The Department for Work and Pensions (DWP) has confirmed that the lower age criteria at which employers are required to auto-enrol employees into a workplace pension is to be reduced from 22-years-old to 18-years-old.
The recommendation forms part of the DWP’s Automatic-enrolment review 2017: maintaining the momentum report, published today (Monday 18 December 2017). The report contains the findings of the government’s review into auto-enrolment, which considered the success of auto-enrolment to date, as well as explored ways it could be developed further in order to meet the needs of individuals saving for retirement and employers actioning auto-enrolment within their organisations.
The review also highlighted plans to change the automatic-enrolment framework so that pension contributions are calculated from the first pound earned rather than the current lower earnings limit of £5,876, which is applicable for 2017-2018. This would also involve removing the entitled worker category, which currently applies to those who are aged between 16 and 74, are working in the UK, and earn less than £5,876 per year.
The report predicts that lowering the age criteria for auto-enrolment would bring an extra 900,000 employees into workplace pension schemes, while removing the lower earnings limit would add a further £2.6 billion into pension saving and operate as an incentive to those with multiple jobs to opt-in to a pension arrangement.
These changes are scheduled to take effect from the mid-2020s, subject to discussions with stakeholders during 2018 and 2019 that will explore how to approach implementation. This will also consider how to ensure the decided changes remain affordable and will use evidence of the impact of the increases in statutory minimum contribution rates in April 2018 and April 2019.
In addition, the review confirmed that the earnings trigger for auto-enrolment will remain at £10,000 a year for 2018-2019, subject to annual review.
Furthermore, the DWP has committed to test targeted interventions aimed at increasing pension saving for the self-employed.
The report also highlights the importance of encouraging better engagement between employees and their pension savings, in particular, noting the role of the employer in this relationship and how employers can better work with pension providers to boost employee engagement with pensions. It also discusses the importance of the use of simple language, simplifying the annual benefit statement, and investing in new technology.
Following on from this review, the DWP plans to report on the feasibility study for the Pensions Dashboard in spring 2018, while the single financial guidance body will be in place after autumn 2018.
The report found the operation of the regulations on alternative quality requirements for defined benefit (DB) schemes, and specific elements of alternative quality requirements for defined contribution (DC) schemes remain fit for purpose. The next statutory review on this area will be carried out in 2020.
The auto-enrolment review was originally announced in December 2016.
A spokesperson at The Pensions Regulator (TPR) said: “We welcome [the] DWP’s automatic-enrolment review which builds on the success so far. Since 2012, nearly one million employers have met their automatic-enrolment responsibilities and more than nine million people are saving into a workplace pension as a result.
“The programme has reversed the downward trend in workplace saving and staff now expect a pension. Lowering the age limit and the threshold for staff to receive employer contributions means more people will have the opportunity to benefit.
“TPR will continue to support employers, providers and advisers so that the roll out of automatic-enrolment continues to be a success.”
Bob Scott, chairman at the Association of Consulting Actuaries (ACA), added: “The announcement is positive news, but we would have liked to have seen both a greater commitment to bring more workers into the [auto-enrolment] world and further phases announced to raise contribution levels, so both businesses and employees can plan ahead. We recognise that there are concerns about both opt-outs and costs in so doing, but that is why a holistic approach is needed, with government playing its part by taking actions over the same time-frame to reduce costs falling on businesses and employees.
“Importantly, we also see the need for greater flexibility to ease the financial pressures on businesses still having to find large sums of money to maintain defined benefit schemes. Easements there will give room for more spending on open DC schemes. And, we also see the need for further flexibilities for younger employees in pension arrangements to be able to draw on some of those savings to meet shorter-term financial pressures, such as home purchases. Allowing this, would in our view mean fewer young people would be turned off pension savings as contribution rates increase necessarily over time.”
Malcolm McLean, senior consultant at Barnett Waddingham, said: “These are sensible but long overdue proposals; minimum age limit and the use of all earnings for calculating contribution levels should have been introduced from the start of auto-enrolment in 2012.
“It is rather disappointing that the government does not seem willing to contemplate bringing in any of the changes until the mid-2020s. This is presumably partly motivated by a desire not to upset the apple cart until the current contribution increases, planned for April 2018 and April 2019, have been successfully implemented and given time to settle down. I sense there is already a certain jitteriness about how these planned increases will play out, with both workers and employers, and what impact they will have on the very good opt-out rates to date.”
John Gordon, pensions lawyer at Ashurst, added: “Any change that simplifies a complex pensions system is likely to be welcomed by employers and employees alike. However, there is clearly still a long way to go to encourage people to save more and tackle one of the key issues of the day, inter-generational fairness."
