Government backs expansion of automatic enrolment

Automatic enrolment was introduced in 2012 with the aim of helping more people save for their retirement. Since then 10.8 million people have been automatically enrolled into a workplace pension scheme and pension participation in the private sector has increased from 41% in 2012 to 86% in 2021, according to recent analysis by the Department for Work and Pensions ("DWP"). We celebrated ten years of automatic enrolment in our previous blog wherein we discussed the possibility of future reform in order to help more people save for retirement against a backdrop of high inflation and rising retirement costs. Fast forward six months and the DWP has confirmed that it will support proposals to expand automatic enrolment to enable "millions of people to save more and to start saving earlier".

Background

The Pensions Act 2008 introduced a duty for employers to enrol eligible jobholders into a "qualifying pension scheme" and to pay contributions to it. Although automatic enrolment is widely regarded as a success story, there are concerns that many people are still not saving enough for retirement. Indeed, recent data from the DWP suggests that 38% of the working population – around 12.5 million people – are not saving enough for an adequate standard of living in retirement.

The proposed changes

The reform proposals are set out in the Pensions (Extension of Automatic Enrolment) (No. 2) Bill ("the Bill"), a private members bill prepared by MP Jonathan Gullis. A similar private members bill had been presented to Parliament last year, but did not make its way through all of the necessary stages before Parliament broke for recess. The Bill, which is scheduled for its third reading stage on 24 March 2023, seeks to expand the current system of automatic enrolment to cater for younger and lower paid workers.

The Bill makes provision for lowering the age at which eligible jobholders must be automatically enrolled into a pension scheme by their employers from 22 to 18, which the DWP suggests will "make saving the norm for young adults and enable them to begin to save from the start of their working lives". In addition, the Bill seeks to abolish the lower earnings limit for contributions which currently stands at £6,240 for 2023/24.

It is worth noting that there is no proposal to lower or remove the £10,000 earnings trigger which means that individuals earning less than £10,000 will still need to opt into workplace pension schemes rather than being automatically enrolled by their employer. In addition, the provisions in the Bill are not intended to result in any immediate change to the current automatic enrolment criteria, and will instead give the Secretary of State powers to amend the age limit and lower earnings limit for automatic enrolment. However, there would be a statutory requirement to consult and report on the outcomes to inform the implementation approach and timing, before using these powers.

Looking to the future

The DWP has emphasised that, following the success of automatic enrolment over the last ten years, the government intends to continue its work with employers and pension providers to further boost the amount of people enrolled into a workplace pension and the amount they save for retirement. Continued commitment to automatic enrolment reform is particularly important given that some groups – such as self-employed and gig economy workers – are not currently within the scope of the automatic enrolment regime. In addition, some industry experts – such as the Pension and Lifetime Savings Association ("PLSA") – believe that further reform is needed to bolster the effectiveness of the automatic enrolment regime. For example, it has been suggested that "further increases should be taken undertaken over the next decade so that automatic enrolment rises from an 8% pension contribution today to around 12% in the early 2030s – split 50/50 between employers and employees."

Whether the government will seek to implement further reforms to supplement those contained in the Bill remains to be seen however the current reform proposals should enable a greater number of savers to have a better income in retirement. We will of course continue to provide updates as the Bill makes its way through Parliament.