It is five years since the automatic enrolment of workers into pensions began to be introduced. Following a review of the automatic enrolment regime during 2017, the Government has announced that it will be implementing changes:
Workers aged 18-22
At present there is no duty to enrol workers under the age of 22 into a pension scheme; but they could opt into pension saving if they wish. This will change so that the duty to enrol will also apply to workers between the ages of 18 and 22, provided they are over the earnings threshold. This is estimated to bring a further 900,000 young people into automatic enrolment.
Contributions are currently based on "band earnings", which are earnings between £5,876 and £45,000. It is proposed to remove the lower end, so that contributions are calculated from the first pound earned.
The Government has recognised that these changes will add significant costs (with contribution rates already due to rise in 2018 and 2019) and so will be consulting further on the impact. The aim is to legislate to amend the Pensions Act 2008 before the end of this Parliament with these amendments taking effect from the mid-2020s.
The Government has also confirmed that the earnings threshold will remain at £10,000 for 2018/19.
The removal of the lower end of the band will bring some much needed simplification. Many employers already base pension contributions from the first pound earned; but this change will add an estimated £2.6 billion per annum to pension savings. Combined, these changes are estimated to increase pension savings by £3.8 billion annually.
The removal of the lower earnings band is also envisaged as an incentive for those below the threshold to opt in. But there are no proposals to specifically deal with workers who are in multiple employments and under the threshold in each – they would have to take the positive step of opting in. This is somewhat surprising as the review also notes that defaulting individuals into pension saving has worked: they have become pension savers and workplace pension saving has been normalised.
However, further changes can be expected. The Government will be continuing to monitor and evaluate automatic enrolment:
- The 8% contribution rate is acknowledged as unlikely to give all individuals the retirement to which they aspire. This will continue to be evaluated as part of a longer-term debate on the right balance between statutory and voluntary savings.
- The Government has a manifesto commitment to extend automatic enrolment to the self-employed. However, there is "no single or simple and straightforward mechanism" to extend automatic enrolment to the self-employed. So the Government is seeking to test "targeted interventions" to identify the most effective options. The target group will be those on lower to middle incomes, mirroring the current automatic enrolment eligibility. More information on this is due in 2018.
- Whilst pension saving is improving, individuals are not necessarily engaged with saving. The Government has set out areas for pension providers, advisors and employers to consider, to improve engagement and deliver better value.
Over the last 5 years, automatic enrolment has been a quiet revolution in pension saving. We are now seeing further evolution, but the key problem – that individuals are not saving enough for their retirement – appears to have been deferred for another day.
Automatic Enrolment Review 2017: Maintaining the Momentum is available here.