The pension contributions actually payable are determined by the individual scheme’s rules. However, for Automatic Enrolment there are minimum contributions that must be paid. The combined 2015 Spending Review and Autumn Statement announced that the previously-legislated increases to Auto-Enrolment minimum contribution rates were to be delayed by 6 months each and ‘aligned to tax years’. This process of increasing minimum contribution rates is known as phasing.
Effective 01 October 2016, two pieces of legislation put these phasing delays on a statutory footing and came into force:
- The Employers’ Duties (Implementation) (Amendment) Regulations 2016 (which amended the Employers’ Duties (Implementation) Regulations 2010 in Great Britain, and
- The Employers’ Duties (Implementation) (Amendment) Regulations (Northern Ireland) 2016 (which amended the Employers’ Duties (Implementation) Regulations (Northern Ireland) 2010)
As such, the statutory phasing position is now as follows:
|Phase||Date||Employer Minimum||Total Minimum|
|1||To 05 April 2018||1%||2%|
|2||06 April ‘18 to 05 April ‘19||2%||5%|
|3||06 April ’19 onwards||3%||8%|
These increases apply to the qualifying earnings that are payable in the Pay Reference Period (PRP) that starts on or after these new phasing dates. Or do they?
In the first instance, therefore, employers will need to be look at their scheme rules to make sure that they will be compliant with the new minimum contributions. If the rules do not allow for minimum contributions, this will render the scheme as non-qualifying.
Then there is the question of when these minimum contributions should actually be reflected in payroll deductions. Currently, this all comes down to your definition of the PRP and there are two main definitions:
- The PRP that is aligned to the period of time for which the worker is paid. For example, a monthly payroll may pay from 01 to 30 April and, therefore, has a PRP reflecting this period of time
- The PRP that is aligned to tax periods. For example, if an employee is paid monthly, the PRP starts on the first day of the tax month and ends on the last day.
The chosen PRP will make a difference as to when the minimum contribution increases are actually effective and reflected in increased contributions. If the employer operates a PRP aligned to the period of time for which the worker is paid, the minimum increases may not actually be effective from the phasing date. Taking the example of a worker paid from 01 to 30 April 2018, the first PRP on or after 06 April 2018 does not commence until 01 May 2018.
As stated above, the rules of the pension scheme itself dictate the actual deductions that are made, always remembering the legislative Auto-Enrolment minimum contributions requirement. So, say that the employer operates a PRP that is aligned to the period of time for which the worker is paid and this is 01 to 30 April 2018. The legislative position is that total minimum contributions must be 2% for this PRP, increasing to a total of 5% in the PRP that commences 01 May 2018.
However, it could be that the pension scheme rules say that contributions must be deducted at 2% up to an including 05 April 2018 and 5% from 06 April. The pension scheme rules override the statutory minimum contributions.
It is vitally important that employers check their scheme rules to see if proration of contributions will be required. So:
- Auto-Enrolment defines the minimum contributions that must be paid, though
- Individual pension scheme rules determine how that minimum contribution requirement is met
This is going to be very confusing.
The pension legislation says one thing, scheme rules are another consideration and payroll software may do a mixture of both. The implications of phasing on employers, workers and software needs to be realised, discussed and clarified.
Watch this space!
Aside from the fact that we are not sure how this is actually going to work, is the delay to minimum contributions a good thing in the first place?
Successive Governments have encouraged us to save for our retirement. As a result of the phasing delay, on the one hand, workers have to wait to see the benefits of increased contributions in their pension pots.
However, on the other, this phasing delay does seem to achieve the Government’s intention which is to ‘simplify the administration of automatic enrolment for the smallest employers in particular’. Employers may feel a relief that future increased pension costs are delayed.
Plus, the delay does bring benefits for the Government and their own documents outline how this will save £390 million in 2017/18 and £450 million in 2018/19 simply, as a result of tax relief on contributions being lower.
Taking both hands together, the whole picture is a confusing one and is a measure that is in contrast to the Government’s message about saving for retirement. The obvious question is whether this could impact State Pension ages in the future or, at least, mean that we are going to have to work longer before we are able to afford to retire.