New plans to expand auto-enrolment were backed by the Department for Work and Pensions (DWP) on Friday 3 March and are likely to be phased in early to mid-next year.
Auto-enrolment (AE) laid the foundation for a new era of pension savings, and since its introduction in 2012, the number of people saving into a workplace pension has doubled. To build on this success, the Department for Work and Pensions (DWP) confirmed on Friday (3 March) that it will support proposals to expand auto-enrolment – measures which will see auto-enrolment extended to younger people and lower paid workers.
In this article, we will explore what this means for employers.
What happens currently with pension auto-enrolment?
Under auto-enrolment, UK employers are legally required to put all their ‘qualifying’ employees into a workplace pension and contribute to their pension savings.
A ‘qualifying’ employee is someone who:
- works in the UK
- is at least 22 years old, but under State Pension age, and
- earns more than £10,000 a year.
The minimum contribution (3% employer and 5% employee) applies to any earnings over £6,240 up to a limit of £50,270 (in the tax year 2022/23). This slice of the employee earnings is known as ‘qualifying earnings.’
What are the new proposals for expanding pension auto-enrolment?
The Private Members Bill looks to grant two extensions to auto-enrolment:
- Abolishing the £6,240 lower earnings limit for contributions
- Reducing the age for being automatically enrolled from the current 22 to 18.
In its press release, DWP stated that ‘lowering the age at which eligible workers must be automatically enrolled into a pension scheme by their employers from 22 to 18 would make saving the norm for young adults and enable them to begin to save from the start of their working lives’.
In addition, it said ‘the removal of the lower earnings limit would support those with low earnings and multiple jobs by ensuring they are saving from the first pound earned’.
When are the changes being introduced?
While the Bill will have to complete its remaining stages in the House of Commons and will also need to be approved by the House of Lords, Former Pensions Minister, Steve Webb, stated that this was “unlikely to be a problem with government support”.
With the next General Election to take place no later than January 2025, we anticipate the phasing of these proposals early to mid-next year.
How will the changes impact employers?
- Reducing the age threshold from 22 to 18 may increase the pool of ‘qualifying’ employees for many employers.
- Deducting pension contributions from the first pound earned – as opposed to deducting contributions from the slice of the employee earnings which fall between the £6,240 and £50,270 bracket – will mean the 3% employer contribution will need to be calculated from an expanded portion of the employee earnings.
- Payroll teams will need to ensure the necessary changes are implemented in a timely manner to maintain correct deduction of contributions.
- Member communications need to be considered – employers will need to liaise with their pension provider to understand member communications regarding both content and timing, as the changes will invariably have an impact on the employees’ take-home pay.
There is a statutory requirement for the DWP to carry out a consultation before releasing the official implementation approach and timings, so we don’t expect the Secretary of State to exercise its powers to amend the age limit and lower qualifying earnings limit for auto-enrolment until next year.
Employers could benefit from having early conversations about what the change means for them because the proposals are likely to impact employers in respect of both their direct and indirect costs resulting from higher employer contributions, administration costs arising from embedding the changes to their payroll system to ensure compliance with its auto-enrolment employer duties, as well as ensuring members are communicated with through appropriate channels before, during and post implementation of the aforementioned proposals.
Need some help with pension auto-enrolment?
Pensions can be complex; however, our in-house experts you can speak to our business growth experts who can help simplify as well as support you with your auto-enrolment compliance requirements.
For more information about unburdening your business from payroll and pension compliance visit our SMART Employment page and read more about supporting your employees’ financial wellbeing, emotional wellbeing and physical wellbeing.
Amrik Birdi, Pension Consultant at Growth Partners
Amrik has a wealth of knowledge in pensions having joined Growth Partners from KPMG where he was responsible for advising companies and trustees on independent DC provider procurement exercises, DC investment strategy review, DC pensions strategy review, automatic enrolment compliance, and meeting ongoing governance requirements. Amrik spent three years before this as a Pensions Guidance Specialist at Pensions Wise helping members understand their pension and retirement options, empowering them to take control of their retirement journey. With a Diploma in Regulated Financial Planning and Certificate in DC Governance, combined with a Degree in Economics, Amrik is a fully qualified pensions consultant and able to offer strategic support to our clients on their options for workplace pension schemes and auto-enrolment.