Certification and Contribution Rates
The Regulator has provided guidelines on the required Pension Scheme contribution rates, in order for an existing or new Pension Scheme to comply with Automatic Enrolment.
They are concerned that contributions meet the statutory minimum and existing schemes do not create a barrier to entry.
An employer can elect to ignore the first £5,825 of earnings and anything over £42,385. This is referred to as banded or Qualifying Earnings. If the banded earnings basis is used, contributions must be a percentage of all Qualifying Earnings. These earnings includes hourly/basic wages, overtime, bonuses, holiday pay and some allowances (such as car allowance where this is a perk and not an essential for the job). It also includes statutory benefits such as sick pay and maternity pay etc.
As a minimum, employers using banded earnings must be contributing 3% of this band of earnings by 1st October 2018. See Phasing of Contributions for further information.
For new schemes or if an employer already has a pension scheme in place, such as a Group Personal Pension, they will be required to confirm the contributions meet the Certification requirements. As a minimum they can use one of 3 “Sets” for everyone or different Sets for different categories of staff or use their own, provided it means contributions are equal to or more than banded earnings.
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Set 1 – 9% of Pensionable Pay (where pensionable pay is at least basic pay). Made up of at least: |
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| 4% employer contribution | 5% gross employee contribution (4% after tax relief at source) | |
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Set 2 – 8% of Pensionable Pay (where pensionable pay is at least basic pay*). Made up of at least: |
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| 3% employer contribution | 5% gross employee contribution (4% after tax relief at source) | |
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Set 3 – 7% of total earnings**. Made up of at least: |
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| 3% employer contribution | 4% gross employee contribution (3.2% after tax relief at source) | |
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Qualifying Earnings– all earnings between £5,825 and £42,385 |
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| 3% employer contribution | 5% gross employee contribution (4% after tax relief at source) | |
*to be able to use Set 2, basic pay must make up at least 85% of the total payroll for the Company
** total earnings can be the same as Qualifying Earnings (ie excluding car/clothing allowances) but from the first £ earned and are not likely to be capped. This is acceptable, as long as this basis provides workers with the statutory minimum pensions contribution.
The employer can decide to take responsibility for the total contribution due or indeed make higher than minimum contributions. If however they make employee contributions unreasonably high, this could be deemed as a barrier to entry which is dimly viewed by the Regulator. A 10% employee contribution with a 5% employer contribution could cause an issue. The Regulator is happy to provide guidance on such matters, as are we at Campbell Thomson.