Personal Pension  

Napf opts for £10k auto-enrolment pay trigger

Freezing the minimum earnings auto-enrolment trigger at its present £10,000 is the best option to encourage people to save more in the current economic climate, as it is simple for employers to understand, the National Association of Pension Funds said today (26 November).

In its response to the Department for Work and Pensions’ consultation on the auto-enrolment earnings threshold, Napf said freezing the trigger at £10,000 strikes the “right balance between simplicity and coverage”.

Last month, the government proposed freezing the minimum earnings threshold for people being auto-enrolled for the 2015/16 year, as one of four options up for consultation on the pay trigger for contributions.

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The four options under consultation are:

• freezing the trigger at its current level of £10,000;

• raising the trigger by indexation (CPI or earnings);

• increasing the trigger to £10,500 in line with the threshold for paying income tax; or

• using the Pension Commission benchmark replacement rate to determine the trigger.

Over the next three years, small and micro employers will be auto-enrolled and Napf said they will struggle with the “complexity” of the required payroll systems, so it is imperative to make auto-enrolment simple to administer and understand.

It added that freezing the trigger at £10,000 means that those with those with flexible working patterns and lower incomes, as well as women, will not be excluded.

However, Napf warned that a trade-off is being made; auto-enrolment will be less simple to administer as payroll systems will be made marginally more complex. It noted that in light of this, “greater efforts should be made by industry stakeholders to support small and micro employers to comply”.

While Napf showed the most support for ‘option 1’, it also ruled that ‘option 3’ was a possibility because of it’s ease for employers to understand and being line with the income tax threshold. The income tax threshold is currently at £10,000 and set to rise to £10,500 from April 2015.

The trade body dismissed the other two options, adjusting the threshold in line with CPI or earnings growth, as “too complex” to introduce suddenly, particularly for small and micro-employers.

Furthermore, the Napf stated that in 2017 a scheduled review for automatic enrolment should be undertaken by an independent retirement savings commission that has a “clear remit” to define and promote good retirement outcomes.

“With all but the smallest employers on board, this will be the right time to assess more complex arrangements for the trigger, such as option two and four.”

The DWP’s consultation noted that if the trigger was too high then people who should be saving, or should be saving more, may lose out, while setting it too low means other people may be driven to opt out.

Darren Philp, director of policy at auto-enrolment master trust The People’s Pension, also stated that as it is so late in the day to make fundamental changes for next year, “the sensible option is for minimal change, for example, freezing the trigger at £10,000 in 2015/16,” although he added that this would only be a short term measure.