There’s lots to consider when managing your workplace pension scheme, but a crucial part is the employer contributions you make.
A pension scheme with enhanced employer contributions can be a driver to attract and retain talent. With many people still facing financial challenges, your contributions could make a difference to employees who are struggling to save themselves. But on the other hand, if economic uncertainty is impacting your business, reducing your contributions – even temporarily – might be a difficult choice that you’re considering.
This article will cover some of the practical and technical steps and considerations for:
- Increasing your employer contributions
- Reducing your employer contributions
- How to make changes to your employer contributions
This article is intended as guidance only and shouldn’t be taken as advice. Before making any changes, we recommend speaking to your scheme adviser, if you have one, to talk through your options.
1. Increasing your employer contributions
Increasing your employer contributions could be a way to support your employees with their retirement savings plan, especially during periods of financial difficulty. If you’re considering this, here are some things to think about before you do.
How long do you intend to increase the contributions for?
Are you planning to increase your contributions permanently, or for a set period only? Doing so even for a limited time could make a difference to your employees – but be clear about this upfront to manage their expectations.
If you don’t think increasing contributions in the long-term is financially viable but are looking to support your employees through financial uncertainty, there may be other methods more suited to you. For example, promoting other existing benefits you offer, one-off cost of living payments or hosting a session for staff with a financial adviser.
How much should you increase the contributions by?
This is entirely up to you and what you can afford. You might wish to contact your scheme adviser to discuss this. If you’re planning to make the change long-term, make sure the increase is financially viable for your business.
Another consideration is whether you plan to promote your enhanced contributions as a means of attracting new talent. If so, consider doing some research or benchmarking to make sure your contributions are competitive for your industry.
How will it impact your employees’ personal contributions?
The more you choose to increase your contributions, the less your employees might be obligated to contribute themselves. However, this is dependent on any contractual obligations, for example if your employees have agreed to pay a certain amount to receive a matched employer contribution.
The minimum contributions required via auto-enrolment is 8% of qualifying earnings – 3% from employers and 5% from employees. Here are a few examples of how an increase could affect employees, based on them only having a requirement to pay the minimum amount:
- If you increased your employer contributions from 3% to 6%, your employees would only need to contribute the remaining 2% to reach the 8% requirement.
- If you increased to 8% or above, the minimum requirement would be fulfilled and your employees wouldn’t be required to make contributions.
- If you already make employer contributions of 8% or more, your employees might not currently be making contributions, and so an increase wouldn’t make any difference.
Regardless of how much you contribute, your employees can of course choose to increase or keep their contributions at the same level. Make sure they know this is an option if you make changes to your contributions.
Will you apply the increased contribution rate to new employees?
If you hire any new employees who are eligible for auto-enrolment (or who choose to opt-in), it’s up to you to decide if you want to contribute more than the minimum requirement of at least 3% of qualifying earnings (or the equivalent under one of the alternative quality requirements).
If you wish to contribute the same amount as your existing employees, bear in mind that whatever contribution level is noted on their contract becomes a contractual obligation. This means if you want to reduce contributions at a later date, it might require contract negotiations. Your newer employees would also be included as part of the consultation process required to reduce your contributions. This is outlined in the next section.
2. Reducing your employer contributions
We appreciate that financial uncertainty is posing a challenge for many businesses. If you currently pay more than the minimum of 3% in employer pension contributions, reducing this might be something you have considered doing to cut costs.
However, reducing your employer contributions isn’t quite as straightforward as increasing them. There are several factors you need to consider. Significantly reducing contributions, even temporarily, could have a big impact on your employees’ retirement savings further down the line.
Here are some of the considerations and steps you should take before making a change.
The impact on your employees by reducing contributions
For many employees, a workplace pension is one of their most valuable sources of retirement income. Reducing their contributions, even for a short time, could make a difference in how much they’ve saved when it’s time to access their savings. Remember too, that the value of a pension can fall as well as rise and isn’t guaranteed. The value of their pension pot when they come to take benefits may be less than has been paid in.
Reducing contributions risks making a negative impact on employee morale and in turn, impact your employee retention and hiring rates.
Auto-enrolment considerations when reducing contributions
If you’re currently paying in more than the minimum 3% of qualifying earnings, you might be able to reduce your contributions to this level. This is dependent on your contractual obligations. Your employees may have contracts that include a commitment from you to pay in a certain level of employer contributions. So, make sure you check before taking any next steps.
Consultation requirements before reducing contributions
Another big consideration in reducing your employer pension contributions is consultation requirements.
If you have 50 or more employees (not the number of scheme members), you’re required to consult on any reduction to the pension contributions you make. We also recommend that when thinking about a consultation you get legal advice. Here’s a summary of the consultation requirements you’d need to follow.
Providing written notice to reduce contributions
Before the pension consultation starts, you should give written information about the proposed change to affected members. This means members who are actively paying into their pension, or prospective members who would be affected by the change. Deferred members (those no longer paying contributions) and pensioner members (retirees) don’t need to be consulted. You also have to share this information to any representatives who will be consulted, for example a trade union or elected representatives. The information provided must:
- Detail the number of prospective and active scheme members who will be impacted by the change.
- Describe the proposed change and how it will affect the scheme and its members.
- Be accompanied by any relevant background information.
- Indicate the timescale over which the change will be introduced.
- Allow the affected members’ representatives to consider, study and give feedback to the employer of the impact of the change on members.
Consultation timeline
The consultation period must last at least 60 days. You have to tell those being consulted when the consultation will end and any deadline for the submission of written comments. If no responses are received by the end of the consultation period, it can be regarded as complete. If you do receive responses, you must be able to evidence that you have properly considered the responses before proceeding. Otherwise, it could invalidate the consultation.
It’s worth noting that the purpose of a consultation is not to obtain the consent of those consulted. It’s to inform members and provide an opportunity for them to give feedback on the proposed changes.
3. How to make changes to your employer pension contributions
Once you’ve taken on board the considerations, made a decision and completed any necessary actions, the process to increase or reduce your employer contributions is fairly straightforward.
1. Update your payroll to reflect the new basis for calculating your contributions.
2. Inform your scheme provider of the changes.
3. The changes should take effect from the beginning of a pay reference period (the beginning of the period over which employees are paid their usual salary or wage). This is so that the minimum contribution for the whole pay reference period can be calculated on the same basis.
Make your scheme work for your employees and your business
As some people continue to see difficult times, your actions could make a significant impact on both your employees and your business.
There’s not likely to be a one-size-fits-all solution, but it’s important to consider all of your options before making changes to your workplace scheme. If you need further assistance, remember to contact your scheme adviser if you have one. Or alternatively, speak to your usual contact from your scheme provider.