Mandatory increases to auto-enrolment contribution rates

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It is just over five years since the first employers started to automatically enrol eligible workers into a qualifying pension scheme. Research has shown that this policy has generally been a success. However, it is also acknowledged that a key test will be how the picture develops as the minimum contribution levels are increased.

The first such increase takes effect from 6 April 2018. If they have not done so already, employers should consider what steps need to be taken to ensure that the statutory increases are implemented.

What are the increases?

The current minimum 1% employer and 2% overall contribution rates for defined contribution schemes which meet the quality standards for auto-enrolment are set to increase:

Date Total minimum contribution (including tax relief) Of which, the employer must contribute
Until 5 April 1018 2% 1%
From 6 April 2018 to 5 April 2019 5% 2%
From 6 April 2019 onwards 8%  3%

Contributions are paid on an employee's "qualifying earnings" which, for the 2018/19 tax year will be the employee's gross earnings between £6,032 and £46,250.

What action needs to be taken?

1. Check whether a rule amendment is required

The scheme rules will need to be reviewed to check that they provide for contribution rates to rise in line with the current statutory timetable. If they do not, a rule amendment may be required.

2. Is consultation with affected employees required?

Unless exempt, employers with 50 or more employees need to consult in respect of certain “listed” changes. Increasing the level of member contributions and requiring member contributions where these were not previously required are “listed” changes. However, the requirement to consult is subject to certain exceptions, such as if a change is being made to comply with a statutory provision.

There has been some debate as to the circumstances in which consultation with affected members is required before the increase is implemented.

According to the Pension Regulator’s guidance on auto-enrolment, consultation will be required where the “proposed increase does not explicitly match the statutory increases” or “the proposed change to increase member contributions was not already part of the operation of the scheme at the time the employer first started using that scheme to meet their employer duties.”

Where there is a requirement to consult, the consultation period must be at least 60 days and this would need to be factored into the timetable.

3. Check that the correct contributions will be deducted

Employers should contact their scheme and payroll providers to make sure that the change in contributions will be correctly calculated and paid over to the scheme. Any payment schedule which has been agreed with the trustees of an occupational pension scheme should also be updated.

4. Communicate with members

Although there is no statutory requirement to provide further information to members ahead of the April 2018 increase, employers should consider reminding them about the change.

Employers should act now to ensure compliance with the statutory increase in minimum contribution rates in time for the 6 April 2018 deadline.