Govt faces growing pressure to outline plans on AE reform

Calls for the government to outline how automatic enrolment (AE) pension contributions could be increased and the eligibility criteria could be extended have continued to grow, after the Association of British Insurers (ABI) shared a suggested timeline for such changes.

The ABI’s report, Automatic Enrolment: What Will The Next Decade Bring?, argued that whilst AE has been an enormous success and achieved its target of increasing pension participation, people still are not saving enough, with targets on voluntary pension saving rates not materialising as expected.

In light of this, the ABI proposed gradually increasing the minimum contribution rates from 8 per cent to 12 per cent over the next 10 years, arguing that the new minimum contribution should be split between employers and employees evenly.

However, the ABI also acknowledged that there are currently challenges in light of the rising cost of living, therefore recommending that savers should have more flexibility, including an option to ‘opt down’ to 10 per cent contributions.

Alternatively, it suggested that the minimum contribution could be set at 10 per cent, with an option for savers to ‘opt up’ to 12 per cent, although it acknowledged that further research would be needed to understand which option is more affordable for both employers and savers.

The group recommended that a "whole of market solution" for small pots should be implemented alongside this to tackle the current trajectory of 22 million pots by the end of the next decade, also suggesting that this legislation should enable contract-based providers to carry out non-consented transfers.

In addition to this, whilst the government has previously committed to extending AE by lowering the age threshold from 22 to 18 and reducing the earnings threshold so that contributions are made from the first pound earned from the mid 2020s, the ABI argued that these changes need to be legislated “as a matter of urgency”.

In particular, the ABI recommended that the lower qualifying earnings threshold be reduced to £4,160 in 2023, £2,080 in 2024, and £1 in 2025, before reducing the threshold to £0 as part of a Pensions Bill in 2025/26.

The ABI suggested that the next Pensions Bill should also include provisions to reduce the age threshold and allow 18-year olds to be automatically enrolled, and to introduce a small pots solution.

Changes to contribution levels were proposed for slightly later, with the ABI recommending that these be included in a further Pensions Bill in 2028, starting with a rise in employer contribution at 5 per cent, before raising both employer and employee contributions to 6 per cent, respectively, in 2031.

Commenting on the recommendations, ABI director of policy, long term savings and protection, Dr Yvonne Braun, stated: “The huge success of automatic enrolment reflects a long-term plan based on consensus between political parties, industry and employers.

“We need the same approach now to determine the future of the policy, ensuring more people are included and are saving enough, with the right level of flexibility. Our report describes the key steps for the next chapter of automatic enrolment and sets out specific recommendations to adapt and evolve the policy."  

The report has also received backing from some of the wider industry, with Standard Life workplace managing director, Gail Izat, highlighting the call for minimum contributions to be increased to 12 per cent over the next decade as "sensible".

“Given the current economic conditions are putting pressure on both corporate and personal finances it will be important to carefully consider how these changes can be implemented," Izat continued.

"Given it is most likely that such changes would be phased in over a number of years we believe that it is important for the decisions to be made in the very near future.”

Adding to this, Fidelity International head of pension products & policy, James Carter, argued that "now is the right time to review the UK’s pension system in the round, including the state pension".

He continued: "For lower earners, the state pension currently provides the majority of their retirement income. The future value of the triple lock and the state pension therefore directly influences the level of provision that workplace pensions need to offer.

“With increasing dependence on DC pensions at retirement, state, workplace and private provision need to be considered in tandem to create a secure future for the UK’s older generations and the generations that will come after them.

"This all obviously comes at a time of fragility for public finances and employer affordability, making for no easy answers. As an industry, this is something we need to recognise as we work with policymakers and industry groups such as the ABI.”

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