The government has confirmed it intends to expand automatic enrolment, but questions remain about when this will happen.
In a document from the Department for Work and Pensions, titled 'Analysing the impact of private pension measures on member outcomes', published today (July 11), the government confirmed it was going ahead with changes to auto-enrolment.
Legislation is going through Parliament in the form of a private members bill which is supported by the government but it does not include a timescale for implementation.
Key reforms include:
- Removing the ‘lower earnings limit’ for minimum contributions, meaning the first pound of earnings will qualify for a matched employer contribution and tax relief.
- Lowering the minimum age at which someone qualifies for auto-enrolment from 22 to 18.
Tom Selby, head of retirement policy at AJ Bell, said: “Six years after an independent report backed the idea of expanding automatic enrolment, the government is finally getting the wheels in motion. The proposal to ditch the lower earnings limit, currently set at £6,240, so the first pound of earnings counts for both a matched contribution and tax relief, should help more people build bigger retirement pots over their careers.
“Similarly, lowering the age at which someone first qualifies for auto-enrolment from 22 to 18 will be a significant step in helping millions of young people benefit from the magic of compound growth.
“Both of these reforms should be good news for savers but also come with significant risks. Most obviously, ratcheting up contributions during a cost-of-living crisis could be the straw that breaks the camel’s back for some savers, who might decide they simply cannot afford to put money to one side for retirement.
The reforms are forecast to increase total pension contributions by £2bn per year in 2022-23 terms – or by £45bn over 30 years.
But in the cost analysis document the government states: “As such, within this paper we supply estimates of pension saving in annual terms, for 2022-23. This is not because there is any intention that the policy changes would be implemented this year.
“As outlined above, the government has set out its ambition to implement changes by the mid-2020s. We use 2022-23 to provide an illustrative impact of the likely use of powers because estimates for this year are the easiest to produce and comprehend.”
Therefore questions remain as to when this expansion will happen.
Selby said once the proposed reforms have been introduced, a future government will likely need to address the question of how to ramp up pension contributions even further.
“For large sections of the workforce, particularly those who came to pension saving later in their lives, an 8 per cent contribution rate simply won’t deliver anything close to the standard of living they are hoping for in retirement,” he said.
“One option could be to scale up contributions as people’s salaries increase – a policy often referred to as ‘save more tomorrow’.”
“In short: while auto-enrolment has been successful in dramatically increasing the number of people saving something for retirement, it is still only a job half done. Whether the reforms are ultimately viewed as a success will depend largely on what happens next.”
