Pensions World

Andrew Cheseldine, Lane Clark & Peacock, explains the scheduling of the minimum rates of contributions to a defined contribution scheme

In last month’s article, we looked at the minimum quality requirements which pension schemes must meet to fulfill the auto-enrolment requirements, including the minimum rates of contributions that must be paid to a defined contribution (DC) scheme. These minimum rates of contributions are being phased in over the period to 1 October 2017 to ease the burden on employers (and employees) and this month’s article looks at how this is being done.

The phasing in of the “core” minimum rates of contribution that must be paid to a DC pension scheme to meet the minimum quality requirements was originally as shown in Table 1.

Delay

However, the government announced on 28 November that the increase in employers’ minimum contributions from 1% to 2% from 1 October 2016 will be delayed.

As yet, there is no confirmation of a new date and no clarity as to whether increases to total contributions will also be delayed.

Phasing also applies to the alternative DC scheme structures (Tiers 1, 2 and 3) which are based on a definition of earnings other than qualifying earnings and which are also deemed to meet the quality requirements.

These alternative structures were covered in last month’s article. For these alternative structures, phasing was originally as set out as in Table 2 although, as for the core requirements, we are now expecting the 1 October 2016 increases in the minimum rates to be delayed.

Meeting requirements

Employers will need to ensure that contributions to each DC scheme used to meet the auto-enrolment requirements are at least equal to the minimum required rates, both during and after the phasing in period.

Employers are not required to phase in contributions and can, if they wish, pay higher contributions than the prescribed minimum during the phasing in period (and subsequently).

Where contributions are phased in, it is entirely possible (and likely in many cases) that the employer’s administration, record keeping and communication costs in the early years of auto-enrolment will exceed the contribution costs.

In next month’s article we will look at waiting periods for pension scheme membership, including what is allowed by the auto-enrolment requirements and the administration requirements surrounding the use of a waiting period.