On 6 April, the quality requirements that pension schemes being used for automatic enrolment (“qualifying schemes”) must meet are changing.
DC schemes – what’s changing?
At present, for a DC scheme to be a qualifying scheme:
- The employer must make a contribution of at least 2% of the worker’s qualifying earnings.
- The total contributions paid by the employer and the worker must be at least 5% of the worker’s qualifying earnings.
From 6 April, the minimum employer contribution will rise to 3% and the minimum total contribution will rise to 8%.
Qualifying earnings are broadly gross earnings including salary/wages, commission, bonuses, overtime, and statutory maternity, paternity, adoption and sick pay between £6,136 and £50,000 (2019/20 figures). Where pensionable pay under a scheme is based on something other than qualifying earnings, employers can choose to satisfy one of three sets of alternative contribution requirements. Pensionable pay will vary from scheme to scheme and will be defined in the scheme’s rules, but typically only includes basic pay. These alternative contribution requirements will also increase from 6 April.
DB schemes – what’s changing?
Before the abolition of contracting-out, a DB scheme was a qualifying scheme if it was contracted-out. When contracting-out was abolished in 2016, a new test was introduced under which a DB scheme must meet a prescribed cost-of-accruals test. This test must be met at either a scheme-wide level or, where there is a material difference in the cost of providing benefits for different groups of members, for each group of members.
However, a transitional easement allows schemes which were contracted-out at the time of abolition to apply the test at a scheme-wide level, even if there is a material cost difference, provided the scheme has not made any rule amendments which would mean it ceased to satisfy the contracting-out requirements had they still been in force. This easement expires on 5 April.
Alternative quality requirements also apply to DB schemes – these will remain unchanged.
What do employers need to do?
Employers should check that the pension scheme they use for automatic enrolment will continue to meet the relevant quality requirements from 6 April. If changes need to be made to the scheme to meet the new requirements, the employer should speak to the scheme trustees about these urgently.