Time to review your DC Scheme
In April 2018 the minimum contribution levels required to satisfy auto-enrolment requirements are set to increase.
The new minimum requirement will be a total contribution of 5% of which the employer need only pay 2%. This could mean that the employee contribution required could rise from 1% to 3%.
In April 2019 the minimum rates will increase further with the required total rising to 8% and employers only required to pay 3% - meaning employees could be asked to pay 5%
So far only a small minority of employees who have been auto-enrolled have exercised their right to opt-out but there is a danger that opt-out’s could increase over the next two years
Which companies and schemes will be affected
These changes will impact on quite a number of companies and their schemes
· Schemes where employers are simply applying the legal minimum
· Schemes where new employees are auto-enrolled at the minimum level but where employers give employees options to switch to higher rates
· Schemes where employers offer something better than the current minimum but currently offer rates lower than the new auto-enrolment minimums
Any scheme where all or any employees are offered a minimum contributions basis which involves a total contribution of less than 5% of pay will need to be modified by April 2018, and those where it is less than 8% by April 2019. We need to try and exert influence on company decisions
What is Unite’s policy
Unite has consistently argued that the balance between employer and employee contributions under the auto-enrolment legislation is wrong. Employers should not be permitted to offer schemes, or options within schemes, where employer contributions are lower than employee contributions . For lower paid employees any chance of a decent pension in retirement depends on the employee getting a decent contribution from their employer.
We would always seek to achieve a position where the employer pays at least twice as much as the employee. This is almost the opposite of what the auto-enrolment legislation will permit. The Unite Pension database, covering over 300 employers who recognise us, indicates that the average maximum employer contribution offered to our members is 10% and the average they have to pay to get it is 5%. Where lower options are offered we would still be looking to maintain as favourable a ratio between employer and employee contributions.
How to tackle this issue
Clarify the contribution options open to members
- This will make it clear to what extent the scheme offered will need to be modified
- Identify what the default option is i.e. the level at which new employees are auto-enrolled
- Identify which options fail to meet the auto-enrolment minimum in 2018 , or in 2019
- Identify what definition of pensionable pay contributions %’s are based on
Find out how members/employees are split between different pension contribution options
- You may be surprised at the numbers of members who do not take up contribution matching options offered by the employer
- Pension contributions may be costing the employer a lot less than it might first appear
- Consider the scope to encourage members to take advantage of better contribution options as may be available to them
- Try and involve the employer/scheme to improve communications about pension options
Consider how contribution options might be improved
- Where members are on the minimum auto-enrolment contribution level we could propose either that the increased contribution levels required should be met with the employer paying at least as much as the employee (i.e. 2.5% for 2.5% in 2018 and 4% for 4% in 2019
- Alternatively that the minimum contributions required be reversed (i.e. the employer pays 3% for the employee paying 2% in 2018 and 5% for 3% in 2019) so that the employer pays more than the employee
- Decide whether higher contribution options need to be modified to be consistent with the new minimum proposed
- Where take-up of higher contribution options s is low consider whether to propose reducing the member contribution required to gain the benefit of higher employer contributions
- Propose a wider definition on pensionable pay as a way of increasing the value of the Scheme.