A year after auto-enrolment's 10th birthday the government gives the green light to changes which have the potential to extend to workplace pension savings initiative to more workers than ever before. But what does it really mean?
Auto enrolment saw its 10th birthday last year, and by all accounts it has been extremely successful, with the Pensions Regulator reporting in its monthly Compliance Report that between July 2012 and the end of August 2023 2,265,863 employers had confirmed they had met their automatic enrolment duties, and 10,951,000 eligible jobholders had been automatically enrolled.
Clearly then, using inertia to help people get into a savings habit has been very effective. However, the question as to whether more could be done has been a longstanding one. As far back as 2017 the DWP was considering the scope of auto-enrolment to provide for contributions to be calculated from the first pound of earnings and to include individuals below age 22 to be considered, subject to earnings, as eligible jobholders. The 2017 report estimated the former would result in an additional £2.6 billion in annual pension savings, whilst combined with the latter would result in an additional £3.8 billion (with not insignificant improvements in estimated retirement income).
The lingering question has now been answered. The Pensions (Extension of Automatic Enrolment) Act 2023 received Royal Assent on 18 September 2023 although it does not make any immediate changes to the current regime, requiring regulations to be made to bring its provisions (and the corresponding amendments to the Pensions Act 2008) into force.
What are the changes?
The changes introduce the possibility of further regulations being introduced which would:
- decrease the lower age threshold for an individual to be classified as an eligible jobholder (currently those below age 22 do not qualify); and
- reduce or remove the lower limit that applies to qualifying earnings, meaning pension contributions would be payable from the first £1 of earnings.
With the current cost-of-living crisis, notwithstanding there may be a glimmer at the end of the tunnel, the next big question is whether bringing in these changes is the right thing today. With reports of people reducing or stopping their pension contributions, albeit temporarily, any changes that will add financial strain, even if they are beneficial in the long term, are unlikely to be popular.
What does this mean for employers?
There are a few things that employers will need to factor in, including:
- If and when the above changes are implemented, costs are going to increase – pension contributions will be due in respect of more employees, and on a larger proportion of their salary (including the first £6,240 of their earnings in the 2023/24 tax year).
- There is a possibility that more individuals will opt out (or cease their membership), as individuals may decide additional contributions are unaffordable or that pension contributions simply are not important at their stage of life. Communication is key here, it being well established that the longer pensions are invested (i.e., the earlier someone starts contributing), the better their likely retirement outcome.
- With more individuals opting out or ceasing membership comes additional administration – it will become ever more important to keep track on who needs to be re-enrolled every few years.