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What is automatic enrolment?

In UK by law every employer has an employee whose duty is to enrol other eligible employees to the workplace pension scheme. Employers also have to contribute towards this pension scheme. This scheme is called ‘automatic enrolment’ due to its nature of automatically enrolling staffs to it, wherein employees don’t have to take any step to get enrolled. However, the scheme is not automatic for employers.

Let’s discuss its importance and the factors controlling it here.

There will be changes in automatic enrolment time and again, which may disrupt your client’s duties as employers. Some of the changes would be planed and informed from the beginning of the introduction of the scheme in the UK, whereas there could be others to be announced later by government legislations.

Auto Enrolment Changes

For you and your clients’ awareness, you can visit this page for detailed information on all types of necessary changes to automatic enrolment.

Under automatic enrolment following the UK law, minimum pension contributions by the employer increases over time on fixed dates. This page will help you understand how to support your clients with the increasing contribution.

Try to figure out if your clients are ready for increase in contribution?

What do your clients know about the contribution increase in minimum pension schemes?

Ensure they have clear understanding of the changes that will apply to them and their employees/staff. They should also be prepared for the minimum contributions increases.

Main points

  • Raise in minimum contribution amounts is set at specified times, according to law.
  • Current total minimum contribution of 2 per cent raise
  • On 6 April 2018, increases from the present overall minimum contribution of 2 per cent of qualifying earnings will take place, continuing to rise to 5 per cent. This will reach a total minimum amount of 8 per cent on 6 April 2019.
  • If your client has decided to use certification, their overall minimum contribution rates will also go up on these dates
  • If they want to, your client and their staff can pay more than the minimum contributions
  • Your client can choose to pay the total minimum contribution. In that case, their staff do not have to compensate for any deficit, and may not have to pay into the pension at all, conditional on the scheme's rules
  • In order to remain a qualifying scheme, all automatic enrolment pension schemes with contribution rates that would be lower than the minimum amount following the increase in rate must apply the higher rates
  • If your client runs a defined benefit (DB) scheme, these contribution raises are not relevant and they do not have to anything

Auto Enrolment – New Pension Rules

On April 6, 2018, your clients will have to increase the minimum contribution amount to at least 2% of qualifying earnings into their employee’s/staff’s automatic enrolment pension scheme. Shortfall has to be paid by the members of the staff to make the full minimum contribution up to 5%, which will also include your client’s contribution.

On April 6, 2019 the minimum contribution levels will again increase along with your clients’ pay of minimum of 3% owing to the pension. This will take the total minimum contribution to 8% together with difference made by the staff.

If your client does not have any staff in a pension scheme they don’t need to take any additional action for automatic enrolment or also if they already have the increased minimum amounts as mentioned above. The contribution amount doesn’t increase for the staff who wanted to be put into a scheme that your client does not have to pay.

It will be your client’s choice to contribute total amount of the complete minimum contribution. This means staff or employees do not have to contribute at all to the scheme, unless there is such rule that says contribution of staff is a must. If they wish, both your client and their employees can decide on their own whether to contribute more than the minimum amounts to the pensions.

The below table indicates minimum contributions that employers must pay, which is a fixed defined contribution scheme for automatic enrolment. It also indicated the date when employers must increase the contribution amount. The figure is calculated based on incomes between £5,876 to £45,000 per year (£490 to £3,750 per month, or £113 to £866 per week), which also includes certain features of the contribution.

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%

Schemes with different rules on contributions

You clients will have diverse minimum contribution increases to the depiction set above, subject to the type of scheme, if workplace pension scheme is already in place which they would have self-certified for use with automatic enrolment.

Table below shows the new rates for these schemes.

Criteria for Certification

When using an existing DC scheme for automatic enrolment, the three different sets of minimum contribution requirements are discussed below.

On the basis of how pensionable contributions are considered, every set has its own minimum contribution levels. This cannot be applied for automatic enrolment if your client's scheme doesn't match the criteria in any one of these contribution sets.

Table below depicts the stages of increase in contribution for every single set:

Set 1: Gross Earning Contributions Calculation

Contribution calculations are done on the basis of gross earnings by your client. Bonus, commission, overtime, or particular employee allowances (like shift incomes or relocation allowance) are not included in the calculation.

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: Gross earning calculation based on at least 85% of total earnings

Contribution is calculated on the basis of gross earning by your client and bonus, overtime, commission or certain employee allowances (like shift earnings or relocation allowance) are not include in their calculation. Gross earnings used for calculating contributions for all employees in the scheme that your client has to check should be at 85% of their total incomes.

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: All Earnings Contributions Calculation

Contribution is calculated based on all the factors of employee pay and incomes by your client.

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%

The Changes in the scheme rules

Ensure Pension Scheme meets the requirements

To allow scheme rule increase minimum contribution, most pension schemes would already make arrangements. No change is necessary, if scheme contribution rates in some cases are already above the minimum required.

The scheme rules and governing documentation for your clients should be changed by pension providers for your clients if their scheme needs payments at the current minimum amount, and the increased minimums is not reflected in the rules.

If the increased contribution is not supported by their scheme, to amend the scheme rules your clients should speak to their pension providers to allow new rates.

Consult the Employer

To increase contribution payment from the employee scheme, if your clients plan to change the rules of terms and conditions of their pension scheme, they would generally require consulting the affected staff.

If the changes to employer’s pension scheme are required as an outcome of the increase in the minimum payment needed by the law, then the trustees of the scheme and providers will inform your clients whether the current scheme member requires to be assessed about the changes to their rate contributions.

Make Sure the Correct Payments are deducted

When the contributions rise on 6 April 2018 and 6 April 2019, it is essential your client’s employees are ready to deduct the increased minimum contribution, and are aware when and how much contribution to deduct.

Your clients should check with outsourced payroll service if they have outsourced the service that they are prepared for the increase in the contribution and ensure they are aware when to deduct them.

If the payroll is done in-house, then they should be certain that their software is ready for the increase in contribution. To avoid any kind of problems, it is advisable that they speak to the payroll service provider to update the system as per the changes introduced in the payroll systems and pension contribution.

Your clients need to be certain that their software is ready for the purpose of payroll changes if they own their payroll system. They should talk to their payroll providers to avoid any problem whatsoever as there would be a chance of discrepancies due to payroll changes that will also be required to be changed into their systems.

If you are running payroll for your client, you should be sure that the contribution increased are placed correctly. This also includes the first payroll run where in the new rates take away the influence part through the pay period.

Pro-rated contributions

It’s quite likely that the increase in contributions will take place in stages through employee’s work time. This is the case if your client has decided to use certification, or if qualifying earnings as the definition of pensionable pay are applied by rules or terms and conditions of the scheme, and the reference of pay period is not the one linked to tax weeks or months.

Here’s an example to make it clear – your client may have a salary period of 1st to 30th April, with 6th of April as the date for putting the raises into effect.

It suggests there may be a need to raise deduction in the pro-rated pension contribution for a period of income which includes 6th April 2018 or 6th April 2019. In these circumstances, the pay reference contribution period till 6th April would be seen keeping in mind the old rates, and from 6th April till the end of the period of pay reference, it will be on the basis of the new rates.

Clients should talk to pension provider and payroll provider and find out the best ways to deduct, if pro-rated contributions are not processed by their payroll. They should also pay the outstanding amount to the scheme.

Even if the salary date is before 6th April, your client may choose to take account of the rate that is raised for any contribution period that includes 6th April 2018. It will be similar for 6th April 2019 raise.

Employees should know about the developments

When a member employee is enrolled automatically to the scheme for the first time, the letter she/he gets from the employer explains that contribution stages will increase over a stretch of time.

Under the automatic enrolment scheme, there is no other duty for your clients to counsel your employees about the contribution raises.

No other duties are there under automatic enrolment for your clients to give advice to staff about the raises. However, they may like to do so anyway to help reduce queries, or cut down the number of workers who choose to pull out of their schemes following the raises.

Here’s an example letter outline that your clients can modify:

If your clients choose to increase the minimum contribution levels before the 6 April 2018 and 6 April 2019 raises, they should still think about the need to discuss the matter with their staff.

Pension schemes may be helpful if the staff of your clients are kept informed about the developments through writing. If a client wants help from their scheme, they should get in touch with them to learn what can be done.

Letters sent to clients from TPR

Employers get letters from The Pensions Regulator (TPR) to help them with their automatic enrolment duties. Letters about raises in minimum contribution are mentioned below.

End of transitional period for pension schemes

The intermediary period for pension schemes with defined benefits comes to an end on 30 September 2017, which implies that clients who have applied for this period will have to do something to abide by the law.

When they used the intermediary period, employers were able to defer automatic enrolment of staff into the pension scheme with defined benefits. Employers who have used a defined contribution (DC) pension scheme for automatic enrolment are not affected by this. Hence, the majority of employers will remain unaffected.

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