Automatic enrolment is widely regarded as one of the most successful public policy interventions of recent decades, and understandably so.
The pensions landscape in the UK has been transformed since its introduction in 2012.
Years of decline in workplace pension saving have been reversed. Millions of individuals are now better prepared for their retirement.
The success of the policy at a national level has been underpinned by rare consensus. AE has become part of the backdrop, one of few policies to have transcended the cut and thrust of everyday politics. The gains are clear to everyone.
Indeed, each of the main political parties can take credit for playing a role over the past 15 years or so, whether in terms of design, introduction, implementation, or now, expansion.
Having promised to build on this success and introduce the further changes proposed by the official review of AE in 2017 by the ‘mid-2020s’, the government made headway this year by supporting the private members bill introduced by the Conservative MP Jonathan Gullis.
The new Pensions (Extension of Automatic Enrolment) Act 2023 gives the secretary of state for work and pensions the power to remove the qualifying earnings threshold – the level above which contributions are calculated (currently set at £6,240 per year) – and extend AE to those under the age of 22 (in the event, likely to be 18).
Like many in the pensions industry we at Nest await the launch of the required consultation on these changes, which officials have promised for this autumn, with great interest.
The extension of AE to younger workers will be a positive change, helping them to save for longer and improving their eventual retirement outcomes.
We know that small, regular contributions early on in an individual’s career can help them to build up a larger pension pot later in life.
Establishing a savings habit is important in behavioural terms and the four more years of potential additional saving at the start of working life (with the effects of compounding) will help savers achieve better outcomes in retirement.
Significantly, it should also help to protect the pension outcomes of groups who go on to take breaks from work, to take on caring responsibilities for example, which is likely to particularly benefit women.
Clearly though, and as government is aware, important questions remain about the timing and implementation of these changes, particularly in the current economic context.
The initial success of AE was helped by having a clear timeline and giving both employers and the market time to prepare.
The changes were introduced in stages from 2012 and a similar approach is likely to be beneficial this time around. Given the prevailing economic climate, lead time should be allowed so that employers can budget for their increased contribution obligations.
