When it was launched in 2012, auto enrolment was the Government’s key initiative to get more people saving for their retirements and, based on recent Department of Work and Pensions (‘DWP’) data, that initiative appears to be working.
In 2017 approximately 78% of UK employees had an active workplace pension. That translates to 16.2 million people participating in a workplace pension scheme and represents a significant increase from 2012 when participation was less than 55%. Despite initial estimates and warnings of significant opt-out rates, anecdotal evidence suggests up to 9 out of 10 employees in some sectors have stayed in their workplace pension after being enrolled.
Under the legislation employers are required to complete a re-enrolment process every three years, which is expected to further increase participation, and many local medium sized and large companies will have already started the process.
Whilst the demonstrable increase in the number of people in a workplace pension should be welcomed, the cost of pensions to employees has thus far been relatively low, and indications are that many of those who auto enrolled are contributing at minimum levels. To provide a decent level of income during retirement however those rates need to rise.
April 2018 marked the first increase in the minimum contribution percentage of an employee’s qualifying earnings rising to a combined 5% (3% from employee), and April 2019 will see rates step-up again to a combined 8% minimum (5% from employee). At those levels, employee contributions are more significant and the increases in contribution rates may prompt some employees to reconsider their position in the scheme, and whether or not to ‘opt-out’.
For employers, the increased contribution rates under auto enrolment, together with increases in national minimum wage rates and living wage rates, will almost certainly impact budgeting and pay review decisions over the next few years.
In addition, employers also need to be mindful of the age profile of an employee as they try to manage labour costs. For those employees turning 21, the increased national minimum wage rate will apply, and for those turning 22, there will be an overnight impact on pension costs.
Auto enrolment continues to evolve and further changes to the framework are proposed including: Lowering the age limit from 22 to 18; Removal of the qualifying earnings lower earnings limit, which will mean that contributions under auto enrolment will be calculated from first pound earned; and To extend auto enrolment to the self employed.
As yet, no specific timetable has been attached to these proposals and further innovations are likely as we continue on the auto enrolment journey. However, employers’ legal responsibility to provide workplace pension schemes for employees is now well established, and at each stage of that journey businesses and employees should expect to bear increased costs in relation to employee retirement.