Automatic enrolment sought to transform pension engagement by reversing the decline in private pension savings, compelling employers to enrol eligible workers in qualifying workplace pension schemes. Despite auto-enrolment's success, its eligibility criteria has excluded portions of the working population. Progress has been made toward implementing proposals made over the past decade to address these issues and expand auto-enrolment through the Pensions (Extension of Automatic Enrolment) Act 2023, which received Royal Assent on 18 September 2023 .
Auto-Enrolment Background
Automatic enrolment was introduced in 2012 and requires all UK employers to automatically enrol eligible workers in a qualifying workplace pension scheme, with a specified minimum contribution. The eligibility criteria is complicated and subject to exceptions but broadly, eligible workers include individuals between age 22 and State Pension age with earnings over a specified amount in a relevant period from a single job. This is known as the 'earnings trigger' and is currently set at £10,000 for the 2023/34 tax year. As noted in an update from the Department for Work and Pensions (DWP), more than 10.7 million eligible employees have started contributing to a workplace pension scheme, with those aged 22 to 29 saving for their pension more than doubling in that period.
The success of automatic enrolment, although notable, hasn't been universal. Around 10 million eligible workers remain outside workplace pension schemes, disproportionately comprising women, younger workers, and those in the gig economy.
In its 2017 review "Maintaining the momentum", DWP made two recommendations to help expand auto-enrolment beyond its current success calling, firstly, to lower the auto-enrolment age from 22 to 18 years old and, secondly, to remove the lower earnings limit for contributions (LEL) (currently £6,240 per annum). The review also emphasised that many individuals, are not saving enough for retirement and acknowledged that there is more to do to encourage saving among younger, part-time, and lower earners. The "Protecting pension savers" report released by the Work and Pensions Committee last year, which we covered in a previous blog, expanded upon the findings of 2017 DWP review and underscored the urgent need for reforms within the auto-enrolment pension system. In addition to the DWP's recommendations, the report further proposed to increase the minimum contribution rates and to extend coverage to gig economy and self-employed workers.
Provisions of the Pensions (Extension of Automatic Enrolment) Act 2023
The Pensions (Extension of Automatic Enrolment) Act 2023 was initially presented as a Private Members' Bill, and garnered support from the DWP during its legislative journey.
Whilst the Act does not implement the regulatory changes proposed, it introduces the authority for the Secretary of State for Work and Pensions to enact regulations that lower the minimum age for eligible workers to be automatically enrolled in a pension scheme by their employers, foreseeably from 22 to 18 years, and to enact regulations that would either reduce or, as anticipated, entirely remove the LEL within the qualifying earnings band. This adjustment could allow for pension contributions to be calculated from the very first pound earned, potentially streamlining the pension contribution process and enhancing savings for individuals, particularly those with lower earnings.
The Act requires a consultation on the implementation approach and timing, along with reporting on the outcomes to Parliament before the changes are brough into effect.
Looking Forward
Though this Act marks positive progress for younger workers and those in lower paid employment, concerns persist about inadequate savings, including among the self-employed. Further, calls from the Work and Pensions Committee for an increase in minimum contribution rates to 12% and the establishment of an auto-enrolment system for self-employed individuals have not been addressed. We will of course, keep you updated as any of these matters progress.
If you have any queries about anything raised in this blog, please get in touch with a member of the pensions team.
