On 6 April 2018, and again on 6 April 2019, minimum contribution rates will increase for defined contribution (DC) qualifying schemes. The phasing in of these increases has been pushed back by the Government from 1 October 2017 and 1 October 2018 respectively, giving employers more time to prepare.
If employers have not already done so, they should now be considering whether contribution rates for their DC qualifying schemes need to change from April 2018 and/or April 2019 and whether affected members need to be consulted with prior to the changes taking effect.
To recap, the law requires a minimum employer contribution and a minimum total contribution for DC qualifying schemes based on a percentage of qualifying earnings (that is. the band of earnings between £5,876 and £40,000 for the 2017/18 tax year). These standard minimum contribution rates will increase in accordance with the following table:
For example, it is common for schemes to pension all basic salary from £1 upwards. In such circumstances the current minimum employer contribution is 2% of basic salary, with a total minimum contribution of 3% of basic salary.It is open for employers to certify their DC qualifying schemes on alternative bases to the above, which have different minimum contribution requirements attaching to them.
Under the phasing in of contributions, this will increase to 3% and 6% respectively in April 2018 and 4% and 9% respectively in April 2019.
In practice the actual percentage increase will be dictated by the elements of salary that are pensionable under a given scheme.
Practical steps to take
As well as identifying which employees and schemes will be affected, employers should consider whether minimum contribution rates are currently entrenched in the governing provisions of their scheme and whether amendments are needed to bring the governing provisions in line with the statutory minimum requirements. Employers may also need to take legal advice on the current position on minimum contributions in employment contracts and whether changes need to be made to such terms.
Where an employer is proposing to reduce its own contributions to a DC scheme or, more likely in this scenario, to increase member contributions to a DC scheme, there will be a requirement for the employer to conduct a 60 day pensions consultation process prior to implementing the proposed change.
There is a general exemption which means that employers do not need to consult if they are implementing a change in order to comply with a statutory provision. However the statutory minimum requirements for DC qualifying schemes do not require members to contribute at a specified level (they only specify a minimum employer and a minimum total contribution to the scheme). As such any proposed increase in member contributions as part of the phasing in process will generally require consultation.
Consultation will generally not be required where affected members have already been through a pensions consultation process on the change previously or if their contributions under the relevant scheme will automatically move in line with the phasing in of the statutory minimum requirements as a function of how the governing provisions of the scheme are drafted.