What does the auto-enrolment contribution rate rise mean for employers?
From April 2019 auto-enrolment contribution rates will rise from a minimum of 5% to 8% of earnings (which means 5% from the employee and 3% from employers). With nearly 10 million people using the scheme, now is the time for employers to communicate this change to their staff.
Who does it apply to?
The changes apply to all employers with staff in a pension scheme, whether its auto-enrolment or an existing scheme.
According to the Pensions Regulator, you don’t need to take any further action if you don’t have any staff in a pension scheme for automatic enrolment or you are already paying above the increased minimum amounts.
What are the changes?
This will vary according to the type of scheme you hold, and its rules. The Pensions Regulator advises “Most employers use pension schemes that from April 2018 require a total minimum of 5% contribution to be paid. The calculation for this type of scheme is based on a specific range of earnings.”
- Minimum employer contribution: 2%
- Minimum employee contribution: 3%
- Minimum total contribution: 5%
From April 2019
- Minimum employer contribution: 3%
- Minimum employee contribution: 5%
- Minimum total contribution: 8%
Communicate the positives
“A good employer should desist from harbouring any resentment towards this increase” advises independent IFA Guy Skinner from Citygate Consulting. “This is an excellent opportunity to educate employees about the importance of financial planning and making provisions for later life. The happiest workplaces are those in which the employee feels valued by the employer, so there is real scope here – with proper communication – to stress how your business welcomes the initiative and is invested in your employees’ futures, and not just solely in here and now.”
Educate staff on pensions
Auto-enrolment was launched in the first place to tackle the huge shortfall in the knowledge around retirement provisions, and lack of savings. The increase in contributions is now because not enough people are saving for their retirement, and still an issue that many haven’t addressed.
“It is a sad fact that due to lack of foresight, many will simply not be able to afford to maintain a desired standard of living post-employment and worse still, they may not even realise this yet” according to Skinner. He advises these changes provide a good opportunity to help your staff plan for their future but warns against taking a lazy approach and rolling out the increases without any fanfare. “This is particularly important when communicating the 2% rise in personal contributions as there will undoubtedly be a degree of apprehension and concern over the reduction of their net pay.”
What’s more, research has shown that employers who help their staff with succession planning are more likely to attract and retain younger staff.
Tips for communicating the changes
- Gather staff together for a briefing about the changes, so that they are fully aware of what is ahead and why it’s happening.
- Use it as an opportunity to talk to staff about financial planning.
- Skinner suggests asking staff to consider if they were solely reliant on the maximum state pension (circa £8,500 per year) would they be able to live sufficiently? Are they also aware this may not be available until they are 67?
- Let them know that opting out should be a last resort, and if so then savings should be made elsewhere on non-essential items before opting out even becomes a consideration.
- Auto-enrolment should be viewed as a forward-thinking initiative and employees should not be led to believe it’s a negative change.
- Follow up in writing to inform all employees of the changes.
- Allow for one to one discussion with any staff members who have concerns.
- Consider inviting a financial advisor as a guest speaker to your business / team meeting to speak to staff about financial planning and ask any questions they may have.
Skinner concludes “Ultimately this is money that they will get back, with added interest, and not only that but contributions they receive from employers on the scheme should essentially be seen as free money. As such, the value of a pension scheme cannot be overstated.”
Get in touch for more information, or for an informal chat if you have any concerns.