Auto-enrolment and phasing of contribution increases
Auto-enrolment was introduced by the government to encourage employees to save more for their future in a workplace pension scheme.
A workplace pension is separate from the State Pension which is £8,767.20 a year or £168.60 a week in tax year 2019/20. (Based on someone reaching state pension age on or after 6 April 2019 with a full National Insurance record).
To enjoy a comfortable retirement it’s likely employees will need more than the State Pension. For an employee, active membership of an auto-enrolment scheme with their employer is a great way to increase their pension savings.
Employers with an auto-enrolment scheme must make sure the contributions payable meet the minimum contribution requirements. The minimum contributions to be paid to a qualifying workplace pension scheme are increasing in two stages - this is known as phasing.
The minimum contribution rates increase from 6 April 2019.
It’s your responsibility as an employer to understand what this means for you and to take action to ensure the minimum contribution requirements are met.
The value of an investment can fall as well as rise and isn’t guaranteed. An employee could get back less than they originally invested.
How does this affect you?
The impact on you will vary depending on the following:
- Your pension arrangements for your employees.
- Whether you're using 'qualifying earnings', or one of the other earning sets, to calculate contributions.
- The software used for auto-enrolment (Aegon's SmartEnrol or another package).
- The current contribution rates being paid by you and your employees.
For more information on these, see below.
Your pension arrangements for your employees
You’ll want to make sure your existing pension arrangements – scheme rules or terms and conditions - already need payment of at least the minimum contributions set out in the legislation, including the increases being phased in. If you plan to make changes to what’s already needed, you should take legal or specialist advice about whether or not you’ll need to consult with your employees. The Pensions Regulator has further information and a letter template(Opens new window)(Opens new window) to help you communicate the changes if you have to.
The new contribution rates applying from 6 April 2019 differ depending on whether you use qualifying earnings, or one of the other earnings sets, to calculate contributions.
Use the table below to identify the minimum contribution rates that apply to your qualifying workplace pension scheme.
|Earnings set||Earnings definition||Minimum contribution to 5 April 2018||Minimum contribution 6 April 2018 to 5 April 2019||Minimum contribution 6 April 2019 onwards|
|Qualifying earnings||Based on all earnings, deducting the lower earnings threshold and capped at the upper earnings threshold.||2% at least 1% of which must be the employer’s contribution.||5% at least 2% of which must be the employer’s contribution.||8% at least 3% of which must be the employer’s contribution.|
|Set 1||Based on pensionable earnings which must be at least equal to the employee’s basic pay.||3% at least 2% of which must be the employer’s contribution.||6% at least 3% of which must be the employer’s contribution.||9% at least 4% of which must be the employer’s contribution.|
|Set 2||Based on pensionable earnings which must be at least equal to the employee’s basic pay. This set can only be used if the combined total pensionable earnings of all employees in the group is at least 85% of their combined total earnings.||2% at least 1% of which must be the employer’s contribution.||5% at least 2% of which must be the employer’s contribution.||8% at least 3% of which must be the employer’s contribution.|
|Set 3||Based on all earnings.||2% at least 1% of which must be the employer’s contribution.||5% at least 2% of which must be the employer’s contribution.||7% at least 3% of which must be the employer’s contribution.|
- An employer can agree to pay more than the employer minimum contribution, but can’t pay less than this.
- The employee must pay any difference between the employer contribution and the total minimum.
- Employers and employees can arrange to pay more than the minimums.
Your next steps will depend on the earnings set you use and the current contribution rates that apply under your pension arrangements.
Where the current contribution rates that apply are:
Above the minimum for 6 April 2019
- There’s no further action you need to take for contribution phasing. Continue paying these and consider if a higher level for you and your employees is appropriate.
Above the minimum for 6 April 2018 and below the minimum for 6 April 2019
- Please open the sections below and read on for more information. This will help you prepare for the changes required by 6 April 2019.
Does the software I use for pensions and auto-enrolment need updating?(Expand content) (Minimise content)
This will depend on the software you use.
For employers using SmartEnrol
We’ve updated SmartEnrol and made all the changes required for phasing. This means your process will remain unchanged. However, where you include contribution percentages in your payroll file, you’ll need to update the minimum percentages. Where the contribution percentages aren't included in the payroll file, you can ask us to add these.
You’ll need to speak with your payroll provider to make sure that the correct contribution rates are used to calculate contributions.
For employers not using SmartEnrol
If you’re not using SmartEnrol, you're likely to be using software that helps you in meeting your auto-enrolment duties. This may be provided by a third-party and may be part of your payroll software.
We recommend that you speak to your payroll provider (this could be in-house or provided by a third-party) as early as possible to understand how phasing will work for you and your employees.
You’ll continue to submit contributions to Aegon in the same way as before, though adjustments to your contribution rates may be needed as explained above.
You’ll have received a letter from The Pensions Regulator (tPR) informing you of the changes - take time to read this.
We recommend you review the information on their website(Opens new window).
You should give your employees early notice of the changes to contributions affecting them. tPR has produced a sample letter(Opens new window) you could adapt as necessary.
Speak to a financial adviser and legal representatives to understand your responsibilities and ensure what you're doing is correct.
Pay Reference Period (PRP) overlapping the start of the tax year beginning 6 April 2019(Expand content) (Minimise content)
The new minimum contribution rates apply from 6 April 2019. SmartEnrol will continue to check and inform you whether the contributions being paid meet the minimum required by legislation, set out above. Where the PRP spans 6 April SmartEnrol will calculate the contributions for the purposes of this check on a pro-rata basis.
For example, if you're using a calendar month as a PRP, SmartEnrol will calculate the contributions for the PRP starting on 1 April 2019 and ending on 30 April 2019 as follows;
- 1 – 5 April 2018/19 rates
- 6 – 30 April 2019/20 rates
If you don’t use SmartEnrol, you should check how your software provider intends to deal with any required increase at 6 April 2019.
You need to consider how to amend your payroll processes to make sure that the required minimum contributions are paid at the right time. We recommend that you speak to your payroll provider (this could be in-house or provided by a third-party) as early as possible to understand how this will work for you.
Does phasing in of minimum contribution increases apply to all types of pension schemes?(Expand content) (Minimise content)
Yes, it applies to all defined contribution pension schemes that are used as an auto-enrolment or qualifying scheme.
What happens if an employer doesn’t make sure their pension arrangements meet the minimum contributions requirements, including increases, in line with legislation?(Expand content) (Minimise content)
Aegon strongly supports the Government’s principle of encouraging people to make adequate pension savings for themselves. Help from employers is critical to achieve this.
You have a responsibility to meet the legal duty that the correct contributions are paid, as required under your pension arrangements. By not doing so you could negatively impact your employees’ retirement pension and could leave you open to legal action from The Pensions Regulator.