DWP auto enrolment review should have done more
18 December 2017
Proposals put forward by the Department for Work and Pensions (DWP) in its review of automatic enrolment to workplace pensions largely are seen as positive but more needs to be done to bridge the retirement income gap, say commentators.
The review, which took place earlier this year, set out to ensure that automatic enrolment continues to meet the needs of individual savers and employers into the future. It sought to do this through the examination of three main strands:
• Coverage: reviewing existing coverage of the policy and considering the needs of those not currently benefiting from automatic enrolment. It also committed to consider how the self-employed could be supported to save for their retirement;
• Contributions: strengthening the evidence around appropriate future contributions into workplace pensions; and
• Engagement: exploring how engagement with individuals can be improved so that savers have a stronger sense of personal ownership and are better enabled to maximise savings.
In brief, the review made two key proposals, which are due to take place in the mid 2020s and will seek to improve the overall coverage of workplace pensions. These are:
1. Reducing the age at which people begin auto enrolment from 22 to 18. The upper age is the same as the state pension age. This would increase the number of eligible savers by some 900,000 and total annual pension savings by £770 million in 2020/21.
2. Removing the lower earnings limit – currently £5,875. This means that contributions will be made across all a person’s earnings rather than earnings above the limit, and receive employer contributions accordingly. This also means anyone earning blow the limit can now receive employer contributions if they opt in. The upper limit for contributions is set at £45,000.
Currently the 5 million self-employed workers in the UK fall outside of auto enrolment – and only 12% pay into a pension. The proposals shy away from implementing rules for this group but will kick-start a series of “tested interventions and consultation” with a view to introduce legislation “before the end of this parliament” the Department for Work and Pensions (DWP) has said. The DWP said it would be exploring technology solutions and working with organisations using self-employed contracted labour to see if they can help facilitate a self-employed solution.
The proposals will also help to bring in people with more than one job who earn over the £10,000 in each job required for inclusion in auto enrolment, not the 1.11 million people* who have multiple jobs but are earning below the £10,000 salary figure in each.
In April 2018, phased increases to contributions will begin, with minimum contributions increasing from 2% to 5% of qualifying earnings (and from 1% to 2% from the employer) and in April 2019 they rise again to 8% (3% from the employer). Most employee’s contributions also benefit from income tax relief. However, commentators pointed out that even this rise will not be high enough to ensure a good retirement income.
The effect of the increases will be monitored in respect of how they are transferred through the economy and the behavioural effect on people, notably any increase in opt outs.
Neil Carberry, CBI managing director, hailed automatic enrolment as “a success story”, as it had reached 9 million people through the scheme, with opt-out rates of less than 10%.
He added: “Today’s report shows how far we have come, and makes some sensible suggestions about how to evolve the system in future. But much of the original plan is still to be delivered, with contribution rates rising over the next two years.
“For firms who are facing rising costs across the board – and employees with other legitimate calls on their income – it is right to complete this first phase and let it bed in before making further changes. A timeline of the mid-2020s for new proposals would be sensible and enjoy business support.
“It’s right to take steps to ensure the self-employed can benefit from pension saving sooner rather than later, and the CBI will be happy to help the DWP address this issue.”
Graham Vidler, director of External Affairs at the Pensions and Lifetime Savings Association (PLSA), said the announcement was “an important step on the road to helping people save enough for retirement.
“By increasing the salary band on which people are saving, and extending automatic enrolment to younger workers, more money will be going into pensions.
“The PLSA has long argued that automatic enrolment should cover more people and that contributions should rise, ideally to 12% over the next decade.
“The new measures, plus the commitment to review contributions after 2019, marks real progress and we look forward to supporting the Government in implementing the policy.”
Jon Greer, head of retirement policy at Old Mutual Wealth, said the wait and see proposal regarding increasing contribution rates would mean “a decade of low-level pension saving from the launch of auto-enrolment in 2012 – so anyone that wants to get ahead of the game should think about paying in more.
He added that it was also “a little disappointing” that the government hadn’t stepped in to fix the gap between the £10,000 automatic-enrolment earning trigger and the personal income tax allowance for those that have been automatically enrolled into a net pay scheme. “This arbitrage in the tax system needs fixing as it creates a perverse situation in which those on modest incomes miss out on a 25% uplift on their personal contributions, which would help them build up a healthier savings pot.
However, Greer added the proposals were a step forward for future generations: “As upcoming generations take less traditional career paths and start work from a younger age the government’s decision to lower the age threshold makes sense. Putting money aside for retirement from age 18 is the right thing to do and will set people up for a lifetime of saving.
“But it is a gamble. Young people with modest earnings in their first job might decide they’d prefer to keep the money in their pay packet rather than save for retirement that is half a century away.
“Government and employers will need to show young adults why saving early can make a big difference to your future prosperity. Ultimately, they need to tackle the growing epidemic of financial illiteracy within the UK, as the power of inertia can only go so far, particularly given pension freedoms require people to be more engaged with their later life provision.”
* As at March 2017.
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