Auto-enrolment – proposed changes to the legislation

In 2017 The Department for Work and Pensions (DWP) carried out its statutory review of automatic enrolment (AE) and published their findings in December 2017.  The bulk of the report consists of statistics showing how AE has performed over the last 5 years and if it has met its objectives.

The conclusion is that it has been successful to date with over nine million employees having been auto-enrolled and many saving for the first time.  In addition some 600,000 new workplace pensions had been set up.  The opt-out rate is significantly smaller than expected and is as low as 9%.  Although, it will be interesting to see what affect the statutory contribution increases in 2018 and 2019 will have on the number of members leaving schemes.

It is important to note that the last 5 years are still only the initial stages of AE, with more to come.  The following are the main proposals from the review:

  • To expand eligibility to 18 year olds –

Currently an Eligible Jobholder (an employee who has to be automatically enrolled) is aged between 22 and State Pension Age (SPA).  The proposal is to lower the age threshold at which employees become eligible from 22 to 18.

  • To calculate pension contributions from the first pound of salary –

This means changes to the band earnings, so that contributions are always calculated from the first pound of earnings.  This will directly affect employers who are using the Qualifying Earnings definition of pensionable earnings.  For example, the 2018/2019 annual bands are £6,032 to £46,350.  In this case the contributions would be paid on all the earnings up to £46,350 rather than deduct those under £6,032.  This will mean an increase in the contribution costs for both the employee and employer.

  • Suggested piloting expanding automatic enrolment to the self-employed –

The Government has been concerned that the self-employed have been left out of AE, when they too should be saving towards a retirement income.  For employed individuals, the employer contribution has been an incentive for employees to remain enrolled. However, the approach for the self-employed will probably be focused on behavioural nudges and convenience.  The Government will test various ways to make it easier and more convenient for the self-employed to save for their retirement.

  • Maintaining the earnings trigger for AE at £10,000 pa (£833 pm) for another year and reviewed on a yearly basis

 

  • Separately, the Government confirmed that the cap on the annual management charge for AE default funds would remain at 0.75% – to be reviewed again in 2020

The Government are probably waiting to see what affect the 2018 and 2019 statutory contribution increases will have before deciding to make any changes to the cap.  With general comments made by MPs and the Treasury Select Committee we still feel that the cap will be reduced over time.

The proposed changes are expected to be implemented by the mid-2020s, which seems too far off.

Both the proposed reduction in the age limit to 18 and the removal of the lower contribution threshold are positive moves that will make AE more viable over the longer term.  The danger with AE is that employees believe that they have a meaningful pension.  In reality, a contribution of 8% per annum will not provide a suitable pension for most people.  The general consensus in the pensions industry is that a contribution of 12%, similar to Australia, is probably the right level.  Another interesting question for employers is, if and when the contributions are again increased, how will they be split between the employer and the employee?

It should also be noted that the percentage contributions that employees think that are being made to their pension funds may in fact be lower.  For example, under Qualifying Earnings the contributions are only paid on the band earnings.  Therefore, an employee whose total earnings are £50,000 and the total statutory minimum is 8% (2019) they only have contributions paid on the middle band earnings of £40,318.  This means that the actual percentage is 6.45% of total earnings.

The Government is also concerned about part-time employees and those in the GIG economy with multiple jobs. They want to see pension saving as the norm and to help lower earners including those in multiple part time employment build up their pensions.

AE has certainly moved employees into saving for their retirement.  However, it needs to move to the next stage in order to provide meaningful pension funds in the longer term.

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