In the 10 years since it was first debated, auto-enrolment has brought about some of the biggest changes to retirement planning in a generation.
Actively saving for retirement, using a combination of personal and employer contributions is now mandatory (assuming they don’t opt-out) for all employees who fall within the eligibility criteria. Eligible workers are those who are:
- Aged between 22 and the State Pension Age
- Earn £10,000 or more per year
- Classed as an employee
The system has meant that, so far, an estimated nine million employees have been enrolled into workplace pensions since the roll-out of auto-enrolment began in 2012. Now, the Department for Work and Pensions (DWP) has released the findings of the 2017 review, in a report entitled Automatic Enrolment Review 2017: Maintaining the Momentum.
Here are the key points you need to know:
1. Some things are better left alone
Amidst a range of ideas and suggestions, the report states that two factors are working well and should be kept as part of the auto-enrolment system. They are:
- All employers will continue to have auto-enrolment duties, regardless of size, how long they have been trading or sector
- The £10,000 earnings trigger for automatic enrolment is to remain the same
These are both staples of the system which changes will be made around. However, the minimum earnings trigger will be reviewed annually and increased or decreased if necessary.
2. Making pensions saving the norm
The aim of auto-enrolment is to ensure that as many people as possible are saving for their future. Part of that is making the workplace pension a normal part of working life; i.e. from the age of 18.
The review explains that the minimum age criteria of 22 was based on National Minimum Wage (NMW) bands at the time. Of course, these are now outdated and NMW applies to all workers and apprentices. The review therefore includes plans to lower the minimum age for auto-enrolment to 18 by the mid-2020s. This would introduce an additional 910,000 people to pension savings.
Currently, a lower earnings limit of £5,876 applies to employees who are not automatically enrolled, but wish to join their workplace pension (known as non-entitled workers). The review suggests that a ‘first pound earned’ system be put in to replace this, removing the ‘entitled worker’ system altogether and making all earners eligible to be included in a workplace pension, if they choose to be.
3. Promoting engagement
One of the key factors in normalising and encouraging more people to use their workplace pension is making sure that they are engaged with the system and aware of the impact it can have on their finances and future lifestyle.
As part of the review, the DWP have set out plans to promote employee engagement. This will include working with employers, providers and the advisory community who have already proven to instil a social norm of workplace pensions, through marketing.
The review displays the intent of the DWP to build on initiatives which encourage engagement and deliver better value for customers. Recognising that a one-size-fits-all approach will not engage individuals, the report outlines the aims of individualised and tailored communication, which include: “building awareness, understanding and curiosity about workplace pension saving within the context of developing social norming around retirement saving more generally.”
4. Further investigations and analysis are needed in some areas
The report outlines the key areas which will need to be monitored and analysed to continue to improve and streamline the auto enrolment system. These include:
- Analysing the differences between statutory and voluntary contributions to a pension
- Considering expenses and exploring ways to make the process more cost effective for businesses
- Ongoing analysis of the clarity of information received by employees and its effectiveness in reaching eligible people
The report also noted that minimum contributions need more attention. Even though the minimum contribution will reach eight per cent (5% employee, 3% employer) in 2019, it will not create a sufficient amount to be financially secure in retirement. The document says: “A key focus is for individuals to keep saving and to save more after minimum contributions reach eight per cent in 2019. But we recognise that contributions of eight per cent are unlikely to give all individuals the retirement to which they aspire”.
2018 marks the end of the initial phases of auto-enrolment and all eligible employees should now be contributing to their scheme. This means that improvements need to be made sooner rather than later, to ensure that both employees and employers are making the most of the opportunities facing them.
For employees, further changes are needed to ensure a balance between their short-term income, and the money saved for retirement.
However, employers have their own part to play as well. Of course, remaining compliant is important, but auto-enrolment offers an opportunity to offer better rewards to your employees, improving retention and staff morale.
Whether you’re an employee or employer, we’re here to help. Contact Sarah or Bev on 0115 9338433.