Amidst the gloom and uncertainty facing retailers following a difficult Christmas trading period, there is one good news story for their workforces. Automatic enrolment into workplace pensions, introduced to help individuals to save towards retirement, has become "business as usual" with the vast majority of staff across the UK now saving for their retirement. Some predicted that the increase in auto-enrolment contribution rates in April 2018 would cause greater numbers of staff to opt out of pension provision but this has not proved to be the case.
Minimum contributions are also due to increase from April 2019, with further changes predicted beyond then. Whilst this is good news for staff, it will increase costs for retailers in an already challenging environment.
A quick recap
Auto enrolment requires employers to enrol all eligible jobholders into a defined contribution (DC) pension scheme and make contributions. This applies to staff aged at least 22 but under state pension age, ordinarily working in the UK and earning more than £10,000 per year, unless they are already a member of a pension scheme that meets certain criteria. Anyone who is automatically enrolled into a scheme has the option to opt out of it within one month.
The auto-enrolment obligations are ongoing and employers need to continue to meet them, for example, by re-enrolling staff every three years.
Auto enrolment requires a minimum employer contribution and a minimum total contribution for DC pension schemes based on a percentage of qualifying earnings (for the current tax year, this is the band of earnings between £6,032 and £46,350). Minimum contribution rates for DC qualifying schemes increased on 6 April 2018 from a total minimum contribution of 2% of qualifying earnings (of which at least 1% came from the employer), to a total minimum contribution of 5% (of which at least 2% comes from the employer). These rates will increase again from April 2019.
Changes from April 2019
From 6 April 2019, the lower and upper earnings limits of the qualifying earnings band for auto-enrolment purposes will increase in line with the lower and upper earnings limits for NICs (from £6,032 to £6,136 and from £46,350 to £50,000 respectively). Some DC schemes use this band of earnings as the measure for contributions into the scheme, while the lower threshold is used to distinguish between non-eligible jobholders and entitled workers for all employers. You should continue to use existing figures up to, and including, 5 April 2019 but will need to ensure that payroll and HR systems are revised to factor in the new figures from 6 April 2019.
The earnings trigger at which a worker is automatically enrolled will continue to be set at £10,000.
Also from 6 April 2019, the minimum total contribution explained above will rise to 8%, of which at least 3% must come from the employer. Employers may certify their DC pension schemes on alternative bases, which have different minimum contribution requirements. For example, many schemes pension all basic salary from £1 upwards, in which case the current minimum employer contribution is 3% of basic salary, with a total minimum contribution of 6% of basic salary. Under the phasing in of contributions, this will increase to 4% and 9% respectively on 6 April 2019.
In practice the actual percentage increase will be decided by the elements of salary that are pensionable under a given scheme.
For information about the action you may need to take in respect of this increase, see our earlier article
There was concern that more staff might choose to opt out of auto enrolment when higher contributions took effect from 6 April 2018 but, in practice, opt-out rates appear to have remained consistent with those existing before the increase. We will have to wait and see whether the same happens with the April 2019 increase.
At the end of 2017, the Government published the outcome of its review of auto enrolment. That proposed reducing the lower age limit for auto enrolling eligible workers from 22 to 18 and removing the lower earnings limit from the band of qualifying earnings so that workers being auto enrolled at the minimum level would receive contributions between £1 and the upper earnings limit. The Government's intention is to implement these changes in the mid-2020s.
The Government also said that it would monitor the impact of the increases in minimum contribution rates "to inform discussions with stakeholders about future contribution rates and the balance between statutory and voluntary saving". In the light of Brexit uncertainty, it remains to be seen whether further contribution increases will be high on the political agenda.
As auto enrolment is likely to result in an increase in workers with multiple small pots, the pensions dashboard will be vital to enable individuals to view all their pension savings in one place. At the end of 2018, the Government set out in a consultation document how it expected the pensions dashboard to work - in essence, an industry-led system of multiple dashboards, which would allow consumers to access their pension information in a single place online.
When parliamentary time allows, the Government intends to pass legislation to require pension schemes to provide individuals' pension data for use by the pensions dashboards (but only with the consent of the individual). In the meantime, the Government intends that some schemes, such as master trusts, start to supply data to dashboards on a voluntary basis from 2019/20. The Government's consultation, which seeks views on the creation of pensions dashboards, closes on 28 January 2019. Further details, including how to respond to the proposals, can be found in the consultation document.