At the end of 2017 the government published the results of its year-long review of the automatic enrolment scheme, under which employers have been required to enrol almost 10 million workers in pension schemes since 2012.
Probably the only headline to spring from the review is that nothing much is likely to change over the short term. There are some quite interesting and creative ideas in the review (of which more below), but the government is talking about having changes in place ‘by the mid-2020s’, which is a decidedly leisurely goal.
Too late for some
One reason for the cautious timetable is that significant changes are already affecting people who come within the scope of automatic enrolment, and that will continue for the next couple of years. At present, the law only requires a worker and a firm each to contribute a sum equivalent to 1 per cent of the worker’s salary into a pension. In April 2018 this will rise to 3 per cent from the worker and 2 per cent from the firm, and in April 2019 it will rise again to 5 and 3 per cent respectively. The government wants to wait and see how all this goes before making further changes.
The problem with this is that by doing nothing until the mid-2020s, a whole generation of people currently in their 50s could lose out on adequate pension provision – people who perhaps joined companies after ‘gold-plated’ final salary schemes had closed but never really got started with their own pension saving. If the planned improvements to automatic enrolment are nearly a decade away, this group could be close to pension age before they benefit, which may be too late for some.
Under the proposals that have been announced, the starting age for automatic enrolment will drop from 22 to 18. This proposal has been widely welcomed, and it helps to communicate the message that as soon as you start a job, you should expect to be in a pension. Although this measure will add somewhat to employers’ costs, there are also costs involved in ‘excluding’ those under 22, including the cost of writing to them about their rights to opt into a pension. The new arrangement should be simpler and reinforce the importance of starting a pension early.
A second change will have the effect of increasing the amount being contributed, particularly by lower-paid workers. At present, the mandatory contributions for workers and firms don’t apply to the whole of a person’s salary, but only to a band of qualifying earnings. In simple terms, the rates only apply above a floor of just over £6,000 a year (in 2018/19). This obviously adds complexity to the system and means someone earning, say, £12,000 a year is only required to contribute based on half of their earnings. The review therefore proposes that this floor be abolished and contributions be payable from the ‘first pound’ of earnings. This will have a proportionately greater impact on lower-paid workers and help them build up worthwhile pension pots more quickly.
As well as setting out these two major changes, the review considers how pension providers might modify the way they communicate with their members, and a good deal of work has gone into trying to boil down long and complex ideas onto a single sheet of paper. Hopefully, these changes will come through long before the mid-2020s.
More research will be done, particularly on different ways of ‘nudging’ the self-employed into pension saving. There will also eventually be a review on whether the 8 per cent mandatory contribution is enough to fund a decent retirement. Given that the Department for Work and Pensions admits in its review that 12 million of us are not saving enough for retirement, I think we already know the answer to that question. The key conclusion therefore needs to be that we can’t rely on the government to get us saving at the right rate anytime soon. The onus is on each of us to review our pension saving regularly to make sure it is set to deliver the sort of retirement we would want for ourselves.
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