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Employer sense check

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Employer auto enrolment sense check: what you should now be contributing

 

Employers saw their pension contribution rates rise in April, from 1% to 2%. While this is a deceptively small amount at first glance, what does it look like in practice?

Our high school maths suggests that effectively doubles an employer’s pension costs.

For an employee earning £30,000:

  • The employer’s contribution has gone up from £239.68 per year, to £479.36 per year.
  • From April 2019, that’s going to hit £719.04 (3% of salary).
  • Of course, it’s not quite that straightforward. Pension contributions are a business expense and therefore reduce your corporation tax bill.
  • As such, you might be able to knock 19% off the increase, depending on your circumstances.

The Pensions Regulator has a calculator here.

There’s also the issue that not every employer just contributes the minimum. In fact, according to a recent CBI survey, around 92% of firms surveyed were contributing above the statutory minimum level requirement. However, before you start feeling like Scrooge, details from the Office for National Statistics found that pension contributions tended to ‘cluster’ around the minimum contribution levels. So even if employers are paying more, they’re not paying a lot more.

While you can hope that employees opt out and save the business some cash, you are definitely not allowed to encourage them to opt out. That includes offering them ‘inducements’ – no-one should be swapping their pension rights for cinema tickets. The Pensions Regulator is clear: “Any decision to opt out must be taken freely by the staff member without influence from the employer”.

Opt-out rates are generally low. Janet Whiting, who runs the auto enrolment scheme for construction group Atlantic Projects Company, says that the opt-out rates among their blue-collar work force is below 2%. She found that some even joined before the start date. “We’ve only had 3-4 opt out of the 200 guys we have on site.” The scheme started in April this year at the new higher rates.

The group is guided by the NJC pay scales and the ‘blue book’, which recommends the scheme from Welplan. Whiting adds: “Certainly, auto enrolment adds to the cost of doing business. We have to factor it into our tender process, for example, but we will up it again in April next year in line with the legislation.”

The CBI reports that only around 5% of eligible workers have opted out and two-thirds now cite a firm’s pension scheme as an important factor when looking for a job. Admittedly, it is older workers and those with higher salaries that show the most engagement, but younger people aren’t opting out and increasingly recognise the importance of early planning.  

You can at least be reassured that you are doing a good thing. Auto enrolment has had a dramatic effect on pension savings - 73% of employees are contributing to a company pension scheme, up from 47% in 2012. You are part of a quiet revolution in pensions’ savings. Keep it up!

 

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