Ten years on from the introduction of automatic workplace pension enrolment, evidence suggests that the majority of people are unknowingly under saving for retirement. To ensure that the auto-enrolment process continues to work for all savers, the Work and Pensions Committee (Committee), in its recent report on 'Protecting pension savers', has urged the Government to introduce reforms by next spring and focus on achieving a consensus as to what "a good outcome in retirement looks like for people relative to their working-age situation."
The current system
Auto-enrolment covers individuals aged between 22 and state pension age, who earn more than £10,000 a year. While the Government has previously considered extending auto-enrolment to include 18 to 21-year-olds, no changes were ever formally implemented.
There is a low-earnings threshold (£6,240 in 2022/23) below which employer contributions are not payable. Individuals earning between £6,240 and £10,000 are not legally entitled to be automatically enrolled into a workplace pension scheme but they do have the right to opt in and receive the minimum level of employer contributions.
Other exclusions also apply, for example for the self-employed or for sole-directors of a company with no other staff members.
The Work & Pensions Committee Report
By way of background, the report issued by the Committee on 21 September 2022 is the final report of a three-part inquiry on 'Protecting Pension Savers', looking at who is not saving enough for an 'adequate' income in retirement and how to address this. The inquiry has taken place in the context of a changing pensions landscape characterised by the decline of defined benefit schemes in the private sector, where most employers now automatically enrol employees into defined contribution schemes.
The report highlighted that auto-enrolment is generally considered to be a success story on the basis that it reversed the previous decline in workplace pension saving by boosting the proportion of eligible workers contributing to a pension from 44% in 2012 to 86% in 2020.
However, we have seen huge changes across the economy since the introduction of auto-enrolment in 2012: a cost-of-living crisis, declining home ownership rates spurred on by rising house prices as well as an increasing number of self-employed and gig economy workers. According to the findings of the report, the changing economic landscape necessitates reform in this area. The report identified three key issues which need to be addressed:
• Many are not saving enough for an 'adequate' income in retirement but do not realise this;
• There are many people who would benefit from saving in a pension but are not doing so because they are not auto-enrolled either due to low earnings or because they are classed as self-employed;
• Decisions that people take in retirement result in them not having a sustainable income that meets their needs throughout later life.
Increases to minimum contributions
In 2017, a Department for Work and Pensions (DWP) review of automatic enrolment recommended lowering the minimum age at which a worker has to be auto-enrolled from 22 to 18 and removing the low-earnings threshold. It was thought that lowering the age threshold would foster positive attitudes towards saving amongst young people while removing the lower earnings limit would help low earners, and those with multiple part-time jobs, who would benefit from an employer contribution "from the first pound earned".
The latest report urges the government to "introduce the necessary legislation no later than the beginning of the next session of parliament". In support of this, the Committee considered comments made by Guy Opperman, noting that the former Pensions Minister previously stated that the reforms were on track to be implemented by the mid-2020s. The MPs have also urged the Government to "publish a timetable for consultation on implementation, taking account of cost pressures on employers and workers."
Support for self-employed and gig economy workers
In a bid to increase financial stability in retirement for self-employed workers, the Committee highlighted the importance of establishing a plan to increase pension saving among this group. This recommendation is unsurprising given that in December 2021 the National Employment Saving Trust (Nest) estimated that just 16% of self-employed individuals actively contribute into a pension scheme, a decline of 32% since the late 1990s.
The Committee has recommended that the Treasury and DWP work together to set a date to trial ways to default self-employer people into pension saving and consult on the proposal to increase the national insurance contributions paid by the self-employed, with the option to have the increase paid into a pension if they also contribute.
In relation to those working in the gig economy, MPs have raised concerns that given the uncertainties around how auto-enrolment applies to these individuals, they "may be missing out on their right as a worker to build up a pension through auto-enrolment" because their employer classes them as self-employed. The Committee has urged the government to bring forward an Employment Bill for parliamentary scrutiny as soon as possible to boost the protection available to people in low paid work and the gig economy. In the meantime, the Committee has recommended that DWP and the Pensions Regulator (TPR) work together to investigate how many gig economy workers should be classed as workers and what resources or powers TPR needs to be able to ensure employers in the sector comply with their auto-enrolment duties. They must report back to the Committee by March 2023.
Conclusion
While automatic enrolment has been successful in increasing participation in workplace pension saving, the current system has been subject to criticism on the basis that many people are "sleepwalking" into an uncertain future by failing to save enough to meet their needs on retirement. The Committee contends that, despite the current cost-of-living crisis, the Government must begin to lay the groundwork for future changes to the auto-enrolment rules by building consensus between employers and the general public.
It remains to be seen to what extent the Committee's recommendations will be implemented by the Government and how the balance will be struck between the need to increase awareness around retirement savings without placing additional pressure on individuals and businesses in the midst of the current cost-of living crisis.
If you have any queries about anything raised in this blog, please get in touch with a member of the pensions team.
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