Automatic Enrolment Review 2017:

The government have reinforced their commitment to enabling future generations to achieve security in later life. Automatic enrolment has already succeeded in transforming pension savings for millions of today’s workers and on Monday this week, the DWP issued their Automatic Enrolment Review 2017: Maintaining the Momentum report. This report includes future planned changes to the automatic enrolment rules, the details of which were leaked over the weekend prompting headline coverage in the media. To view the original report click here. This communication focuses on the cost impact these future changes will have on employers, but it also shows the government wants employers, advisers and pension providers to do more to support individuals’ engagement with their savings, building a sense of personal ownership. Whilst we feel it is important you are aware of these changes, the DWP have confirmed there are no plans to introduce these until the mid-2020’s. Implementation of these changes will also require legislation to become effective.  

What are the changes that will affect employers?

There are two key changes:

Minimum entry age for auto-enrolment: Employers currently must enrol any worker aged 22 or over who is earning over £10,000 a year, into their approved pension scheme. This minimum age threshold will be reduced to 18 meaning those between age 18 – 21 will now be automatically enrolled if their earnings exceed £10,000 a year.

Removal of the pensionable earnings collar: Currently employers who pay contributions on the statutory minimum basis  use a qualifying earnings definition of pensionable pay. This means they can ignore the first £5,876 of an individual’s annual earnings, when calculating pension contributions.The government proposes completely removing this collar on pensionable earnings. 

NB the qualifying earnings definition of pensionable pay also includes a cap, currently £45,000 per annum. This cap which will remain in place.

What will be the impact?

The extent to which employers will be affected by these changes will depend on their current pension scheme rules.

Minimum entry rules:  All employers will be required to adopt the lower age threshold of 18 when assessing their workers and whilst this will increase participation in pension schemes it will consequently increase the cost of total pension contributions.

Removal of the pensionable earnings collar: Employers who operate their pension scheme on the statutory minimum basis will face additional costs as they will have to start paying contributions on the first £5,876 of earnings. If this change were effective from today, it would mean an additional annual cost to employers of £58.76 per pension member, based on a minimum 1% contribution rate.

You will be aware that the minimum employer contribution rate will be increasing from 1% to 2% on 6th April 2018 and then from 2% to 3% on 6th April 2019. At the 3% rate, the additional annual cost for employers would equate to £176.28 per pension member.

If you are an employer who uses a basic pay or total pay definition of pensionable earnings, then the removal of the £5,876 collar will not affect your pension costs (as these earnings are pensionable already).

Summary  

Perhaps some welcome news is that there are no plans to increase the minimum rates of 3% beyond April 2019. For now, the focus of the DWP is to target employers who are simply meeting the minimum requirements as it is them who will see the greatest impact when the changes come into effect. However, there is clear intent that employers, advisers and pension providers all need to contribute to the achievement of the governments long term aims. This combined with developing market practice, employee expectations and competitive pressures means that employee engagement around financial education and long-term savings is something all employers should be delivering or planning for.

For more information please speak to your Lucas Fettes consultant, or alternatively call us on 0345 357 8910 or email us: employeebenefits@lffp.co.uk

 

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