The amounts that are required to be paid into auto-enrolled pension schemes only ever seem to go in one direction. Up!
Total mandatory minimum contribution levels increased from 2% at outset in 2012/13 to 5% in 2018/19 and 8% in 2019/20 for schemes using a basis of ‘qualifying earnings’ (which include: salary, wages, commission, bonuses, overtime, statutory maternity, adoption and sick pay and ordinary or additional statutory paternity pay).
Furthermore, with pensions experts continually highlighting that even the current minimum levels are inadequate for most people to secure a comfortable retirement, who would bet against them climbing significantly higher still?
Nevertheless, with such upward momentum virtually now taken for granted, and with massive disruptions like the coronavirus and Brexit to deal with, it is all too easy to overlook a small reduction in contribution amounts hidden away in the smaller print.
Indeed, because the change did not come into effect until the start of the current tax year, most employers may be entirely unaware of it.
This time it is not the percentage mandatory minimum contribution level that is deserving of scrutiny but the qualifying earnings contribution thresholds.
With effect from April 6th 2020, the lower limit rose from £6,136 a year to £6,240 a year. At first glance this might seem nothing unusual as it has increased every year except 2016/17 (1*). But the difference this year is that the upper level of qualifying earnings remains unchanged at £50,000.
We can only assume that the decision not to increase this is linked to a desire on the part of the government to synchronise the earnings limits with the personal tax thresholds – as the £50,000 higher rate threshold has, unusually, has also remained unchanged for 2020/21.
The upper qualifying earnings level, which was £46,350 in 2018/19, had risen every year before that since 2013/14.*
But the fact that it remains at £50,000 in the current tax year means that the overall qualifying earnings band will actually shrink by £104.
Although such an amount may not seem terribly eye-catching, it can all add-up over 30 years or so and make a tangible difference to the size of a final pension pot.
So, this could perhaps act as a valuable trigger for employers using a qualifying earnings basis to consider whether either employer or employee contributions, or both, should be increased above the current mandatory minimums.
It could also be a good opportunity for some employers to reconsider whether qualifying earnings continues to be the most appropriate contribution basis for their employees.
One alternative is to use a basis of basic pay only (known as Set 1), which requires a total minimum contribution of 9% – of which employer contributions must be at least 4%.
Another is to use a basis of basic pay, provided it constitutes at least 85% of workers’ total earnings. (Set 2). This requires – like qualifying earnings – a minimum total contribution of 8%, including an employer contribution of at least 3%.
The final option is a basis of total earnings (Set 3), which requires a minimum total contribution of 7% – of which the employer’s contribution must be at least 3%.
We are finding this total earnings route to be particularly useful for clients with employees with modest levels of basic pay but high levels of bonuses, commission or overtime. Firms in the motor or leisure industries or those that operate call centres are obvious examples.
Such company-specific decisions need to be taken in conjunction with expert advice, and Chase de Vere is well placed to help with these and other pensions issue. It should also be stressed that, despite the health crisis, our services are continuing as normal.
The pensions consultancy services we provide to corporate clients are designed to ensure that they continue to meet their employer duties and the guidelines set out by The Pensions Regulator.
They incorporate an annual pensions governance review, which includes revisiting the employer’s adopted contribution strategy, and information and advice on legislative or market changes relevant to their workplace pension arrangements, business plans and budgets.
Sources
* www.thepensionsregulator.gov.uk
Content correct at time of writing and is intended for general information only and should not be construed as advice.