On 6 April 2019, minimum contribution rates will increase for defined contribution (DC) qualifying schemes used for auto-enrolment purposes. Employers should now be considering whether contribution rates for their DC qualifying schemes need to change from 6 April 2019 and whether they need to consult and/or agree contractual changes with affected members before the changes take effect.
The phasing in of contributions
As a reminder, the auto-enrolment requirements require a minimum employer contribution and a minimum total contribution for DC qualifying schemes based on a percentage of qualifying earnings (the band of earnings between £6,032 and £46,350 for the 2018/19 tax year). On 6 April 2018 minimum contribution rates for DC qualifying schemes increased and they will again on 6 April 2019. The phasing in of these increases had been pushed back by the Government from 1 October 2017 and 1 October 2018 respectively, giving employers more time to prepare. With the April 2019 changes, the current planned phasing in of increases to contributions will be complete.
The increases to the standard minimum contribution rates are as follows:
Employers may certify their DC qualifying schemes on alternative bases, which have different minimum contribution requirements. For example, many schemes pension all basic salary from £1 upwards, in which case the current minimum employer contribution is 3% of basic salary, with a total minimum contribution of 6% of basic salary. Under the phasing in of contributions, this will increase to 4% and 9% respectively on 6 April 2019.
In practice the actual percentage increase will be dictated by the elements of salary that are pensionable under a given scheme.
Action to take
As well as identifying which employees and schemes will be affected, employers should consider whether minimum contribution rates are currently entrenched in the governing provisions of their scheme and whether amendments are needed to bring the governing provisions in line with the statutory minimum requirements.
Employers may also need to take legal advice on the current position on minimum contributions in employment contracts and whether changes need to be made to such terms.
Is consultation needed?
If the intention is to reduce the employer's contributions to a DC scheme or, more likely in this scenario, to increase member contributions, the employer will have to conduct a 60 day pensions consultation process prior to implementing the proposed change.
There is a general exemption which means that employers do not need to consult if they are implementing a change in order to comply with a statutory provision. However the statutory minimum requirements for DC qualifying schemes do not require members to contribute at a specified level (they only specify a minimum employer and a minimum total contribution to the scheme). As such any proposed increase in member contributions as part of the phasing in process will generally require consultation.
Consultation will generally not be required where affected members have already been through a pensions consultation process on the change previously or if their contributions under the relevant scheme will automatically move in line with the phasing in of the statutory minimum requirements as a function of how the governing provisions of the scheme are drafted.
And don't forget, auto enrolment also applies to temporary staff
Employers who are planning to take on temporary staff for the period running up to Christmas will need to factor in auto enrolment as the requirements apply to seasonal workers in the same way as for permanent employees, even if they will only be working for the employer for a short time. This means that employers will need to assess temporary staff when running payroll and if necessary auto enrol eligible staff into a qualifying pension scheme.
Employers can still postpone the auto enrolment of such staff in line with the relevant legislative requirements, but staff may still have a right to opt into an auto-enrolment-compliant scheme (depending on their age and earnings during the relevant pay assessment period).
Are further changes on the horizon?
At the end of last year, the Government published the outcome of its review of auto enrolment. The review's headlines include reducing the lower age limit for auto enrolling eligible workers from 22 to 18 and ensuring that minimum contributions to a DC scheme are calculated from the first pound earned, rather than the lower earnings limit.
Further work was promised in several areas including in respect of statutory minimum contribution levels, where the Government said that it would monitor the impact of the phased increases in statutory minimum contribution rates in order to inform discussions with stakeholders about future contribution rates and the balance between statutory and voluntary saving.
So the April 2019 increase in contributions is unlikely to be the end of the auto enrolment story. If and when the Government issues further proposals, employers may wish to make their views known.
If you have any queries in relation to this update or require assistance in planning for these changes, please speak to your usual pensions team contact at Womble Bond Dickinson.