with day to day expenditure, another increase in contributions this year could compound the problem. Spending for today may well be viewed as more of a priority than saving for tomorrow especially when that spending is for basics like paying bills and buying food.
Make sure you explain the implications to employees
As an employer, it’s your responsibility to make sure the increased contributions are implemented so communicate the fact that they are about to happen. And if employees are thinking about coming out of their workplace pension as a result, make sure they appreciate the implications. They need to understand they will be losing out on tax relief and their employer contributions, both of which are a significant boost to the money they are paying in.
What could the future hold?
While further minimum contribution increases are not imminent, it’s conceivable that down the line they will come in. A 2017 report published by the Department for Work and Pensions also suggested lowering the minimum age from 22 to 18 to bring in an additional 900,000 people. But for now, the Government has confirmed it will assess the impact of these contribution increases first.
Do you need help managing auto enrolment?
Our Legislator payroll software is designed to seamlessly handle all aspects of auto enrolment including changes to pension contributions. We also offer outsourced payroll services so if you could benefit from having some help meeting your pension auto-enrolment duties, please give us a call on 01442 285460.