The rising cost of living has presented financial challenges for many of us. As an employer, you might be considering how you can support your employees, while also being conscious of your business costs and outgoings.
One area you might be paying close attention to is your workplace pension scheme. Here are some practical and technical things to consider before making any decisions. Plus, information on how to process changes for your workplace scheme and other ways to support employees.
This article is intended as guidance only and should not be taken as advice. Before making any changes, we recommend speaking to your scheme adviser if you have one to talk through your options.
Increasing your employer contributions
Increasing your employer contributions could be a great way to support your employees with their retirement savings plan, especially during periods of financial difficulty. If you’re considering this, here are some questions to think about before you do.
How long do you intend to increase the contributions for?
Do you want to increase your contributions for the long-term, or for a set period only? Even though you don’t need to make any changes to your contributions, it could be worth thinking about. Increasing your contributions even for a limited time could be helpful for employees. But, if you think you’ll need to reduce your contributions again at a later date, bear in mind how this might impact them. If they’ve gotten used to paying in less as a result of your contributions, it could be difficult for those who are struggling financially when things change.
Being clear about your intentions upfront should help to align employee expectations and make them aware of any potential changes in the future. If you don’t think increasing contributions in the long-term is financially viable, you might want to consider other forms of support. You can find some suggestions in the section ‘Other ways to support your employees’, later in this article.
How much should I increase my contributions to?
This is entirely up to you and what you can afford. You may wish to contact your scheme adviser to discuss this. The more you choose to increase your contributions, the less your employees may need to pay in. However, this may be dependent on any contractual obligations, for example if your employees have agreed to pay a certain amount to receive a matched employer contribution. Or, if you already contribute 8% or more to your auto-enrolled employees’ pension, they might not be currently contributing at all – meaning your increase would have no impact either way on their contributions. Employees can of course choose to increase or keep their contributions at the same amount if they want – so make sure they know this is an option if they’d like to keep saving.
How will increased contributions impact new employees?
If you hire any new employees who are eligible for auto-enrolment (or who choose to opt-in), it’s up to you to decide if you want to contribute more than the minimum requirement of at least 3% of qualifying earnings (or the equivalent under one of the alternative quality requirements). You may wish to contribute the same as the amount you’ve increased for other employees. However, bear in mind that whatever contribution level is noted on their contract becomes a contractual obligation. This means if you want to reduce contributions at a later date, it may require contract negotiations. Your newer employees would also be included as part of the consultation process required to reduce your contributions. This is outlined in the next section under ‘Consultation requirements’.
Considerations for reducing your employer contributions
Rising costs may have presented financial challenges for you as an employer. If you currently pay more than the minimum of 3% in employer pension contributions, reducing this might be something you’ve considered doing to cut costs.
However, reducing your employer contributions might not be as straightforward as increasing them. There are several factors you may need to consider. Significantly, reducing contributions – even temporarily – could have a big impact on your employees’ retirement savings further down the line.
The impact on your employees by reducing contributions
For many employees, a workplace pension could be one of their most valuable sources of retirement income. By reducing their contributions, even for a short time, it might make a difference in how much they’ve saved when it’s time to access their savings. Although remember, the value of a pension can fall as well as rise and isn’t guaranteed. The value of their pension pot when they come to take benefits may be less than has been paid in.
Reducing contributions may also have a negative impact on employee morale, which could impact your employee attrition rate.
Auto-enrolment considerations when reducing contributions
If you’re currently paying in more than the minimum 3% of qualifying earnings, you may be able to reduce your contributions to this level. This is dependent on your contractual obligations. Your employees may have contracts that include a commitment from you to pay in a certain level of employer contributions. So, make sure you check before taking any next steps.
Consultation requirements before reducing contributions
Another big consideration in reducing contributions is consultation requirements.
If you have 50 or more employees (not the number of scheme members), you’re required to consult on any reduction to the pension contributions you make. We also recommend that when thinking about a consultation you get legal advice. Here’s a summary of the consultation requirements you’d need to follow.
Providing written notice to reduce contributions
Before the pension consultation starts, you should give written information about the proposed change to affected members. This means members who are actively paying into their pension, or prospective members who would be affected by the change. Deferred members (those no longer paying contributions) and pensioner members (retirees) don’t need to be consulted. You also have to share this information to any representatives who will be consulted, for example a trade union or elected representatives. The information provided must:
- Detail the number of prospective and active scheme members who will be impacted by the change.
- Describe the proposed change and how it will affect the scheme and its members.
- Be accompanied by any relevant background information.
- Indicate the timescale over which the change will be introduced.
- Allow the affected members’ representatives to consider, study and give feedback to the employer of the impact of the change on members.
The consultation period must last at least 60 days. You have to tell those being consulted when the consultation will end and any deadline for the submission of written comments. If no responses are received by the end of the consultation period, it can be regarded as complete. If you do receive responses, you must be able to evidence that you have properly considered the responses before proceeding. Otherwise, it could invalidate the consultation.
It’s worth noting that the purpose of a consultation is not to obtain the consent of those consulted. It’s to inform members and provide an opportunity for them to give feedback on the proposed changes.
How to change your employer contributions
Once you’ve taken on board the considerations and made an informed decision, the process to increase or reduce your employer contributions is fairly straightforward.
- Update your payroll to reflect the new basis for calculating your contributions.
- Inform your scheme provider of the changes.
- The changes should take effect from the beginning of a pay reference period (the beginning of the period over which employees are paid their usual salary or wage). This is so that the minimum contribution for the whole pay reference period can be calculated on the same basis.
Employees who want to reduce or pause their contributions
Those struggling with the cost of living might see stopping pension contributions as a viable option to reduce their monthly outgoings. While you can’t stop them from doing so, you can help them understand the implications so they can make an informed decision.
The impact on employees of pausing their own contributions
If your employees choose to reduce or pause their personal contributions, they could miss out on your employer contributions and from government tax relief. Depending on how long they choose to do this for, it could have a significant impact on the amount they save for retirement.
The State Pension alone is unlikely to be enough for a comfortable retirement. This could mean your employees may have to work longer than they were planning. Share our article The impact of pausing your contributions with your employees to help them consider whether pausing contributions is right for them.
What this means for you as an employer
If any of your employees want to reduce contributions below the minimum requirement, or stop them altogether, then you can also stop making contributions. You can of course continue to contribute if you wish, to support them with their long-term saving.
What if the employee is on salary sacrifice?
For those that use salary sacrifice to contribute to their pension, reducing or stopping their contributions would reduce any savings made on tax and National Insurance (NI) contributions. If contributions were stopped completely, employees would revert back to their original gross salary from before salary sacrifice. This means you’d go back to paying the full amount of tax and NI based on their original salary. Learn more about salary sacrifice in our article Salary sacrifice for employers – what you need to know.
Supporting employees with getting back into retirement saving
You may have employees who simply have no other option than to temporarily pause their contributions at this time. If this is the case, there are ways you could help to reassure them with getting back on track.
Remind your employees of their right to opt back in
If they want to re-start contributions at a later date – and are still jobholders (eligible or non-eligible) at that date – they can opt back into the scheme. If they do this and pay the minimum contribution required, you’re also required to re-start paying minimum contributions. If an employee has previously opted in and back out again within the last 12 months, auto-enrolment legislation means you’re not required to allow them to opt-in a second time. However, doing so will allow them to restart their retirement savings.
Consider automatic re-enrolment
Every three years, you must re-enrol certain employees back into your pension scheme as part of meeting your legal duties. You can decide whether or not to re-enrol eligible employees who have:
- Opted out in the 12 months leading up to your re-enrolment date.
- Stopped contributions or started paying in less than the minimum requirement in the 12 months leading to your re-enrolment date.
If employees know they will be auto-enrolled again within 3 years, this might give them more confidence in getting their retirement savings back on track. It’s worth noting, if you’re already approaching your re-enrolment date, that some employees may not want to be re-enrolled again so soon.
Other ways to support your employees
There are other ways to support your employees with the ongoing cost of living crisis. And it doesn’t all have to come at a significant cost.
Promote your other workplace benefits
One way of supporting your employees at this time could be to add to or enhance some of your other workplace benefits. In some cases, you may already have these in place. It might just be a case of better promoting these benefits such as:
- Free or discounted financial advice
- Enhanced maternity and paternity pay
- Childcare vouchers
- Enhanced healthcare options
- Employee assistance helplines and wellness support
Signpost resources to help them
Outside of your own resources, here are some key places you can direct to:
- Citizen’s Advice can offer support and help with the cost of living, including information on grants and benefits available.
- The government’s MoneyHelper offers impartial guidance on all sorts of money matters, including help with finding a financial adviser. However, it’s worth noting that there’s usually a charge for financial advice so this may not be right for those most affected.
- Our Cost of living hub has a range of resources to support your employees during this time.
Manage your scheme to support your employees and your business
As we live through difficult times, your actions could make a significant impact on both your employees and your business. There’s not likely to be a one-size-fits-all solution, but it’s important to consider all of your options before making changes to your workplace scheme. If you need further assistance, remember to contact your scheme adviser if you have one. Or alternatively, speak to your usual contact from your scheme provider.