Guest comment: Adapting automatic pension enrolment to better serve UK employees

It was recently announced that MP Richard Holden’s Private Member’s Bill is unlikely to complete the required parliamentary stages in time for this year’s Queen’s Speech. The bill on extending automatic enrolment (AE) sought to extend AE to all eligible jobholders aged at least 18 and remove the lower qualifying earnings.

To ease individuals and employers into AE, minimum contributions were phased in to reach the current 8 per cent of banded earnings of employees over the age of 22 and earning more than £10,000 per annum.

As the employment landscape and macroeconomic factors impacting retirement constantly change, it is vital that we regularly review the auto enrolment framework to ensure it is effectively meeting the needs of employees.

It is certainly time we plan our industry’s long-term strategic approach and decide an implementation date for the mid-2020 proposals.

The removal of the lower earnings band so that contributions are calculated from the first pound of earnings alongside the reduced age of eligibility to 18 years old, are in the long term vital to boosting individual and household retirement outcomes.

Recent calls to reduce and subsequently remove the earnings trigger would bring all employees into the scope of auto-enrolment, which, while positive in terms of expanding the scope of auto-enrolment, is likely to have a detrimental impact on a particular group of employees.

Recent research shows that AE participation remains constant around 90 per cent for all eligible employees. The lowest financially secure group of employees still maintain this participation rate, however, it is likely they would be better off redirecting contributions to meeting the costs of day to day living and managing personal debt.

To compound matters, we are now firmly into a significant cost of living crisis, which is likely to expose an additional and substantial number of households to financial vulnerability.

The removal of the earnings trigger is a blunt approach to increasing membership with an all or nothing outcome. Unfortunately, inertia among this group is a powerful obstacle to overcome and we cannot knowingly create a framework which automatically enrols employees for which AE is not currently appropriate.

We also need to consider the existing industry consensus for an increase in minimum contribution levels. It is not possible to base an earnings trigger limit or removal decision on the existing framework, as it must also consider future change. Removing the earnings trigger would make future contribution increases a lot more challenging, based on the existing contribution structure.

We recognise that a large section of those earning under the existing earnings trigger such as part-time workers and multi-jobbers would be well served through being auto-enrolled. It needs to be an active decision, but we should be looking at how we can do more to nudge this group towards participation.

While those who earn below the lower earnings threshold can ‘join’, there is no requirement for the employer to make a contribution on their behalf. The eventual removal of this threshold should mean that all lower paid employees could ‘opt in’ and enjoy the benefit of an employer pension contribution.

Currently, non-eligible employees only need to be informed of their right to ‘opt in’ or ‘join’ once – typically when employment commences. This needs to be an annual communication with mandated wording to ensure consistency in the messaging to employees.

To enable the lowest earners to benefit from a meaningful employer contribution, an earnings de-minimis employer contribution could be considered. Introducing a £5,000 de minimis on which to base employer contributions, based on existing contribution levels, would equate to a minimum employer payment of £12.50 per month.

Over a period of several years, small changes such as this can generate genuine changes to outcomes.

The option to contribute more to your pension should also be made clear in the annual communication to opt in. However, with these proposals there needs to be sufficient lead time given to enable employees and employers time to understand the upcoming change, and for employers to prepare for a potential increase in pension contribution costs.

Future retirees need to be motivated and aware of all their options. This will help to make sure all employees have a sufficient pension pot when they reach retirement.

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