The increase in the minimum pension contribution rates for employers and employees required under the forthcoming pension reforms will be delayed from 1 October 2016 to 1 October 2017.
This delay is to account for the fact that auto-enrolment staging dates for small and medium-sized employers have been pushed back to take place between 1 June 2015 and 1 April 2017.
The final increase in contributions as set out under the reforms will now take effect from 1 October 2018.
This means the minimum increase rate of employer pension contributions from 1% to 2% of banded earnings will be delayed from October 1, 2016 to October 1, 2017. Employer contributions will then increase to 3% from October 1, 2018.
Brendan Barber, general secretary of the Trades Union Congress, said: “Today’s announcement does not just hit the staff of small employers. What is worse is that even workers auto-enrolled this year will now have to wait until the end of the staging process before they get their full contribution.
“This is because contributions are being phased in, with the final stage delayed until 2018 – thirteen long years after the Pensions Commission recommended auto-enrolment.”
For more articles on complying with the 2012 pension reforms
Auto-enrolment was conceived against a backdrop of rising personal incomes and a growing economy. It will obviously be tougher for employers and employees to absorb the costs of contributions in today’s environment, but paying for retirement is not getting any cheaper. The government is saying there will be no further delays regardless of what happens to the economy, and employers will have to plan on this basis.
Auto-enrolment is expected to increase participation in workplace pension schemes, and therefore to increase employers’ contribution costs. Towers Watson’s experience is that some large employers are aiming to enrol all eligible staff into their existing pension scheme at the higher contributions rates, which they currently make available on an opt-in basis.
Others intend to divide their workforce into different groups. For example, they might provide a different level of pension provision for short-term employees, or enrol employees who they expect to be less motivated by pensions at a lower contribution rate with the option of trading up.
It is not only small employers affected by these delays: some large employers will be able to keep contributions lower for longer where they do not think all employees attach sufficient value to their main pension offering. However, the latest delays do not give large employers any more time to work out how they will comply with a panoply of complex rules and regulations, some of which are only now being finalised.
As employers get their teeth into these rules, they are finding that many things do not work quite as they thought. They are also waiting for the government to finalise standards that existing pension schemes will have to comply with. Large employers will not have much time to firm up their plans after these are published.
Firms with 250-2,999 employees have seen their original compliance dates, which fall between August 2013 and February 2014, reinstated two months after the DWP withdrew them. Any employers that downed tools expecting a delay will have some catching up to do.
The changes announced will have little impact on larger employers. Many large employers will be contributing at or above the final minimum contribution rates from their staging dates.
For smaller and medium-sized employers, the government’s decision to alter the timescales on both the staging dates and the stepped increases in employer contributions allows more time for the economy to start to recover, and for smaller organisations to be in a better position to introduce auto-enrolment. This will be vital to its success.