According the Auto-enrolment review employers must enrol all staff aged 18 and over into a workplace pension unless they choose to opt out
Under new government plans automatic enrolment is due to extended from enrolling at the age of 22 and over for those earning £10,000 to the age of 18 and over. Ministers hope to have this place in the mid-2020s and state that it will affect about 900,000 young people.
The review considered three themes: coverage, engagement and contribution levels. The three chairs appointed included Jamie Jenkins, Head of Pensions Strategy at Standard Life leading on coverage; Ruston Smith, Trustee Director at Peoples’ leading on engagement and Chris Curry, Director of the Pensions Policy Institute leading on contributions.
“The review report supports the widely held view that auto-enrolment has been a success, with huge swathes of the working population saving at least something for retirement. The power of inertia has worked which is more than proven by the fact that the biggest increases in participation have been amongst younger people, those with lower earnings and those working for smaller employers.” Alan Morahan, Managing Director, DC Pensions Punter Southall Aspire says. “To build on this success the review recommends the scrapping of the auto-enrolment lower earnings limit (currently £5,876) and lowering the lower age limit from 22 to 18. These changes are not likely to take effect until the mid-2020s and will require legislation, so employers and employees will have time to prepare for the changes.”
Scrapping the lower earnings limit (LEL) allows eligible jobholders and those opting into schemes to contribute from the first pound of earning. For median-earners this change is the equivalent of raising the 8% total contribution (from April 2019) to 10% and is estimated to result in a further £2.6bn of pension contributions. Although this change may not be popular, particularly as it increases the costs of employment, it will remove complexity for payroll departments.
“Automatic enrolment of the young has been a great success, with very low opt out rates and therefore, lowering the starting age to 18 makes sense and will include in excess of another 1m people in this pension revolution.” Morahan adds
Although there were positive outcomes that came from the review, Kate Smith, Head of Pensions at Aegon highlights what she believes are the 7 missed opportunities from the Auto-enrolment Review:
1. The Government has stopped short of making auto-enrolment the social norm for every single UK employee. Those earning less than £10,000 will still need to make an active decision about whether they wish to opt in to their workplace pension scheme and benefit from an employer contribution. Removing the earnings trigger altogether would have treated them like any other employee.
2. The automatic right to an employer contribution stops as soon as an employee reaches State Pension Age, as they have to opt in. As many people are enjoying longer working lives, this is a missed opportunity to remove the upper age barrier.
3. Most employers pay more than the April 2018 contribution increases, so the real litmus test for auto enrolment will be in April 2019, when the total rate jumps up to 8%. The government should wait and see how employers and employees react to this before implementing policy changes. But waiting another six years is simply procrastinating. Every year of pension saving counts, it would be a far better to bring forward proposed changes to the early 2020s. This should give employers enough time to plan and budget for increased costs.
4. If employees opt-out of pension saving, or chose to pay a lower contribution than the statutory minimum, they lose the right to an employer contribution, effectively taking a pay cut. There’s been no mention of making auto enrolment contributions more flexible, while retaining the right to an employer contribution.
5. Opt-out rates don’t tell the full story. Cessation rates, where employees pay pension contributions then leave their scheme are almost double the 9% opt-out rate at 16%, peaking at one to three months after being auto-enrolled. Too many employees are building up micro pension pots. Simple ways to address this would be to increase the opt-out period to three months, or allow a refund of micro funds, but this could mean that some employees are never able to build up a pension pot. The proposed pension dashboards offer a far better way for employees to keep track of these micro pots, along with the tools and support needed to consolidate them into meaningful pensions.
6. Although conversations on how to help the self-employed save for retirement using auto enrolment principles will kick start in 2018, a solution seems to be far away for this diverse group. The self-employed can’t afford to be left behind and need to take personal responsibility now for their retirement plans .
7. And the greatest omission of them all, is a forward looking plan setting out higher auto-enrolment contribution rates. Despite plans to make more earnings pensionable 8%, this still won’t be enough for most employees to build up an adequate retirement income.