PENSIONS INSIGHT
Automatic enrolment review
With the announcement in December that the Department for Work and Pensions will be reviewing the current automatic enrolment arrangement for pension provision, Stuart Price, partner at Quantum Advisory, gives his thoughts on the current arrangement and ways it can be improved
T here’s no denying that automatic enrolment is working; at least to some degree. Recent figures showed out of those eligible, 75% of employees were enrolled in a workplace pension, up from 55% in 2012. Last year nearly £82 billion was saved into pensions – £17 billion extra as a direct result of automatic enrolment. It is estimated that ten million workers have started saving because of automatic enrolment or are now saving more because of it; so we’re heading in the right direction. So what do we expect from the review? When new legislation is put in place, upon reflection, there are always going to be flaws that need to be worked out or successes that can be built upon. ● Eligibility criteria – If you’re over 22 (and below state pension age) and earn more than £10,000 from a single employer then you’ll be automatically enrolled. Certain multiple jobholders are being excluded from automatic enrolment as their combined income is being ignored and they only become eligible if they earn at least £10,000 in a single job. Out of the half a million employees with more than one job aged over 22, nearly two thirds don’t meet the minimum earnings criteria and will therefore miss out. One way around this would be to remove the minimum earnings so everyone over 22 (and below state pension age) is automatically enrolled into a pension arrangement. ● Qualifying earnings – The current system only sees pension contributions taken from qualifying earnings rather than whole earnings. For 2017/18, qualifying
earnings are earnings between £5,876 and £45,000. For example, someone earning the minimum salary of £10,000 only contributes on £4,124, equating to a pension contribution of just over £82 a year based on the current total minimum contribution of 2%. The government would do better to quash qualifying earnings and base contributions on the entire salary to ensure more meaningful contributions are made and to make it easier for individuals to understand and for employers to administer. ...could consider readdressing the employee/employer ratio to make less of an impact on the individual employees ● Increasing contributions – Minimum contributions currently stand at 2%, made up of 1% from the employee and 1% from the employer. This combined figure will jump to 5% in April 2018 (3% employee and 2% employer) and 8% in April 2019 (5% employee and 3% employer). To increase the employee’s rate by 500% in a relatively short period of time may scare, and upset, many employees and it is predicted there will be an increase in those choosing to opt out. Though the government cannot reduce the minimum contribution – in fact, this needs to be a lot higher than the scheduled 8% – it could consider readdressing the employee/employer
ratio to make less of an impact on the individual employees. Although 12% could actually be a more realistic figure, this should be done gradually so as not to undo the positive results automatic enrolment has already achieved. No doubt this will be at the forefront of the government’s agenda while going through this review and planning the next steps. In addition, the government should look to promote the tax efficiencies of paying into a pension arrangement and also remind individuals of when and what they will receive from the state once they reach state pension age. Hopefully this may encourage (or scare) individuals to increase what they put away for their retirement. What next? While the review is taking place, many employers are now coming to the third anniversary of their automatic enrolment date and will need to begin considering re-enrolment. This means re-enrolling eligible jobholders who are no longer part of the employer’s pension scheme because they have opted out. Employees who opted out in the past year do not need to be re-enrolled. Employers are given a six-month window to complete the re-enrolment; which is somewhere between three months before and three months after the third anniversary of their enrolment date. Re-declaration of compliance with The Pensions Regulator must be made within five months of the original date. Even if employers don’t have any eligible staff to re-enrol, they will still need to complete the re-declaration of compliance. n
| Professional in Payroll, Pensions and Reward | April 2017 | Issue 29 38
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