PensionsFeb 1 2018

The auto-enrolment review: key developments

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The auto-enrolment review: key developments

Already the UK's largest schemes have seen three years' worth of automatic enrolment among workers, with 2018 marking not only the first of the large three-year reviews for the biggest schemes and the start of incremental contribution rises to 5 per cent, but also the deadline for all small and micro-employers.

At the end of 2017, the Department for Work and Pensions (DWP) published its 134-page Automatic Enrolment Review 2017: Maintaining the Momentum report.

This highlighted the successes of auto-enrolment so far - getting 9m people enrolled into a workplace pension scheme, bringing more women and low-earners into some form of pension saving and getting the UK on target to save an extra £20bn a year into workplace pensions through auto-enrolment by 2019-2020.

The then secretary of state for work and pensions, David Gauke - now replaced by Esther McVeigh - said in his foreword: "We are rebuilding the UK's savings culture.

We need to make sure people are able to access high-quality help with money issues. Charles Counsell

"And as a pioneer of this shift in workplace pension saving, other countries are seeking to learn from our experience."

But there are changes that need to be made to bring more people into the scope of auto-enrolment, and to address the issues created by the growing gig economy and the rising number of self-employed Britons.

He added: "The government's ambition is to implement these changes to the automatic enrolment framework in the mid-2020s. 

"Over the coming year, we will work to build a renewed consensus to deliver the detailed design and implementation of our proposals. 

"Our long-term goal is that future generations can have confidence in saving through workplace pensions and look forward to greater financial security and independence in retirement."

The below infographic is a snapshot of the key auto-enrolment highlights addressed by the review, based on the research carried out by the expert advisory group behind the review, DWP data and the British Social Attitudes Survey 2016.

Review round-up

Here is a reminder of the main points from the review, some of which will be covered in greater detail in separate articles in this guide. 

1) Package of reforms to increase median and lower earners' pension provision

Pensions contributions will now be calculated from the first pound earned, rather than from the lower earnings limit of £5,876 (in 2017/2018).

The DWP is also removing the 'entitled workers' category which means an extra £2.6bn worth of money would be brought into pension saving. It also aims to improve incentives for individuals in multiple jobs to opt into pension saving because they will get an employer contribution for every £1 they earn in every job.

Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association (PLSA), comments: "This is an important step on the road to helping people save enough for retirement.

"While lower earners will be asked to put proportionately more of their earnings into a pension, they will also benefit from a proportionately greater employer contribution.

"For someone earning £12,088, this will mean almost doubling their total pension contribution, or an immediate 3 per cent pay rise."

The earnings trigger for auto-enrolment, set at £10,000 will remain in place for 2018/2019 although it will be subject to an annual review.

2) Lowering the age threshold

The review has outlined lowering the age criteria from 22 to 18, so pension saving is the "norm" when most individuals start work.

According to the review, this will bring a further 900,000 young people into automatic enrolment.

Mr Vidler says: "We are pleased to see the government taking on board our proposal to reduce the age threshold from 22 years to 18 years old, as the earlier people start saving, the better their retirement will be."

Delaying saving can be extremely costly, since it minimises the benefits of compound interest. Jon Greer

He explains the changes to the age threshold and the removal of the lower earnings limit will see someone who started saving at 18 years old build a pot of 15 per cent more than someone who started saving at 22 years old.

According to the review, 1.6m people are under-saving in total, and they earn less than £25,000. A significant proportion of these will be the youngest workers, and 0.9m of these are women - all sections of society the government has pledged in its review to be helping with its changes to the age threshold and the change relating to the lower earnings limit.

3) Improving participation and pension outcomes for the self-employed

According to the review a proportion of the 4.8m (and rising) self-employed is "at risk of under-saving for their retirement". Therefore the review has pledged to work to implement the government's manifesto commitment by testing targeted interventions - including making tax digital - to identify the most effective options to increase pension saving among self-employed people. 

Figures from the Office for National Statistics show that between 2001 and 2015, the number of self-employed Britons contributing to a pension scheme fell from 1.1m to 380,000.

"It is vitally important we tackle this challenge before it becomes even more serious," says Mr Vidler. 

Research carried out by the Pensions Policy Institute (PPI) on behalf of Old Mutual Wealth last year found the self-employed do have equivalent levels of wealth to the employed, but with only 12 per cent of the self-employed saving into a pension, there is a risk of poverty in retirement.

According to the study, those who do save into a pension are 10 years behind their employed peers, as the below graph from the PPI shows. 

The typical employed person aged 35-40 has £11,500 saved into a pension. The self-employed do not hit a similar figure until they are 45-50 years old.

Jon Greer, head of retirement policy at Old Mutual Wealth, comments: "Delaying saving can be extremely costly, since it minimises the benefits of compound interest, which sees the value of savings rise over time."

4) Addressing the increase in contributions

In April 2018 contributions are set to rise from 1 per cent to 5 per cent, followed by a rise to 8 per cent in 2019. 

This basically means the worker contribution as a percentage of qualifying earnings (including employee tax relief) will rise from 1 per cent to 3 per cent and then to 5 per cent.

The minimum employer contribution as a percentage of qualifying earnings will rise from 1 per cent to 2 per cent and then to 3 per cent.

There have been some concerns expressed that a rise of this nature might see the number of opt-outs - currently one in 10 - start to creep upwards as more of people's salaries start to get set aside into a workplace pension.

The government has pledged in the review to "monitor and evaluate" the impact of increasing contributions and will carry out further analysis to inform a longer-term debate on the right balance between statutory contribution rates and voluntary additional retirement savings.

It is understood the impact of the rises will not be able to be evidenced until 2019/2020.

"The tricky issue with pension contributions", says Mr Greer, is "increasing it enough so that people properly prepare for later life, but not so much people feel like it is too hefty a burden, and so they end up ditching them altogether."

5) Pledges to improve engagement

The review found that while more individuals than before were saving, they were not "necessarily engaged with saving, nor looking to take greater personal responsibility to plan, and save more, for their retirement".

The review stated it would set out areas where pension providers, the advisory community and employers, "working with government where necessary" would do more to support individuals' engagement with their savings and deliver better value for their customers. 

Measures include:

  • Putting simple language "at the heart of effective engagement".
  • Providing a short, simple and consistent annual benefit statement that can be used by all providers to make it easier for individuals to understand.
  • Call upon employers to work closely with pension scheme providers to develop new approaches to engagement and communication.
  • Call upon the pensions industry to continue to invest in new technology, offering multiple ways for individuals to access their services alongside more traditional channels.
  • Maintain the work on the pension dashboards "to enable all people to see all their retirement income and savings information in once place".
  • A government commitment to "deliver a policy and regulatory framework that supports the evolution of auto-enrolment and recognises the needs of employers, providers and individuals, including the need for simple, consistent language, and the creation of the single financial guidance body".

The creation of the single financial guidance body was outlined last year in the Queen's Speech to parliament. Charles Counsell, chief executive of the Money Advice Service, comments: "This will give a more joined up offering to customers across debt advice, pensions advice and broader money guidance.

"We need to make sure people are able to access high-quality help with money issues, and help prevent people getting into financial difficulties in the first place.

"Critically, the new body will also carry on the important work underway through the Financial Capability Strategy to improve people’s ability to manage their money effectively."

Timescales

According to the review, the government plans to implement these changes to the automatic enrolment framework in the mid-2020s. 

This will entail discussions with stakeholders throughout 2018 and 2019, evidencing the impact of the increases in the statutory minimum contribution rates in April 2018 to 5 per cent and April 2019 to 8 per cent.

Having monitored these increases and the impact on auto-enrolment, it will discuss with stakeholders plans for any future contribution rate increases, and how any costs from changes to auto-enrolment are shared between individuals, employers and taxpayers. 

The DWP will also begin testing targeted self-employment intervention this year, with a view to evaluating these in 2019 and see how the self-employed might be brought into some form of "atypical" automatic enrolment regime.

It will also report on the feasibility study for the pension dashboard some time this spring, and the single financial guidance body will be in place some time in autumn this year. 

simoney.kyriakou@ft.com