Employers and advisers need to prepare for phase three of auto enrolment of workplace pensions, as the big increase in pension contributions is less than six months away.
On 6 April 2019 the minimum total workplace pension contributions rise to 8%, of which the employer must pay 3%. There is no mandatory level of employee contribution – the employer may pay the full 8%. Where salary is sacrificed for pension contributions it amounts to a non-contributory scheme for the employee.
Be mindful that this hike in pension contributions where a salary sacrifice is in place will lead to another tranche of employees having to stop having their contributions deducted under sacrifice arrangements due to national minimum wage constraints. Instead, those employees will have to revert to an employee contribution being taken from net pay for Relief at Source scheme (RAS) or from gross taxable pay in Net Pay Arrangement schemes (NPA), with no impact on the employee’s NIC’able pay.
The Pension Regulator’s recent compliance focus has been on the quality of data being passed to pension providers. The emphasis has shifted from checking whether the right people have been auto-enrolled, to the calculation of contributions based on pensionable pay. In many cases “pensionable pay” won’t be the same figure as “qualifying earnings”.
Expect renewed focus from pension providers from April 2019, who will be anxious to demonstrate to the Pension Regulator that they are doing all they can to ensure the integrity of pension data.
It remains to be seen if employee opt-outs will rise above the 10% average as their contributions rise.
The odd statistic that 100% of employees had opted out of auto enrolment at recruitment agency Workchain, alerted the pension provider Nest that something was amiss. Further investigation led to the first suspended sentences against the company’s directors and senior staff.
The prosecution was made under The Computer Misuse Act 1990, as the management had impersonated staff when telephoning Nest to ask for employees’ IDs, then used those IDs to log in to the Nest portal and opt each employee out of the pension scheme.
It’s also possible that employers and agents will get more requests to “opt-down”, ie go back to the March 2019 level of pension contributions. Whilst this is permissible, there are some considerations:
- Does the provider permit non-statutory contributions?
- Is the additional work involved in handling non-standard contributions something that the payroll agent/employer wants to entertain even if the provider permits it?
It is not a requirement to consider opting-down. The employer can simply advise the employee that they may opt-out if they can’t afford the higher contributions. Then the individual will be re-enrolled on the employer’s re-enrolment date.
It is not wise to alert employees to the fact they can opt-down ahead of the April 2019 increase, as this could be seen as contravening the inducement provisions of the legislation. This is because once an employee is not paying the statutory minimum contributions, they are not in a qualifying pension scheme, and that also means the employer is not obliged to make any contributions at all. Hence the need to avoid the assertion that opting-down was encouraged in order to avoid employer contributions.
There are no further planned changes to auto-enrolment until the mid-2020s when the lower age limit will reduce to 18 from 22. The lower qualifying earnings’ band will be removed such that pension contributions will begin at the first pound of earnings.
I wonder when the politicians will be brave enough to announce the next increases in contributions, given that at least a total of 15% contributions is the bare minimum required to provide replacement income in retirement.
In the 2018 Budget, the Chancellor gave DWP another £5m to assist with the development of the pension dashboard. This project has now been handed over to the pensions industry to lead on.
The dashboard is designed to deal with the fact that by 2020 it is estimated that there will be around 50 million so-called “stranded pots” of pension contributions left behind when people change jobs. The dashboard should allow individuals and their advisers to keep track of where those pensions are. The dashboard project has been a long time in gestation, as we were promised a feasibility report by DWP in Spring 2018 and it’s not yet appeared.
State of the market
What will be the state of the pension market this time next year?
The introduction of mandatory registration for master trusts from 1 October 2018 as part of the Pension Schemes Act 2017, is expected to lead to at least 30 of the 88 current master trusts choosing not to get registered with the Pensions Regulator. If those master trust schemes are not absorbed into existing larger master trusts such as People’s and NOW, the provider will have to exit the market.
The fate of the money left with the exiting pension provider in this situation isn’t clear. Some assets will be invested with firms who are regulated by the FCA. Employers with less than 50 employees could seek redress from the financial services compensation scheme (FCCS). However, not all pension pots will be covered by the FCCS, so they will be at risk. The pension protection fund (PPF) will not be available to pick up those pension liabilities, as these workplace pensions are defined contribution arrangements, not defined benefit schemes.