The introduction of auto-enrolment has helped many to start saving for retirement. However, there are still restrictions that prevent many workers from reaping its benefits. New proposals aim to significantly increase the scope of auto-enrolment, which would particularly impact younger workers and lower earners.

Auto-enrolment legislation requires employers to enrol their employees into a qualifying workplace pension scheme if they are:

• at least 22 years old but younger than state pension age;
• earning more than £10,000 a year; and
• normally working in the UK.

Once automatically enrolled into a pension scheme, the employer must also make minimum contributions on behalf of the employee (usually at least 3 per cent of ‘qualifying earnings’). This is a minimum, and many employers offer higher pension contributions as an incentive.

Think tank Onward recently recommended abolishing the £10,000 earning threshold and lowering the age for automatic enrolment from 22 to 18 years. It estimated that this could boost UK pension savings by some £2.77tn over the working lives of the current workforce. Following this recommendation, Conservative MP Richard Holden put forward a Private Members’ Bill to lower the age at which workers are auto-enrolled to 18 and to scrap the £10,000 earnings threshold.

The changes proposed by the Bill could have a significant impact. They would result in far more younger workers, part-time workers and lower earners being auto-enrolled into pension schemes. Many young people are unable to benefit from auto-enrolment. Those who go straight into work after school, or who work in part-time jobs while studying, are not building up a pension.

However, there are more barriers to inclusion than age requirements or earnings caps. The concept of ‘qualifying earnings’ also bars many workers from auto-enrolment. Many large UK pension schemes use qualifying earnings to calculate pension contributions. For the tax year 2021/22, qualifying earnings are £6,240 – £50,270. This means that an employee earning £11,000 will have their employer pension contributions based on a percentage of £4,760 rather than their full salary.

This approach seems at odds with the policy of trying to get people to save more for retirement. The government has recently confirmed that the earnings threshold of £10,000 is set to remain in place for the 2022/23 tax year. Part of its reasoning behind the earnings threshold is that employees earning less than £10,000 may not be in a position to put aside money for retirement and may need the money for daily living.

This may be true, but auto-enrolment allows employees to choose to opt out. There is a choice. Somebody earning £10,000 in one job might have several other jobs and have enough money to live comfortably and save for their retirement. The recent rise in inflation and the cost of living may serve to bolster arguments against the abolition of the earnings cap. Arguably maintaining the earnings threshold takes the choice away from people and makes potentially incorrect assumptions.

Plans to reduce the age limit for auto-enrolment are not new. A Department for Work and Pensions policy paper Automatic enrolment review 2017: Maintaining the momentum, reviewed the success of auto-enrolment and stated the government’s ambition to lower the age threshold and earnings limit by the mid-2020s. Pensions minister Guy Opperman was recently asked about any plans to implement these changes, to which he responded that events had got in the way over the past four or five years.

The Private Members’ Bill was due to have its second reading on 25 February, but has been delayed for this parliamentary year. If the proposals gain some traction and are pushed through, however, it could have ramifications for many.

Read Rhiannon’s article in People Management.