Increase in mandatory pension contributions from 06 April 2018

This briefing outlines some of the key issues employers should be considering now to ensure that their UK pensions offering remains compliant in the light of these contribution increases. Employers should be aware that there are civil and criminal penalties for breach of these requirements.

The change in brief

The Pensions Act 2008 requires UK employers to automatically enrol eligible workers into a tax registered pension scheme. Once auto-enrolled, a worker is free to opt out of the scheme. For so long as he/she remains an active member, however, his/her employer is required to pay a minimum level of pension contributions.

The statutory minimum pension contributions were initially set at a total employer and employee contribution of 2% of qualifying earnings. From 06 April 2018, however, these minimum contributions increase as set out in the table below.1

Note: The employer can choose either to pay the total minimum contribution in column C, or require the employee to pay the difference between columns B and C.

Issues to consider

One of the first key steps will be to consider, with your pension and payroll providers, how to implement the required contribution increases from 06 April 2018. Even relatively simple changes to existing payroll processes can often give rise to issues, so we would recommend early testing of any proposed changes to your payroll.

That is unlikely, however, to be all that is required. We often find that our clients need to consider the following additional items, amongst others:

• Contractual issues: Many employers are choosing to require their employees to also increase their pension contributions (instead of the employer bearing the cost of the full total contribution increase). These employers need to consider whether this is permitted under existing contracts with employees.
• Employee communication and implementation: Any contribution increases will need to be carefully communicated to employees. Further, some changes to contribution structures may require mandatory employer consultation for at least 60 days before the change.
• Pensionable pay measure: Employers who are using their own pensionable earnings measure to calculate pension contributions, instead of the statutory “qualifying earnings” definition, should consider whether this remains appropriate in the light of the contribution increases.
• Governing documents of your pension arrangement and member booklets: These may require updating to refer to the new contribution rates. 
• Employees who do not wish to contribute more: Some employees may not wish to increase their pension contributions above the current level. Employers will need to consider whether they wish to continue to allow these employees to contribute at the current lower levels and, if so, how that can be managed within the statutory auto-enrolment framework.

1 These rates apply where contributions are calculated by reference to “qualifying earnings” - broadly all earnings between £5,876 and £45,000 for the 2017/2018 tax year. If an employer uses a different measure of earnings to calculate pension contributions (eg basic pay from the first pound earned), then different minimum contribution rates can apply.