Automatic Enrolment - the next steps

2019 sees the 50th anniversary of the first lunar landing – “That’s one small step for man, one giant leap for mankind”. It also sees the third in a series of small steps planned for the evolution of automatic enrolment, created by the Pensions Act 2008.

In the next few years we’ll see a shift from the initial “giant leap” taken; getting all employers to select an automatic enrolment scheme and enrol their eligible employees, or “jobholders” as the Government calls them.  This employer enrolment process has been ongoing for almost 6 years since October 2012, based on the size of the employer’s payroll. Larger employers have been joining first and very small employers with less than 25 employees are joining last.

Through this initial phase, the Government has kept the overall minimum contributions needed from the schemes and employer at a low amount, so that businesses that were required to automatically enrol their employees at an earlier date are not at an unfair disadvantage to businesses required to join at a later date.  The current standard minimum contribution requirements, valid until 5 April 2018, are:

Total minimum contribution: 2% of “qualifying earnings”
Of which, minimum employer contribution: 1% of “qualifying earnings”

Different minimum requirements apply when employers are using a different definition of pay to “qualifying earnings” to calculate pension contributions.

Now that all employers have started on the automatic enrolment journey, April 2018 and April 2019 bring two further “small steps” in the minimum contribution requirements:

April 2018

Total minimum contribution: 5% of “qualifying earnings”
Of which, minimum employer contribution: 2% of “qualifying earnings”

April 2019

Total minimum contribution: 8% of “qualifying earnings”
Of which, minimum employer contribution: 3% of “qualifying earnings”

These increases are a requirement.  It’s your responsibility to ensure that the contributions into the plan follow these requirements.

Again, there are slightly different requirements where employers aren’t using “qualifying earnings” to calculate pension contributions, depending on which “Quality Standard Test” you’re using.

The rates shown represent the standard rates that apply to the Basic Quality Standard Test.  Find out the details of the various quality standard tests, showing the different minimum contribution requirements and definitions of pay in respect of each of the tests.

What do you need to do?

If you’re using your Prudential scheme as a qualifying scheme, you’ll need to make sure the total contributions made by you (as the employer) and your scheme meet the minimum requirements.  If they don’t, you’ll need to increase your contributions to at least meet the minimum requirements from April 2018 and/or April 2019.  You’ll also need to do this for any non-Prudential schemes being used as qualifying schemes.

If you’re changing the minimum contributions you need to update the Employer Agreement/Declaration in respect of the changes.  This is a good opportunity to check that all the information you’ve provided is up-to-date.

What if employee contributions need to increase?

If there are increases to employee contributions, you’ll need to let the affected employees know. If you’ve been using the Prudential scheme as a qualifying pension scheme under the automatic enrolment provisions, you’ll have been issuing the Prudential Jobholders’ Agreement to your employees who have joined the scheme.

This shows them that their contributions represent the difference between the minimum total contribution needed, and the employer contribution. So if the minimum contribution needed increases, their own contribution could increase too. You’d need to tell your employees before these changes happen and what this would mean to their future contributions.

Government activity

The Government commissioned a review in 2017, asking a number of senior pension’s figures to look at various issues around automatic enrolment. They put forward a report with a number of proposals just before Christmas, but these would not be introduced until the mid-2020s. The proposals include: 

  • Extend provision to all 18 year olds (currently only a requirement for employees over 22)
  • No change to the earnings trigger before employees must be enroled (currently £10,000pa)
  • Remove the lower earnings threshold on which pension contributions would be required (currently £5,876pa)
  • No requirement to include the self-employed, but options are being investigated to include them at some stage in the future

These changes would increase the number of eligible employees by almost 1 million, and a potential annual increase in pension contributions of £3.8 billion. This needs to be balanced by the possibility that the significant increase in employee contributions for lower earners could prompt them to opt out.

There are no proposals for more increases to contribution rates after the planned changes for April 2018 and April 2019.

Before making any decisions about the future, the Government will want to wait to consider the success of the automatic enrolment process, including whether 8% total minimum contributions will give individuals large enough pots for a suitable income for their retirement.  They’ll also consider whether the low early opt-out rates from the early days of automatic enrolment are maintained as the very small employers become engaged, and whether the increased minimum contribution requirements will change this. We’ll watch this space for developments.

For additional information on automatic enrolment, please visit the employers’ hub or the Pensions Regulator’s website.