Mar 2019
11
Auto Enrolment Phasing - The Second Coming
Ten million people have joined workplace pension schemes since auto enrolment began in 2012. The scheme faced its first major test in April, when the total minimum pension contributions increased from 2% to 5%.
Under automatic enrolment, minimum pension contributions are required to increase over time. This happens on set dates - the 6th of April 2018 and the 6th of April 2019 - and is a key feature of automatic enrolment. By law, a total minimum amount of contributions must be paid into a pension scheme. The employer must make at least the minimum employer contribution towards this amount and employees must make up the difference. It is an employer’s responsibility to make sure these increases are implemented.
In 2019, the minimum contribution levels will rise again on the 6th of April, with the employer paying a minimum of 3% of qualifying earnings towards the pension. Staff members will have to make up whatever shortfall remains of the new total minimum contribution up to 8%, including the employer's contribution. These increases should be seamlessly handled by payroll software.
| Date effective | Employer minimum contribution |
Staff contribution | Total contribution |
| Before 6th April 2018 | 1% | 1% | 2% |
| 6th April 2018 to 5th April 2019 | 2% | 3% | 5% |
| 6th April 2019 onwards | 3% | 5% | 8% |
If a member does not wish to pay the increased contributions due, they can choose to opt-out of the pension scheme, or they may be allowed to remain at the lower contribution rate after the increase. This will mean they continue to be a member of the scheme, but as contributions are below the minimum level required by law, the scheme will not be a qualifying auto enrolment pension scheme.
Opt-outs as a result of Phasing
Since April 2018, many pension providers have said that they have seen very little impact on opt-out rates as a result of the higher contributions. In the two months after the April 2018 increase, the opt-out rate rose by approx. 0.2% to 8.2%. In a survey of nearly 350 employers, 88% said that the increase in minimum auto enrolment contribution rates in April 2018 had not reduced scheme participation. Prior to the increases, there were fears of a bigger spike, with the Department for Work and Pensions (DWP) projecting opt-out rates as high as 28%.
There was also a very low percentage of workers who opted to reduce their contribution rate to the previous 1% contribution level. One employer with 30,000 workers enrolled had just 40 employees choosing to remain at the lower amounts.
Steve Webb from Royal London said: “We have seen very little impact of April’s rise in contributions. The rise coincided with the annual boost to tax thresholds, some annual pay rises and an increase in the living wage, all of which will have cushioned the rise in contributions. Inertia also remains a powerful force and will continue to be so as long as contributions remain at relatively modest levels.”
Employers are predicting that opt-out rates will remain low as auto enrolment contribution rates are set for another increase this year.
Click here for more information about phasing / increases to minimum contributions.
