Endorsement for the suggested changes to auto-enrolment

The UK Government has shown support to the proposed changes to auto-enrolment announced in the recent bill. This includes several modifications to how the current system works, as well as adjustments to eligibility and deduction thresholds and values.

Since the introduction of auto-enrolment in April 2012, for certain types of ‘eligible’ workers, auto-enrolment into a workplace pension has not generally changed other than the required level of contribution. However, since its introduction, approximately 10.8 million people have been auto-enrolled and are saving for their retirement with the help of their employer.

Also according to the DWP, a significant proportion of employed individuals (38%) are not saving enough for their retirement when compared to the percentage of their pre-retirement earnings required to ensure a comfortable income during retirement. The situation is more pronounced for those in the higher income bracket, where 55% are under-saving, in contrast to 14% in the lower income bracket. These figures demonstrate the urgency for the auto-enrolment system to be revised in a manner that motivates a greater number of people to save for their post-retirement years.

At the start of January 2022, a private members bill named “Pensions (Extension of Automatic Enrolment) (No. 2)” was introduced in parliament with the intention of bringing about modifications to the auto-enrolment scheme. The bill had its second reading in the House of Commons recently and is expected to undergo additional stages in both the Commons, and the House of Lords, before becoming law. Additionally, the DWP has endorsed the proposal to extend Automatic Enrolment, a move that would enable millions of workers to begin saving earlier and contribute more towards their retirement.

Why are the auto-enrolment changes being considered?

Recent statistics have shown that there are some pension participation rate disparities between employees under 22 years old and those employees which also work part-time hours. As mentioned before, a push for fair accessibility to auto-enrolment, no matter your hours or age, would be a positive step forward to encourage saving for retirement.

Some of the key statistics (2021) that perhaps influenced support for the proposed changes are:

• The employee participation rate was lowest for those aged 16 to 21 years at 20%.
• Only 43% of the lowest earning full-time employees (earning £100 to £199 per week) were participating in a pension.  This was around half the rate of equivalent earners in the public sector.
• By working patter, 87% of full-time employees are participating in a workplace pension versus 61% part-time employees.

What are the proposed changes? What impact would these changes have?

The Secretary of State will have the power to make any amendments if the bill passes Royal Assent. Although it will not bring about an immediate modifications to pension auto-enrolment amendments, the Government would be required to consult on any of the proposed changes.

Perhaps one of the most significant changes being discussed is reducing the age at which employees would be enrolled into a workplace pension plan. Currently, companies must comply with regulations and automatically enrol workers who are at least 22 years old, but below State Pension Age (SPA).

The proposed change is considering reducing this age to 18 years old, establishing saving as the standard for young adults and enabling them to start saving earlier. It has been calculated that lowering the SPA to 18 would allow individuals to save an extra £20,000 into their pension pots by the time they reach SPA (68 years old, based on the proposed plan to increase it to this between 2044 and 2046).

Secondly, the bill proposes the notion that not only do employees have to be 18 or over, but that they also will not have to earn at least £10,000 to be automatically enrolled. Instead, the bill suggests wither significantly reducing or removing this earnings ‘trigger’ altogether.

Not only would more people be enrolled into a pension plan if this were to happen, but it would particularly benefit part-time and minimum wage workers too. The bill also supports removing the Lower Qualifying Earnings band, which would increase the contribution level for savers.

The changes were originally expected to take place in 2020, but due to the remaining work involved, the implementation date is again likely to be postponed further. More information on this will be provided in due time.

During 2022, we handled pension scheme obligations for 70%  of our payroll clients. Our team has long-standing expertise supporting clients in creating and managing a compliant pension scheme. If you have any questions regarding how the proposed changes may impact your business, you can contact Stuart Curtis, Amy Sadler or Zoe Masterson using the form below.