Not all employees will want to pay the new higher auto enrolment contributions, so employers need to know how to react.
Although we are not anticipating any spectacular increase in drop-out rates, we readily acknowledge that next month’s significant hike in statutory minimum contribution rates to auto-enrolled pension schemes constitutes a step into the unknown.
Even if there weren’t widespread concerns about the possible economic repercussions of Brexit, the new overall contribution minimum of 8% of qualifying earnings, of which at least 3% must be paid by the employer, will still be regarded by some employees as quite a step up from the current 5% overall minimum – of which the employer must pay at least 2%.
So, it’s important that employers enter this new chapter of auto enrolment with their eyes wide open and are aware of the necessary considerations and procedures involved should any employees decide they want to step down from these increases.
Employers are not compelled to communicate the increased contribution rates to their workforces in advance of their implementation but are strongly advised to do so – although they must not promote the option for employees to step down.
If an employee decides they don’t want to pay the extra, either as a result of their employer’s communications or because they notice a significant increase in the amount being deducted from their pay, they can cease membership of the qualifying arrangement but still have some involvement in the pension scheme – should the employer decide to allow this option.
As long as they are re-enrolled at the employer’s next re-enrolment date, they can be in a non-qualifying section of the same pension scheme.
Here they can continue paying the same contribution levels as they were doing before the 6th April 2019 increases or even elect to stop making contributions altogether and just continue to receive employer contributions.
Their employer will not, however, be required to continue paying such minimum contribution levels if it doesn’t want to.
Chase de Vere is well placed to advise them on the best course of action in this respect, taking into account factors such as their budgetary constraints and the needs of their workforce.
We can also help firms devise an effective communications programme to inform employees about the options open to them and the stance that their employer is taking with regard to the forthcoming increases.
The importance of undertaking such a programme in conjunction with external experts like ourselves should not be underestimated as this is area is a potential minefield. Of paramount importance is the fact that employers are not allowed to use their communications to encourage staff to remain at current levels or stop contributions altogether.
The first position should be to make the deductions. Then, if an employee requests an alternative, this can be offered – but is not required by legislation.
By way of example, one client that we are devising a communications programme for is currently making employer contributions of the full 5% current overall mandatory minimum, without its employees having to make any contributions at all. However, it has decided that it is not prepared to raise its contribution levels any higher to cater for the new 8% overall minimum contribution level on April 6th.
It has therefore elected to deduct the remaining 3% from employees’ pay, and we have devised a communications programme to explain to the workforce exactly what is happening – but taking great care to ensure that the information provided cannot be viewed in a way that could be construed as inducing any employees to opt out.
Another important communications issue we can help with is explaining to employees the potential impact on their final pension pot if they decide not to increase their own contributions in line with next month’s changes, or to cease them altogether.
Such education is very much in the employer’s interests as well as the employee’s because, if employees find themselves unable to afford to retire when they had originally intended to, it can play havoc with a company’s succession planning.
The Financial Conduct Authority does not regulate some aspects of auto enrolment.