Proposals to change the way auto enrolment works have been published by the Department for Work and Pensions.
A review group looked at auto enrolment to examine whether it’s working properly and whether it could be adjusted to get more low earners saving more into pensions. We look at what the main results of the review could mean for auto enrolment schemes.
What are the proposed changes?
- Upper and lower minimum contribution thresholds
As expected the band of earnings on which minimum contributions is based will change in line with National Insurance thresholds - £6,032 to £46,350 for 2018/19.
- Removal of the lower contribution earnings threshold
At the moment, auto enrolment minimum contributions are based on a band of earnings in line with National Insurance Contributions thresholds. Removing the lower amount will mean that minimum contributions will now be due on the first pound of earnings although the upper cap will remain. Workers will benefit from increased pension contributions and it is hoped that people with multiple jobs will be more likely to save. For employers with schemes set up on the minimum contribution level, it will mean an increase in cost. Where an employer uses a different contribution structure for their scheme, this proposal should have little or no impact.
- Reduction of the auto enrolment age
This will mean employers will have to automatically enrol workers from age 18 instead of age 22. The hope is that by saving longer in an auto enrolment scheme, they will build up bigger pension pots. In addition, auto enrolment administration will become simpler. Employers however might see an increase in their contribution costs, especially if they have a lot of younger workers as they will have to pay contributions for them if they don’t already.
When will the changes happen?
The Government will consult on how to introduce the changes over the next few years with a view to introducing them in ‘the mid-2020s’.
What hasn't changed?
- The auto enrolment earnings trigger
The review concluded that there is currently no need to change the auto enrolment earnings trigger of £10,000 although it will now be reviewed every year to make sure the level is sustainable and meets its objectives.
- The self-employed
The DWP say they will test targeted interventions from 2018, followed by consultation and eventual implementation. But no firm plans just now.
- Contribution increases beyond 8%
Government will monitor the minimum contribution increases in 2018 and 2019 to inform if or how consideration should be given to further increases in the future. So no firm plans at the moment.
- Non-taxpayers and tax relief
Some non-taxpayers in auto enrolment schemes that operate on a ‘net pay arrangement’ tax basis will not receive any tax relief on their pension contributions. These people would receive tax relief in a ‘relief at source’ scheme (e.g. a group personal pension). The DWP recognise this is an issue however there are no firm plans to address it yet.
While the proposed changes will bring younger people into pension saving and might encourage people with more than one job to opt in, it’s disappointing that this won’t happen anytime soon. An opportunity has been missed to help build up pensions for thousands of workers under age 22.
In addition there is a widening gap between the auto enrolment earnings trigger of £10,000 and the tax standard personal allowance of £11,850 (figures for 2018/19) meaning more workers won’t get any tax relief on their contributions.
We’d like to see the self-employed brought into scope and we have already submitted what we believe could be a workable solution.
Where can I find out more?
Rest assured we’ll be involved in any consultation process and we’ll keep you up to date on how these proposals might affect auto enrolment schemes as we approach their implementation. You can also read the DWP paper.
If you have any questions on how these proposals could affect a particular scheme, please get in touch with your usual Royal London contact.