Where next for auto-enrolment?
As it is five years since the beginning of auto enrolment the DWP were required to undertake a review of the reforms. The results of this review were announced on 18 December 2017, they will not be implemented until the 2020s as the government wishes to assess the outcome of the increases in 2018 and 2019 and carry out further work on the adequacy of retirement incomes before it makes further decisions on contribution rates.
The review acknowledges that the current total savings of 8% from April 2019 will be insufficient to provide a satisfactory income in retirement, however the likely total contribution of 15% in the futures is not referenced in the report or how it will be achieved.
The report does note research from the independent Pensions Commission that identified that the state pension and auto enrolment contributions of a total of 8% of qualifying earnings would deliver around half of the level of savings needed to provide adequate retirement income for most people. Despite the success of automatic enrolment around 12 million individuals are still under saving for their retirement, that is 38% of the working age population. The vast majority (87%) of the individual who are under-saving earn over £25,000 pounds a year indicating that for those on the lowest incomes, who only need to provide around 50% of their working life income in retirement, auto enrolment is achieving that.
There have been suggestions already over recent years that implementation would have to be via auto acceleration – which would require both employer and employee to increase their pension contributions every time they received an increase in salary. There is, however, recognition in the report of the cost burden that has been faced by employers due to the competing demands of national minimum wage and the apprenticeship levy.
Following the Taylor review and numerous court cases on employment status last year, it is no surprise that the review makes a commitment to consider how the 4.8m self-employed individuals can be bought within the scope of auto enrolment. The trials of a number of different approaches to solving this will begin this year. This will include using the submission of a digital tax return as a prompt. The review addresses the problem of the up to 1 million individuals who are not self-employed nor employees, but are classified as workers and therefore already should be being assessed for auto enrolment but have largely been ignored over the last five years. We are likely to see more compliance efforts from the Pension Regulator targeted at this group and those that engage them. This will also be a focus of the government’s response to the Taylor review.
The auto enrolment age threshold will be lowered from 22 to 18, and all earnings from pound one will be treated as qualifying earnings rather than a band between the lower earnings limit and the upper earnings limit (there will still be an upper limit to the qualifying earnings band that will still be the upper earnings limit for national insurance). This acknowledges that as contributions are calculated only once an individual reaches the lower earnings limit (just over £6000 in 2018/19) lower earners are missing out on a potentially significant amount of contributions and tax relief, and more than once if they have multiple jobs. As earnings are not aggregated across multiple employments, an individual who earns £10,000 in each job will not be auto enrolled even if in aggregate their earnings exceed £10,000.
The concept of the entitled worker will be removed, such that anyone who joins a workplace pension will be entitled to an employer contribution.
There are no planned changes to three-month a postponement period.
The Government is concerned that the growth in consumer debt presents a challenge to the auto enrolment policy, should those on low incomes be saving into a pension or putting money aside into or accessible savings so that they are more financially resilient. To this end, Nest are developing what they call the ‘sidecar’ model, where employees are encouraged through their employer to deposit money into an accessible savings fund which then ‘overflows’ into their pension when it has reached a certain level. They will be trialling the ‘sidecar’ model with some larger employers in 2018.
No mention was made at all in the review of the current discriminatory approach of tax relief with regard to those in net pay arrangement schemes. For 2018/19 they will continue to be auto enrolled at £10,000, but will not receive any tax relief until their earnings exceed £11,850. Of course, the proposals to abolish the lower limit of qualifying earnings will significantly increase the cost of tax relief for government.