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Get ready for the contribution increases

Do your products support the automatic increases in minimum pension contributions?

Make sure you understand how these changes will affect you and your customers, and start adapting your products to be compatible now.

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Key points

  • these minimum contribution amounts are required to gradually increase at set times
  • contribution increases from the current minimum of a total 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 the employer has chosen to use certification, there are corresponding incremental increases in the applicable contribution rates on these dates
  • the employer and staff member can choose to pay more than the minimum contributions if they wish
  • all automatic enrolment pension schemes with contribution rates that would be below the minimum amount after the rate increases, must apply the higher rates in order to remain a qualifying scheme
  • if a pension scheme does not increase its minimum contribution levels in line with the legal requirements, it will no longer be a qualifying scheme for existing members and cannot be used for automatic enrolment
  • pension scheme trustees and providers, and payroll and software providers, should ensure their products support this legal requirement of automatic enrolment

How minimum contributions increase in stages

Beginning on 6 April 2018, employers may be required to increase the amount of their contributions into their automatic enrolment pension. Staff members will have to make up whatever shortfall remains of the new total minimum contribution.

The contribution levels continue to rise until the employer is paying a minimum of 3% towards the pension and the total minimum contribution reaches 8% - with the member of staff making up the rest.

If the employer pays the same as the minimum total contribution then the member of staff will not need to pay any contributions, unless the scheme rules require a contribution.

Both the employer and staff member can choose to contribute greater amounts to the pension if they wish.

If the employer contributes more than their required minimum amount - but less than the total minimum amount - then the staff member only needs to make up the shortfall between the total minimum and the employer contribution.

The table below demonstrates the phases of contribution increases, with the employer paying only their minimum, and the staff contribution shown in brackets (the difference between the total minimum and the employer minimum):

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%

Self-certification scheme increases

Employers may already have DC or DB workplace pension schemes.

Rather than needing to set up a new automatic enrolment scheme, these schemes can sometimes be used to put staff into under the employer's automatic enrolment duties, as long as they meet certain conditions.

Employers can self-certify that their scheme meets the minimum requirements to qualify for automatic enrolment. In these cases, schemes are divided into three sets, each of which have their own qualifying conditions, with particular requirements under automatic enrolment for each of them.

If the scheme doesn't meet the standards of one of these sets, then it cannot be used for automatic enrolment:

Set 1
As from 6 April 2019, a total minimum contribution of at least 9% of pensionable pay (at least 4% of which must be the employer’s contribution).

Set 2
As from 6 April 2019, a total minimum contribution of at least 8% of pensionable pay (at least 3% of which must be the employer’s contribution), provided that pensionable pay constitutes at least 85% of earnings (the ratio of pensionable pay to earnings can be calculated as an average at scheme level).

Set 3
As from 6 April 2019, a total minimum contribution of at least 7% of earnings (at least 3% of which must be the employer’s contribution) provided that all earnings are pensionable.

The table below demonstrates the phases of contribution increases for each of the above sets, with the employer paying only their minimum and the staff contribution shown in brackets:

Set 1 phasing

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 phasing

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 phasing

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%

Supporting employers with the changes

The increase in the minimum contributions should be simple to do, but early preparation is needed.

It is the employer's responsibility to ensure that the pension scheme they use to meet their duties is a qualifying scheme, and that pension contributions are deducted correctly - but pension scheme trustees and providers, and payroll providers, have a key role in making the process work smoothly.

We expect that schemes should help support employers with communications to members, either by providing template letters or handling the direct communications for them.

If the pension scheme being used for automatic enrolment requires contributions at the current minimum amount then the increased minimum contribution levels will need to be reflected in the pension scheme’s rules and other governing documentation in time for 6 April 2018 and 6 April 2019.

In most cases, changing the scheme rules and governing documentation will be the responsibility of the pension scheme trustees or managers.

Then in order to ensure that the amount due under the scheme rules or governing documentation are paid across to the scheme on time, the employer's payroll will need to be ready to calculate and deduct the increased contributions when they rise in April 2018 and 2019.

It is important that pension schemes and payroll products support the contribution increases, otherwise the workplace pension schemes used by your customers may no longer be qualifying, and the right contributions might not be deducted at the right time.

Our guidance below takes you through the steps that should happen to support employers in complying.

Ensure the pension scheme is qualifying

Pension scheme trustees and or managers (in the case of personal pension providers) should look at the rules or terms and conditions of the scheme to ensure they reflect the need to increase the minimum contribution levels on 6 April 2018 and 6 April 2019.

Some rules or terms and conditions may refer explicitly to the increased rates, while others may simply refer to the rates set in legislation.

In some cases the contribution rates may already be above the minimum required so no change is necessary. But, if the pension scheme is being used for automatic enrolment requires contributions at the current minimum amount and the rules or terms and conditions do not reflect the increased minimums they will need to be amended. Otherwise the scheme will not be qualifying and the employer will not be able to use it to meet their automatic enrolment duties after this time.

Managers of group personal pensions should also ensure that the qualifying agreements they have with the employer and members, which set out the terms and provisions of the scheme, reflect the increased rates as necessary.

Trustees of occupational schemes should ensure that the payment schedule they have with the employer is also updated to reflect the minimum contribution rates set out in the scheme rules.

Employer consultation

Changing a pension scheme’s rules or terms and conditions to increase member contributions normally requires employers to consult with the scheme members. 

If changes are needed as a result of the increase in the minimum contributions then pension scheme trustees and providers will need to consider, and advise the employer, whether existing scheme members need to be consulted about the proposed change.

Where the scheme rules or terms and conditions are already set to increase contributions to the minimum levels, either in April 2018 and 2019 or earlier, the employer will not need to consult members before deducting the increased amounts. However, they should still notify them that increased contributions are due to be taken.

So where, for example, the rules or terms and conditions currently include increases on 1 October 2017 and 2018, the employer may decide to continue with increases on that date and not delay until April 2018 and 2019. They may do so without consulting members, as long as they still inform them of the new contribution rates.

If the change is being made to ensure the scheme remains qualifying - that the rules or terms and conditions are being amended purely to reflect the minimum increases set out in law - the employer will not need to consult.

If the employer wishes to amend the scheme rules or terms and conditions to increase member contributions at a different time or by a different rate, they will need to consult members.

Member choice

If a member does not wish to pay the increased contributions due in April 2018 and 2019 the scheme rules or terms and conditions may allow them to remain at the lower contribution rate, or to reduce their contributions again after the increase.

This will mean they continue to be a member of the scheme, but as contributions are below the minimum level required by law, the scheme will not be qualifying for them.

Depending on the scheme, the member may no longer receive employer contributions.

Ensure the correct contributions are deducted

It is important that the employer's payroll is ready to deduct the increased contributions when they rise in April 2018 and 2019.

To help support employers, payroll providers and payroll software developers should consider whether increases can be automatically built into their systems.

If the scheme rules or terms and conditions already meet the minimum contribution levels, the pension scheme will be qualifying. However, the employer's payroll service provider will need to know when to deduct the increased contribution amounts.

If the employer has chosen to use certification - or if the scheme rules or terms and conditions uses qualifying earnings as the definition of pensionable pay, and the pay reference period is not the one aligned to tax weeks or months - then you should note that the contribution increases are likely to occur part way through a worker's pay period. For example, a pay period of 1 to 30 April, with the increase effective from 6 April.

This means that a pro-rated pension contribution deduction may be required for a pay period which includes 6 April 2018 or 6 April 2019. If this is the case, the contribution for the pay reference period up to 6 April would be calculated based on the old rates, and from 6 April up to the end of the pay reference period being based on the new rates.

If the employer's payroll does not process pro-rated contributions, 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 2018, contributions for the full pay period are deducted at the increased rate.

Alternatively, they may decide to apply the increased rate for any pay period that includes 6 April, even if the pay date is before 6 April.

To ensure there are no compatibility problems between payroll and pension scheme processes, if scheme trustees or providers have a preference for how contributions are deducted when minimum contributions increase, they should let employers and payroll providers know well in advance.

Certification

If the employer has chosen to use certification, it's possible that the certification period may include one or both of the increases in the minimum contribution levels. Employers may approach their pension provider or payroll provider for help.

The process of certifying that the scheme can be used as a qualifying scheme is separate from the process to increase the minimum contributions. The scheme rules or terms and conditions will still need to reflect the change in the minimum contributions as above, and the employer’s payroll will still need to be ready to calculate and deduct the increased amounts as above.

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 that the employer certifies at the current minimum up to 5 April 2018 and then at the increased minimum from 6 April 2019.

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

If the employer has not done either of these, then they will need to end the certification period early and re-certify from 6 April 2018. 

Members should know what is happening

When a member of staff was first automatically enrolled, the letter they received from the employer will have set out that contribution levels will increase over time.

There are no additional duties under automatic enrolment for employers to advise members about the increases, though they may wish to do so anyway to help minimise queries, or reduce the number of workers subsequently leaving their schemes. Employers should still be mindful of the need to consult their members if changes are made to the minimum contribution levels before the 6 April changes to contribution rates.

Schemes should consider how they can support employers with communications to members. We expect them to either provide template letters or handle the direct communications for them.

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