Why pension saving is no grey area

For me, however, the key to success has been the 1m plus employers who have entered into the spirit of the legislation and declared compliance and enrolled their employees.

The vast majority of employers I’ve supported over the years didn’t resist this change but embraced it as a valuable development for their people who weren’t planning for later life.

The continued success of AE will very much rely on the ongoing support of UK businesses. To a great extent this will be measured by the impact of recommendations set out in the December 2017 AE review.

But the proposed lowering of the age limit to 18 and removing the lower earnings limit from the qualifying earnings definition aren’t targeted until the mid-2020s. So the immediate focus remains on newly introduced step ups.

For anyone who, like me, has been involved with AE since the start you will have had many moments of incredulity around some of the quirks and complexities in the rules.

The education and guidance wrapped around a well-governed, rewarding workplace pension is paramount to success.

For step ups it is no different as there are a few areas where employers clearly need help from industry professionals.

By far the most common question I’ve been asked is around the options employees have if they don’t want to take the step up. Can they ‘opt out’? Can they pay less than the new minimums?

There is confusion here because of the loophole that exists that could see employees being allowed to ‘opt down’ below the new minimums and continue contributing.

Whether employees opt out completely or are permitted to ‘opt down’ they will need to be reassessed on the re-enrolment date (every three years) and enrolled on the minimums that are required by law at that time.

Interestingly, some employers have asked me for more information about the re-enrolment process generally and if they will be notified about their specific date and if re-enrolment comes with opt out rights again (which it does).

Unfortunately, I’ve witnessed some confusion here and it’s understandable why. As is often the case with AE, things aren’t simply black and white and due to this I’ve faced questions literally at both ends of the spectrum around the basic need to act on the new minimums.  

Some employers have been paying under the new minimum of 5 per cent in total (which includes 2 per cent from them) and some are already beyond the 2019 minimum levels of 8 per cent so their employees will not have to start paying unless they wish to.

For anyone in this luxurious position, I’ve suggested they should still be sharing positive messages with their employees about the great scheme they offer and ensure their workforce appreciates the significant investment they are making for them.

So by April 2019 we will arrive at ‘steady state’ for minimum contributions with workplace pensions having stepped up to at least 8 per cent. This is seven years later than was initially planned for during the early formation of the AE regime.

But we are almost there and although, for many, this rate of saving will not help them reach an adequate replacement income in retirement it is an important step forward.

The success, or otherwise, of these step ups will inform what happens next with contribution rates. The AE Review stopped short of any formal recommendations on contributions while there is uncertainty about how step ups beds in.

What is certain, however, is the central role that employers have played and will continue to play in helping automatic enrolment work harder for employees who must save for their future.

From the conversations I’ve had with both employers and employees, the education and guidance wrapped around a well-governed, rewarding workplace pension is paramount to success.

Alex McCallum is retirement expert at Scottish Widows