Pension changes ahead…

Money Posted 12/02/18
A new tax year dawns and with it comes higher pension contributions.

Phase Two of the pensions automatic enrolment obligations begins. Though companies may hope they have now met their pensions automatic enrolment requirements – systems are up and running, employees have been enrolled and processes are operating smoothly – there are more changes afoot.

Employers and employees are required to pay higher pension contributions from 6 April 2018. At the moment auto-enrolment requires pension contributions of 2% of qualifying earnings in total. Companies are required to pay 1% of this amount with the balance generally being paid by the employee. From April 2018 however contribution rates will increase and next year in 2019, contribution rates will rise again.

Phase one of automatic enrolment, which involved enrolling the UK workforce into a pension scheme, has now been completed. Data to the end of August 2017 showed that 14,800 employers in Hampshire, 11,600 in Surrey, 13,900 in Sussex and 13,000 in Kent enrolled employees into a qualifying pension scheme. Over 650,000 employees have as a result now been put into a pension scheme. (Across the UK as a whole, over 8.8 million workers have been provided with a workplace pension.)

New employers taking on an employee for the first time must comply with auto-enrolment obligations from the first day on which they employ an individual. This is known as the “duties start date”. (Employees that are aged between 22 and state pension age, ordinarily work in the UK and earn over the minimum threshold amount of £10,000 per annum must be enrolled into a qualifying pension scheme. Auto-enrolment can be postponed for up to three months provided the employer notifies its staff that it has decided to do so.)

What should employers do?

With these statutory changes afoot, employers need to ensure firstly that their systems are updated to ensure the higher pension contributions are paid. Payroll systems may need to be revised. If payroll is outsourced, employers need to contact their payroll provider to confirm any changes that need to be made.

Secondly, employers may want to tell their staff about these changes, though there is no statutory requirement to do so. (Unlike so many other areas of auto-enrolment, which does impose a range of statutory obligations to provide information, the legislation is silent here.) Opinion is divided as to the approach to be taken to informing employees. Some commentators have stated that informing employees is not necessary. However, in my view, it is preferable to tell employees of the changes that are taking place. It is a good news story – higher pension contributions are intended to lead to a larger pensions pot. The most appropriate way of informing staff depends of course on the organisation. For some larger companies a newsletter may be suitable, while for others an email communication may be all that is required.


Action for employers:

  • Check payroll software is set to handle increased contributions from April
  • If payroll is outsourced, check with the payroll provider
  • Inform employees about the changes

If employers and staff are paying above the statutory minimum rates outlined above, there may be no requirement for any further action, so long as their rates meet the new minimum requirements.

There is a fear among some that the increased rates will result in higher opt out rates with more employees deciding to exit the pension scheme. Time will tell but research from other countries suggests opt out rates do not tend to increase until contributions rates start to hit 8-9%.

And what if employers fail to meet their duties?

Based in Brighton, the pensions regulator (which has the role of enforcing automatic enrolment obligations) is becoming a more frequent player at the local magistrates’ court. It is taking an increasingly active role and has been seen prosecuting offenders. Two notable convictions come to mind:

  • Dominic Chappell has been prosecuted for failing to give the Regulator information in connection with the sale of BHS after having been served with formal notices under section 72 of the Pensions Act 2004.
  • in November last year, a bus company, Stotts Tours (Oldham), was prosecuted for failing to enrol their employees into a workplace pension scheme.

The regulator is becoming increasingly aggressive, partly as a result of several high profile pensions failures (thinks of BHS, British Steel and Carillion). From July to September 2017 the Regulator issued:

  • 5479 fixed penalty notices (a fixed fine of £400) against employers who had failed to meet some element of their auto enrolment obligations, and
  • 1433 escalating penalty notices (these are daily fines ranging from £50 per day to £10,000 per day depending on the size of the company.)

In the lead up to Christmas, the regulator carried out spot checks on employers in the South of England to ensure compliance with their pension duties. The regulator’s message is clear – employers must meet their obligations or risk the financial penalties.

Employer contribution rates Contribution rates usually paid by employee Total pension contributions
To April 2018 1% 1% 2%
April 2018 – end March 2019 2% 3% 5%
April 2019 onwards 3% 5% 8%

The statutory obligation relates to the company’s contribution rates and the total contribution rates in respect of qualifying earnings. Legislation does not impose a minimum employee contribution.

The above is a general overview and we recommend that independent legal advice is sought for your specific concerns.

Esther White
Solictor at Charles Russell Speechlys
T: 01483 252579
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