Don’t be phased by pension minimum contribution

24 October 2017

Since the introduction of workplace pension via Pension reform automatic enrolments (AE) since October 2012, there has been a slow introduction of legal requirements placed on UK PLC to provide workplace pension meeting legal minimum requirement. The early staging date employers have even hit triennial re-enrolment points to re-capture those who have previously opted out. The process of Pension AE has been complex with convoluted rules and obligations, conflicting operation of Pay Reference Periods and operations of postponement.

Pension Reform AE introduced the concept of set legal minimums in relation to contributions, and especially employer contributions. These legal minimums varied depending on the pension scheme rule basis of the earnings to be included: from former scheme set pensionable pay; to the new pension reform qualifying banded earnings. At least contracting out of the state pension scheme has ended removing a certain layer of complexity from pensions that used lower and upper earnings limits, although now placing an element of burden for pension for all back on the state.

By law, minimum contributions amounts are shortly to be increased at set times. This is either governed by scheme rules timings (if earlier and marching original indicated uplift dates) or at specific points now set in law (which are later than originally intended).

So employers need to identify within their pension scheme whether they have obligations in October 2017 and October 2018, or whether they can rely on the now law minimum application points of April 2018 and April 2019.

Although employers and employee can contribute above state set minimums already, the current minimum sit at 2% minimum overall with 1% minimum from the employer (for a banded earnings based scheme). Else the scheme could be subject to a 3% minimum with 2% from the employer (referred to as Set 1 where earnings do not include overtime, commission etc.).

To remain a qualifying pension scheme for AE, employers must apply increased contribution rates from the relevant rise date.

Employers will need to decide:

  • Whether their contributions rates already meet the relevant criteria
  • At what point does any increase apply for their scheme (whether 1st October or 6th April) for each relevant year
  • What rates are to be applied for the employer meeting any revised minimum criteria
  • What rates (if any) are to be applied to the employee to ensure that any additional amount required to make up at least the minimum overall amount required is applied or higher (if scheme rules allow)
  • How the payroll (or system calculating contributions) control parameters are to be changed to apply the revised correct rates at the correct time point.

By law, for any pay reference period commencing on 6th April 2018, the qualifying pension scheme needs to ensure that the employer is paying at least 2% and then from 6th April 2019 at least 3% with overall contributions of 5% (in 2018) and 8% (in 2019) respectively. The employer may choose to pay all of the contributions to cover the minimum if they so wish.

Don’t expect your payroll software or service to apply any uplifts automatically, they will have the capability for applying revised contribution rates, these scheme rules and governing documentation setting contributions are the employer and pension schemes responsibilities and need to formally set and notified. 

So: Investigate, plan & budget, define, communicate (including staff) and apply your pension AE contribution rate revisions at the applicable time.

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