Auto-enrolment (AE) has transformed how people save for their future, with an extra £33bn saved into workplace pensions in 2021 compared to 2012, according to the government.
Workplace pensions are now part and parcel of many employees' expectations but those under the age of 22 aren't automatically enrolled. And people's earnings need to be above the pensionable threshold of £6,240 to be included.
The good news is that the Extension of the Auto enrolment Bill, which passed through the House of Lords in September, will change this. The bill will deliver two big and very welcome changes designed to get younger and lower-paid people saving and which will help to address the issue of the 12.5 million people under-saving in the UK.*
AE 2.0, as it's being called, will lower the age at which people are auto enrolled to 18. The lower earnings threshold is being removed, too, so that pension saving is from the first pound of earnings. It brings in those on lower earnings and means the first £6,240 of earnings is pensionable, for everyone.
It could see someone joining at 18 accumulating an extra £64,000 into their pension, based on medium-growth assumptions.
Scottish Widows' 2023 Retirement Report highlights just how much this change - which we've been calling for - is needed. Just over one in three people (35%) won't have enough for a comfortable retirement and will struggle to pay for the basics many people take for granted. (Scottish Widows 2023 Retirement Report).
Importantly, AE 2.0 will improve financial inclusivity for women, younger people, part-time workers and the low paid. It's a big step on the way to building their resilience and giving them a better chance of a comfortable retirement.
What will AE 2.0 mean for employers?
Undoubtedly there will be challenges with more complexity and costs on top of employers' existing AE duties.
Employers will need to change their IT and payroll systems to fulfil their AE duties, and some have provider or payroll systems where the responsibility for change sits with their supplier. But it's the employer who needs to check it's ready when it's needed.
Employers also need to plan for the change within their own business. Can the business afford the extra budget, and do they use it as an opportunity to make improvements such as adding contribution matching, or tiers of contribution rates, or both? Will they communicate the changes through a pension engagement campaign and highlight the message that the changes benefit everyone?
They may need to work that bit harder to encourage younger savers to join a pension scheme when they are barely out of school and ‘retirement' seems a lifetime away. Younger savers, like the lower paid, will need to understand why pension saving is so important.
Costs under scrutiny
Costs will be higher for employers and employees alike contributing more into pensions, with sectors such as retail heavily affected due to having more part-time, younger, and lower-paid workers. Many will be automatically joining their workplace scheme for the first time.
Costs can be offset using salary exchange and could even mean some employees having more take-home pay despite increasing contributions by saving on tax and National Insurance. Schemes not using salary exchange might want to consider looking into it.
When will the AE 2.0 reforms land?
The government has said implementation is likely in the mid-2020s, following an Autumn consultation to decide when, how, and if, changes will be phased in. Interestingly, pensions minister Laura Trott, MP, was heard advocating for an immediate consultation in early October.
Does AE 2.0 go far enough?
Whether the AE reforms - welcome as they are - go far enough is another thing. As they stand, auto-enrolment contribution rates are unlikely to give many people a comfortable retirement and will need to increase from the current 8%. Perhaps the consultation will include this in its scope.
That's going to be challenging for employers and employees alike with more costs for everyone amid ongoing economic challenges but it's necessary in the long term.
There could well be unintended consequences too, as those aged 18-22 tend to have more periods of short employment and it could result in more small pots being left behind in different schemes.
The number of deferred small pots is already a worry for many in the industry. It's why the UK Government is proposing legislation for a super consolidator model where authorised schemes could act as consolidators, initially for pots of up to £1,000.
For now, though, let's hope those invites to join auto enrolment schemes start arriving sooner rather than later. For younger and lower paid workers, it can't happen soon enough.
Read Scottish Widows 2023 Retirement Report
Sources:
* DWP's Analysis of future pension incomes - GOV.UK (www.gov.uk)
