Minimum auto enrolment (AE) contribution rates are increasing again but a little employee education can help ease the pain.
A significant further rise in the statutory minimum contribution rates to auto-enrolled pension schemes in April 2019 is around the corner, and Chase de Vere is working hard to help clients communicate the changes to their workforces.
But there is certainly no need for panic, and fears that opt-out rates are going to rocket as a result of the increases appear wide of the mark.
With effect from this April, the overall minimum contribution rate for most pension schemes will rise from the current 5% of qualifying earnings – of which at least 2% must be paid by the employer – to 8% of qualifying earnings – of which at least 3% must be paid by the employer.
Whilst many employees will feel the impact in their pockets, particularly if their employer chooses not to increase its own contribution levels above the mandatory minimum, there are a number of causes for optimum.
It certainly bodes well that opt-out rates did not spike following the minimum contribution increases in April 2018 from 2% of qualifying earnings (of which the employer had to pay at least 1%) to current levels.
Royal London, for example, reports opt-out rates of 8.1% in both the third and fourth quarters of 2018, compared to 8.7% and 7.1% for the corresponding quarters of 2017.
Some commentators point out that increases in the personal allowance for Income Tax and in the National Living Wage – the statutory national minimum wage for those aged 25 and over – helped cushion the impact of the April 2018 increases. So, hopefully, even bigger increases due to both this April will do the same.
In April 2019, the Personal Allowance will rise from £11,850 to £12,500, making many employees £650 better off. In April 2018, on other hand, it only increased by £350 from £11,500 to £11,850.
The increase in the National Living Wage this April from £7.83 per hour to £8 .21 per hour, which is estimated by the government to hand full-time workers a £690 annual pay increase, is also more generous than the corresponding one in April 2018 – 38p an hour compared to 33p per hour.
Whilst we do not altogether rule out a slight increase from current opt-out levels we are not anticipating this being more than a few per cent.
In particular, the impact of inertia on the part of employees should not be underestimated. Intending to opt out is one thing but actually getting around to doing so is quite another.
Efforts made on the part of some employers to make contributions beyond the statutory minimum should also help, and Chase de Vere can advise on whether such a move might be appropriate in the context of your own workforce and budget.
Although many clients are sticking to the imminent new mandatory 3% minimum employer contribution, leaving employees to make a contribution of 5%, quite a number have decided to pay an extra 1% – feeling it fairer to split the contributions equally at 4% for both employer and employee.
Some employers have also helped to soften the blow of the increased contribution levels by introducing salary exchange – realising tax and NI savings by employees trading a lower contractual salary for a rise in pension contributions.
Whatever stance is being taken by the employer, however, the key message is to communicate it clearly to the workforce, along with the potential savings being realised by the increases to the personal allowance and the National Living Wage.
Our experience shows that employees who are given suitable warning and information about such increases will have far less of a problem with them than those who are taken by surprise.
At Chase de Vere we are able to offer educational programmes that can help in this respect because, unlike many of our competitors in the employee benefits space, we also have an independent financial adviser (IFA) arm.