How to prepare employees for the 2019 pension auto-enrolment increase – a checklist
As we enter the final quarter of the financial year, UK employers are preparing for the next set of auto-enrolment increases, which bring a new set of pressures for both businesses and individuals.
With more money entering workplace pensions than ever before, we’ve prepared a brief checklist to make sure your employees aren’t put off by the increase and your administration processes are in-tune with the upcoming changes.
What’s changing for employers?
The increase for employer contributions and the amount will be dependent upon which definition of salary you have elected to use:
- If you use the qualifying earnings definition (salary band between £6,032 and £46,350), the minimum employer contribution will increase from two per cent to three per cent.
- If you use Set 1 your minimum contribution will increase from three per cent to four per cent.
- If you use Set 2 your minimum contribution will increase from two per cent to three per cent.
- For those who use Set 3 (total earnings) your minimum contribution will increase from two per cent to three per cent.
What’s changing for employees?
Similar to above, the changes for employees are dependent on the salary definition your business has chosen to use for auto-enrolment:
- If you use the qualifying earnings definition (salary band between £6,032 and £46,350), your employees’ contributions will increase from three per cent to five per cent, meaning a total minimal contribution of eight per cent.
- If you use Set 1 your employees’ contributions will increase from three per cent to five per cent, meaning a total minimum contribution of nine per cent.
- If you use Set 2 your employees’ contributions will increase from three per cent to five per cent, meaning a total minimum contribution of eight per cent.
- For those who use Set 3 (total earnings) their personal contribution will rise from three per cent to four per cent, meaning a total minimum contribution of seven per cent.
With these contribution increases in mind, here are six areas to consider when preparing your people for the 2019 increases.
1. Removing the shock factor
As an employer, there are no legal obligations to tell your people that come April you will be taking more money from their pay and putting it into their workplace pension. Imagine the shock they might get if suddenly their take home pay has been reduced and you haven’t properly communicated why the changes have happened.
To remove the ‘shock factor’, it might be worth allocating some time to plan a communication campaign leading up to the April increases. Some topics you may wish to explore:
- How much extra will be going into their pension each year?
- How will the increases affect their take home pay?
- What difference will the new contributions have on their projected retirement fund?
Communicating the changes that are going to happen will not only allow for your employees to plan for the increase, but should also help to reduce questions to your payroll when the changes occur.
2. Educate your employees about the importance of saving for their future
As total minimum contributions increase, people will be looking to their employer for help with their financial plans. In fact, while auto-enrolment means that more people than ever before are saving into a workplace pension, many people are confused and 65.2 per cent of employees say they would expect their employer to provide guidance.
The 2019 contribution increases create the ideal opportunity for you to provide some additional education around pensions and saving for the future. By doing so, you can help your employees make confident pension decisions on their own, and relieve any financial worries and anxieties they have. It’s also a great way to ensure the money your business is spending on contributing to workplace pensions is a worthwhile investment.
3. Make sure your employees are making contributions tax efficiently
If you are not already doing so, consider introducing salary exchange/sacrifice. Salary exchange is an arrangement where your employees give up part of their future earnings in exchange for a non-cash benefit, in this case a contribution to their workplace pension.
As the salary is being ‘exchanged’ rather than paid, both you and your employees do not pay National Insurance contributions (NIC) on the exchanged amount. The exchanged amount can then be paid into the employee’s pension plan as an employer contribution. The same pension contribution is received, but both you and the employee are better off due to the NI saving.
Not only will this help to soften the blow of these increases, but the employer NI saving it generates could be used to provide additional educational support for employees.
4. Prepare your payroll and finance department
Start preparations with your payroll software and your staff to ensure they are ready to manage these changes. The 6th April falls part way through a pay reference period, to avoid any confusion for your members, consider increasing the contributions to be effective from the start of the pay reference period that this falls within.
For example, if your pay reference period is 1st to 31st, make the change effective from 1st April and not 6th April to avoid having to pro rata contributions.
5. Review your policy on opt down
As this latest increase will have more than doubled the employee’s contribution requirement since being auto enrolled, certain employees may find this a step too far and consider leaving the pension.
These increases are mandatory and everyone who is already enrolled must have their total contributions increased to the new minimum level. However, once this has occurred, and subject to your agreement, where a worker doesn’t want to pay the higher contributions, but also doesn’t want to cease contributing, you may allow them to contribute at a lower level. Be mindful that your communications aren’t written in a way promoting opting down.
6. Finally…make sure you have a sound governance framework in place
The Pension Regulator’s (TPR’s) Automatic enrolment: commentary and analysis (2018) revealed that more than nine million people are now auto enrolled into a workplace pension scheme. As such, it is no surprise that defined contribution pension plans continue to attract the scrutiny of TPR. As the facilitator of your employees’ pension savings, making sure your workplace pension is as good as it can be and meets best practice is extremely important.
Establishing a formal governance process allows you to periodically review your pension, how your employees interact with it and can help identify and manage any risks to members’ retirement savings, preventing any future problems.
The author is David Roderick, development director at Johnson Fleming.
This article was provided by Johnson Fleming.
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