The Government is to extend the automatic enrolment regime so more people have to be automatically enrolled and higher contributions are paid into the qualifying pension schemes for those who have been automatically enrolled.

Background

The introduction of automatic enrolment in 2012 was revolutionary.  It introduced a legal requirement for UK employers to automatically enrol certain workers into a qualifying pension scheme and pay contributions which at least meet the minimum required.

Marking the 10 year anniversary of automatic enrolment last year, there was a report setting out the findings from a qualitative study by the Department for Work and Pensions which confirmed that most employers perceive automatic enrolment as a good policy and are supportive of its objectives and aims.

What does an employer currently have to do?

The automatic enrolment obligations of an employer in the UK varies depending on whether a worker or individual is categorised as an Eligible Jobholder, a Non-Eligible Jobholder or an Entitled Worker.

For Eligible Jobholders, employers must:

• automatically enrol Eligible Jobholders into a qualifying pension scheme;
• give Eligible Jobholders the right to opt out and automatically re-enrol Eligible Jobholders at least every three years; and
• ensure the minimum required contributions are paid.

For Non-Eligible Jobholders, employers must:

• give Non-Eligible Jobholders the right to opt into a qualifying pension scheme; and
• if a Non-Eligible Jobholder opts in, ensure that the same contributions are paid as if the Non-Eligible Jobholder was an Eligible Jobholder.

For Entitled Workers, employers:

• must give Entitled Workers the right to join a pension scheme (which does not have to be a qualifying pension scheme); and
• if an Entitled Worker joins the pension scheme, do not have to provide the same contributions as if the Entitled Worker was an Eligible Jobholder or Non-Eligible Jobholder.

The category which a worker or individual falls into will depend on various factors, including age and earnings.  An employer currently has no obligation to automatically enrol a person who is under the age of 22 or earning below £10,000.  In addition, if an employer has to pay contributions, the contributions payable are, as a minimum, calculated using qualifying earnings.  This essentially means contributions are paid in respect of salary between £6,240 (the lower qualifying earnings limit) and £50,270 (the upper qualifying earnings limit).

What is changing?

Against this backdrop, steps are being taken to extend the scope and benefit of automatic enrolment.

The Pensions (Extension of Automatic Enrolment) Act 2023 received royal assent back in September.  The Act gives the Government the power to make Regulations to:

• reduce the age workers become eligible for automatic enrolment; and
• reduce or remove the lower qualifying earnings limit.

These changes, once introduced, will reshape the retirement savings framework for many employers and employees. It represents a welcome step forward in terms of enhancing the UK workforce’s overall retirement savings.  Some employers will likely find that more of their workforce is eligible for automatic enrolment, provided they meet other criteria.

Employers utilising the qualifying earnings definition for pension contribution calculations will, once the changes have been introduced, see a shift in the costs of providing for their employees’ pensions. The Act gives the Government power to reduce or remove the lower qualifying earnings limit.  This means it is possible that the Government may make Regulations for contributions to be made from the first £1 of earnings. Although many employers, for administrative ease, do not use the qualifying earnings contribution basis, those that do will need to pay increased contributions. While this will come at an increased cost to those employers, it will positively impact the pension savings of their workforce.

A welcome change?

Generally, the changes seem to be widely well received by the pensions industry.

The Work and Pensions Committee chair, Rt Hon Sir Stephen Timms MP, welcomed the enactment of the legislation, by saying that:

“Lowering the age threshold for auto-enrolment and removing the lower earnings limit on pension contributions will make a real difference to young people, part-time workers and workers in the gig economy”.

Minister for Pensions, Laura Trott, has also shown her support for the proposed changes, saying that:

“This will mean younger workers and those in lower paid employment will be able to fully participate in Automatic Enrolment. For the first time, every eligible worker will benefit from an employer contribution from the first pound earned – which will make a huge difference to their eventual pension”.

It is expected that the changes to automatic enrolment, along with the proposed Mansion House reforms, could increase the average earners’ pension by nearly 50% if saving across their entire career and a minimum wage earner could see their pension pot increase by over 85%.

Is there more to be done? 

While widening the scope of automatic enrolment to include younger employees and reducing or removing the lower qualifying earnings threshold has the potential to be a significant step forward, many limitations on automatic enrolment still persist.

For example, the requirement for employees to earn over £10,000 annually to be within the scope of automatic enrolment is likely to be the most significant barrier for many part-time and multiple jobholding workers.

In addition, addressing the issue of under-saving remains a real challenge.  It has often been questioned whether the current model of contributing 8% of qualifying earnings is enough for the retirement lifestyle that many aspire to, particularly given the level of state pension. It is likely that, even with the new and improved automatic enrolment minimum contributions, retirement savings will fall short of providing a comfortable retirement lifestyle for many workers.  Even if it is enough, in a time of high cost of living and increased interest rates, many would argue that increasing saving for retirement is not viable for many when people are struggling to meet many of the ordinary necessities of life such as increased housing costs, higher mortgage payments, higher energy bills, higher food bills and other essentials.

This creates a policy dilemma between encouraging higher pension contributions but doing so in a way which does not increase the risk of people opting out or leaving their pension schemes altogether. In the current economic climate, it is understandable that many employees may prefer immediate financial benefits over long-term pension savings. Raising minimum employee contributions could be a viable solution. However, this approach requires careful phasing to ensure savers are willing and able to contribute more. Another option is to raise the minimum employer contribution, but that has effects on company profitability which could have further ramifications for employees, and indeed could increase inflation, where those costs are passed on to consumers through higher prices. It is not a problem with an easy fix.

Suffice to say, The Pensions (Extensions of Automatic Enrolment) Act 2023 certainly brings the prospect of welcome changes to the UK pension landscape, however, there is still more work to be done to ensure that workers can confidently look forward to a comfortable retirement. As employers and employees navigate the evolving landscape, a delicate balance between encouraging greater savings and addressing immediate financial needs must be struck.

Beth’s article was originally published in Law360, here.