NEWSLETTER    |     February 17, 2022

Auto-enrolment changes: more costs for employers?

A recently introduced Private Member’s bill is proposing to make changes to widen the group of employees qualifying to be auto-enrolled into pension schemes. The bill would lower the earnings threshold and the age at which employees need to be auto-enrolled. This would represent more costs and a higher administrative burden for employers. But what exactly is the bill proposing and who would be affected?

Auto-enrolment legislation requires employers to enrol their employees into a qualifying workplace pension scheme if they are (i) at least 22 years old but younger than state pension age; (ii) earning more than £10,000 a year and (iii) 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% of “qualifying earnings”). This is a minimum, and many employers offer higher pension contributions as an incentive.

The Pensions (Extension of Automatic Enrolment) Bill had its first reading in the House of Commons on 5 January 2022. It will have its second reading on 25 February 2022. The bill is proposing to (i) remove the £10,000 a year earnings threshold and (ii) lower the age threshold to 18 years. It was brought by MP Richard Holden and based on recent research by the Thinktank Onward, showing how broadening auto-enrolment to previously excluded employees could contribute to the UK economy.

This would have a big impact on younger employees and employees with part-time jobs or multiple jobs. These categories of employees have previously been excluded from the requirement to automatically enrol them into pension schemes. Particular industries, such as hospitality, have large numbers of these types of workers. If the bill is passed, employers could find themselves with much larger pension scheme costs.

Arguably, there would be a lower administrative burden for employers. Currently it can be a complex task to assess which employees meet the requirements for auto-enrolment (especially employees who receive weekly or hourly pay, or receive commission). If there is no earnings threshold, then so long as an employee is over 18 (and normally working in the UK), employers will know they need to be enrolled into a qualifying pension scheme. No assessment or calculation will need to be done.

At the moment, the bill is silent on what would happen with “Qualifying earnings” if the earnings threshold was removed. Qualifying earnings are one of the most popular ways of calculating pension contributions for employees. For the tax year 2021/2022, “qualifying earnings” means salary between £6,240 – £50,270. If the lower threshold for qualifying earnings remains the same, only employees earning at least £6,240 would receive any pension contributions from their employer. Popular defined contribution master trusts such as the People’s Pension and NEST often use qualifying earnings, so a change in the thresholds would impact many people. It would have an effect on those already receiving employer contributions, as they would be calculated on the first pound earned.

If the bill does succeed and becomes law, employers will need to take steps to work out which additional employees need to be auto-enrolled and to deal with any changes to qualifying earnings – in any event, most employers will face additional costs. It’s likely that either the Regulator or DWP (or both) would refresh their guidance on auto-enrolment.

Register for our newsletter

Related Newsletters