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Temporary Respite in Costs of Auto-Enrolment Pension Schemes

Our earlier article ‘Living Wage has Hidden Costs for Employees and Employers’ has been updated to reflect the Chancellor’s intention to postpone the rise in minimum pension contributions from both employer and employees.  The postponement will be for 6 months.  The increases will take place in April 2018 and 2019 instead of October 2017 and 2018.

Sting in the Tail for Employees?

Staff may find that their take home pay is less than expected from any pay rise from the employer and/or the increase, next April, in the National Minimum Wage to £7.20 per hour for those aged 25 or over.

The minimum contribution from employees and employers will increase as follows:

Current rates – employer minimum contribution 1%;  employee contribution 1% bringing total minimum contribution from all sources to 2%.
April 18 – employer minimum contribution 2%;  employee contribution 3% bringing total minimum contribution from all sources to 5%.
April 19 – employer minimum contribution 3%;  employee contribution 5% bringing total minimum contribution from all sources to 8%.

Managers should forewarn employees of this change so that their expectations about their net pay increase from any pay rise or the National Minimum Wage rise is realistic and does not become a source of discontent.

Auto Enrolment Requires Communication and Shaping Employee Expectations

Many SMEs will be subject to introducing auto enrolment pension schemes in the coming months.  The process is simple.  Managers should be prepared to explain the implications to their employees especially to avoid opting out as an individual’s pension is an important benefit.

The minimum total contribution is a legal requirement.   An employer may contribute more than the minimum noted above (e.g. 2% from October 2018) but if not the employee has to pay the difference i.e. 3% to make up the total contribution to 5%.    Compared to employee contributions in many pension schemes that may not seem unreasonable but bear in mind the employee may face a contribution of 5% from October 2019.  Hence, managers should consider what contribution rate the employer will make and communicate that to employees.

Management Time and Costs

Managers will find themselves invariably spending considerable time initially on:

  • setting up the auto enrolment process;
  • changes to the payroll process;
  • checking which staff have to be auto enrolled and who can opt in spend time;
  • familiarising themselves with the implications for their staff so that it is seen as a positive change.

Because of the level of earnings, some staff may not be eligible to be auto enrolled from the outset but may be entitled to opt in or have to wait.  Explaining the effect on individuals is important to avoid a sense of unfairness as employees will be unaware of the eligibility factors that are taken into account such as age and earnings.

After the initial set up, managers will need to keep individual earnings under review to ensure that staff are auto enrolled if they cross the earnings and age thresholds.

© 2015 HR Management Dimensions Ltd.

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