Rhiannon Barnsley: Automatic-enrolment act is no cure for the epidemic of under-saving

Automatic Enrolment BillThe Royal Assent of the Pensions (Extension of Automatic-Enrolment) Act marks a significant development in the UK pension landscape. There are notable changes that could shape the retirement savings framework for certain employers and employees, but more needs to be done to fix the consistent under-saving for retirement that is threatening to become an epidemic if not addressed sooner.

The bill makes two changes. First, auto-enrolment is extended to those aged 18 to 22. Certain employers may now find more of their workforce eligible for auto-enrolment, provided they meet other criteria. Given the requirement to earn over £10,000 per annum to be eligible, only those in full-time work are likely to benefit. Students with part-time jobs will likely still be ineligible for auto-enrolment.

Employers utilising the qualifying earnings definition for pension contribution calculations will witness a shift. Previously, contributions were calculated on salary between £6,240 and £50,270. The bill now mandates contributions from the first £1 of earnings. Although most employers do not employ the qualifying earnings model, those that do will experience increased contributions, impacting the pension savings of their workforce.

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While widening the scope of auto-enrolment to include younger employees and removing the lower qualifying earnings threshold is a step forward, some limitations persist. The requirement for employees to earn over £10,000 annually to be within scope still excludes many part-time and multiple job-holding workers. Addressing the issue of under-saving remains a challenge, as the auto-enrolment minimum contributions may fall short of providing a comfortable retirement lifestyle.

There is a dilemma of encouraging higher contributions versus the risk of people opting-out or leaving their pension scheme. In the current economic climate, employees might prefer immediate financial benefits over long-term pension savings. Raising minimum contributions could be a viable solution. However, this approach requires careful phasing to ensure savers are willing to contribute more. Another option is to raise the minimum employer contribution, but this has an effect on employer profitability, which has further ramifications for employees. It is not an easy fix.

The automatic-enrolment act’s Royal Assent certainly brings welcome changes to the UK pension landscape. As employers and employees navigate the evolving landscape, a delicate balance between encouraging greater savings and addressing immediate financial needs must be struck. The phased implementation of minimum contribution increases and a nuanced approach to diverse employment scenarios will be crucial in ensuring the success of these pension reforms.

Rhiannon Barnsley is an associate at Arc Pensions Law