Auto-enrolment: Here we go again!

April 2018 saw millions of workers across the UK being asked to find extra cash to put into their pension when the first increase to AE contributions was introduced. There were quite a few doom-mongers who predicted a collapse in scheme membership and soaring opt-out rates but in fact it mostly passed without a hitch.  The Government estimates that in 2017/18 employees eligible for AE saved a total of £90.3 billion in their pension and this is set to increase significantly in 2018/19 and beyond.

A survey conducted on behalf of The Pensions Regulator (TPR) in 2018 found that among those employers that implemented the April 2018 increase in minimum contributions, the mean proportion of members leaving a scheme was only 1.8% for micro, 1.7% for small and 0.9% for medium employers. Interestingly, more than 90% of firms stated that none of their staff asked to leave when minimum contributions were increased from 2% to 5% (based on qualifying earnings definition).

April 2019

As we gear up for the next round of increases there have been similar rumblings from the more negative parts of the industry and media alike.  However, we believe there will be a similar outcome to April 2018 for a few key reasons:

  • Awareness – pensions have had such a huge spotlight shone on them over the last few years and it is rare to speak to somebody who doesn’t know what’s happening and why. Employees have a better understanding than ever before that saving into a pension pot is essential to have a happy retirement.
  • Tax allowances – the Government sensibly moved the timing of the increases to coincide with the new tax year rather than the originally proposed 1st October.  As with April 2018, some of the increase will be mitigated by personal allowances increasing and the higher rate threshold being pushed significantly upwards.
  • Communication – Aspira and LEBC have been very active in communicating with our clients about the April 2019 increases and this is consistent across the industry.  Shining a positive rather than a negative light really helps employees to understand what they’re giving up if they decide to opt-out. Employees that properly understand the effect of an employer contribution and tax relief from the government are much less likely to give up this valuable benefit.

And the winner is... AE

Compulsory workplace pensions have been a huge success so far and have resulted in a vast increase in participation in retirement saving, and with continued backing from across all the major political parties it’s likely to continue in this vein. While a great deal of positive work has been done there remain a number of potential issues to be resolved:

  1. A large number of micro companies who might find the increases difficult to bear.
  2. Low-earners (often women) are not benefitting fully from AE due to the lower earnings threshold.
  3. AE does not address the problem of poor pension provision in the self-employed sector.
  4. The new minimum contribution levels from April 2019 are unlikely to be high enough to secure a comfortable retirement income for most workers.

Looking to the future, it seems inevitable that the Government will need to legislate for further increases to AE minimums and indeed there is a broad consensus that this will be necessary. How the Gender Pensions Gap and pension saving among the self-employed will be tackled remains to be seen. In light of the tremendous amount of time and energy that Brexit is currently commanding it’s likely that progress on developing AE legislation will be slow.

The Financial Conduct Authority does not regulate some aspects of auto-enrolment.

Sources:

Ongoing Duties Survey – Summer 2018, www.thepensionsregulator.co.uk, viewed 22/10/18

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/761428/review-of-the-automatic-enrolment-earnings-trigger-and-qualifying-earnings-band-2019-20.pdf

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