What will it cost?
There are a number of costs which employers will have to bear. One of these will be the cost of the pension contributions you will be required to pay.
The total contribution levels will be phased in over a number of years, so you won’t need to pay the full amount straight away.
Necessary contributions will be based upon the employee’s earnings, so it is important to identify how they will be classified.
The statutory way of doing this is known as qualifying earnings. Qualifying earnings are calculated using total monetary earnings, not just basic pay. This means that the likes of bonuses, commission, overtime, statutory maternity pay, statutory paternity pay and statutory adoption pay are all included in this definition. Contributions are limited to a band of earnings set by law that in terms of current pay is expected to be approximately £5,564 to £39,853 (annual).
Time Period |
Qualifying earnings |
|---|---|
First transitional period |
1% employer 2% total |
Second transitional period |
2% employer 5% total |
Long term |
3% employer 8% total |
There are, however, alternative ways to define the earnings which will subjected to contributions. This will be a key decision for you in the auto-enrolment process, as the definition you use will determine the contribution levels paid.
You can use total pay. This is similar to the statutory method, however, there is no limiting band of earnings.
You can also choose to base your contributions on your definition of an employee’s pensionable pay. This can be basic salary and not inclusive of bonuses, commission, overtime etc. but must not include any offsets. If you use this definition there will be two contribution bands; a lower rate will be applicable if the pensionable pay is at least 85% of total payroll.
The contribution levels for these alternative definitions are as follows:
Time Period |
Total pay |
Pensionable pay is 85% of total pay |
Pensionable pay |
|---|---|---|---|
First transitional period |
1% employer 2% total |
1% employer 2% total |
2% employer 3% total |
Second |
2% employer 5% total |
2% employer 5% total |
3% employer 6% total |
Long term |
3% employer 7% total |
3% employer 8% total |
4% employer 9% total |
You can choose to segment your employees and run more than one scheme based on more than one salary definition. This is where getting the right scheme in place really does start to become a complicated process. It’s also why analysing both qualitative and quantitative data is a fundamental part of our four stage process.
Even when all of this has been decided, you may realise you have not even considered all the other costs involved:
- You may have ancillary costs such as life assurance and group income protection if these benefits are linked to pension scheme membership.
- If you are using salary sacrifice, this will actually reduce some of your costs. However, you need to make sure that your sacrifice agreements are fit for purpose under the auto-enrolment legislation and tax law. This could lead to expensive legal advice.
- Further legal costs could also be involved for example on whether you can reduce employees’ pay or whether you need to enrol overseas secondees.
These costs all add up without even taking into account the administrative costs, how your in-house systems will manage and whether you will have to cut existing benefits to cope with the increased overall spend.
If these are things you have not already considered then click here to read exactly what we can do to help.