Employer Pension Contributions
What are employers new pension contribution requirements? Every employer has a duty to auto enrol their employees into a qualifying workplace pension scheme and make contributions into their pension. Staff who are eligible must be between age 22 and the State Pension Age. Employees who are 16 years old and 22 years of age can equally elect to opt in to the scheme and benefit from a contribution from their employer.
Workers can choose to opt out of automatic enrolment, which means employers don’t have to make any further contribution towards their employees’ pension fund. If workers elect to opt out then they must be automatically re-enrolled every three years.
The new pension reforms started in October 2012 and are staged over a four year period. For companies who do not have a qualifying workplace pension scheme, the government has introduced the National Employment Savings Trust (NEST). Companies will still be required to make contributions.
Every employee will be required to have 8% of their earnings paid into the pension, this is broken down into the following;
- An employer contribution of 3%
- An employee contribution of 5% (1% tax relief applies, meaning 4% from the employee)
Employers can choose to pay a higher amount than 3%, if that is the case then the employees contribution can be lower, as long as the total combined contribution is 8%.
Several employers are struggling to know how to balance the costs of increased pension contributions with the requirements of the new legislation. Some businesses may find it difficult to sustain their current levels of contributions into an existing scheme once all of their employees need to be auto enrolled. If they operate a Defined Contribution scheme, then employers can exercise two options;
- Employers can offer a lower contribution level for auto enrolled employees, while ring fencing higher levels of contributions for their workers who are already members of the scheme. Although this protects those members of staff who are already in the scheme, it runs the risk of disenfranchising those employees who have lower contributions and have just joined through auto enrolment.
- An alternative is for employers to reduce the level of contributions for all members to the lower level which would be applicable to auto enrolled employees. Although this would reduce contribution levels and save money, it is likely to cause resentment among employees who would be worse off by a reduced contribution into their pension plan. Any employer looking to pursue this route would need to notify the workforce of their intention to reduce contribution levels and negotiate a change in the employment contract.
An important consideration for employers who choose to offer the minimum 3% or lower contributions is they may experience a backlash from workers who see a reduction in their take home pay. Organisations will have to carefully manage staff expectations and detail the impact of the new pension reforms.
Alternatively, some companies may decide to provide higher pension contributions for their staff and see this as a way to effectively support the business in retaining and recruiting quality emplyees.
For companies that provide a final salary scheme to their employees, they will need to decide whether or not to auto enrol all staff members into the final salary scheme, or close the scheme to new members and choose an alternative arrangement in order to mitigate costs to the business.
Whatever an employer chooses to do, we are able to provide support and guidance when organising retirement planning for employees. Get in touch today or download our free employers guide by completing the form.
How to manage the cost of Pension Contributions
One area which may help employers manage the increased cost associated with the new pension legislation is salary sacrifice. This requires employees to take a reduction in salary and have this reduction paid into the pension pot. The employer doesn’t have to pay National Insurance (NI) on the portion of salary which has been sacrificed, meaning this NI saving can be routed into the employee pension plan. It is important that you seek financial guidance when considering redirecting contributions via this method.
We have designed an employers guide to the new pension rules, please complete the form to download your free copy. Alternatively please contact us for further information or to speak to a workplace pension specialist.