‘Extend the scope of AE': A call for the government to act now

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Conservative MP Richard Holden has introduced a private member’s bill that would extend the scope of automatic enrolment to boost the retirement savings of younger and lower-earning workers. The bill will have a second reading on 25 February. Will the government act on auto-enrolment?

In April 2020, almost eight out of 10 employees in the UK had a workplace pension, compared with less than five out of 10 in 2012 when auto-enrolment was first introduced. But 10 years since its introduction, there are still large groups of people who are not covered.

The youngest employees outside auto-enrolment age of 22, were far less likely to have a workplace pension (20%), compared with 80% for the next age band at 22-29 years. Full-time employees were 1.5 times more likely to have a pension than part-time employees.

“If we are to truly ‘level-up’ the country and ensure that the young, the low-paid and part-time workers - who are often women - can enjoy a decent retirement, then reforming auto-enrolment thresholds should be central to the government’s policy programme,” said director of workplace and savings at Aviva, Emma Douglas.

A call to act now

Holden has recommended lowering the AE age threshold to 18 and removing the lower qualifying earnings threshold as outlined in a report by thinktank Onward and the government’s Levelling Up Taskforce.

This report estimated that abolishing the £10,000 earnings trigger and the £6,240 lower earnings limit for pension contributions, alongside reducing the age threshold from 22 to 18, would lead to benefits such as a full-time worker on National Living Wage gaining a 60% increase their workplace pension, young workers saving an extra £20,267 upon retirement when enrolled at 18, and more.

The government has recognised issues with auto-enrolment and in its 2017 Automatic Enrolment Review committed to making these changes by the “mid-2020s”. But Holden and others in the industry are asking for these changes now.

The report sets out a roadmap recommendation that would help employers properly prepare:

“These proposed changes to auto-enrolment could make a real difference to the future retirement plans of today’s lower-paid and part-time workers as everyone who is in a pension scheme will get a contribution from the first pound they earn. However, the target date of ‘mid-2020’s’ can only be achieved if a road-map is agreed now,” said Douglas.

A growing need

Since the start of the pandemic, young people, part-time workers, and multiple jobholders have been some of the hardest hit. Pension contributions from the first pound would increase pension wealth for these groups by an average of 30% according to master trust Now Pensions.

“Given the recent surge in part-time working, this will bring retirement policy more into line with the new employment landscape and ensure automatic enrolment can deliver on its intentions for the majority of UK employees,” said head of retirement at The Investing and Saving Alliance, Renny Biggins.

Abolishing the lower qualifying earnings threshold would increase pensionable pay by up to £6,240 per year and total pension contributions by £9.60 per week for everyone who earns more than £6,240 a year. This could mean up to an extra £115,700 in pension pots at retirement according to Aviva data.

Costs to employers and employees

However, there have been concerns that this will lead to higher costs for employers, who currently contribute at least 3% towards employees’ pension savings.

“There is a cost for employees and there is a cost for employers. For some employers that would be a big increase in costs, and that’s why we’re asking this to be phased in... for a roadmap, because we realise that you can’t wait until 2025 and suddenly bring this in as an extra cost to business or extra cost to individuals,” said workplace policy manager at Aviva, Dale Critchley.

The bill has been supported by a large proportion of the industry, including the Pensions and Lifetime Savings Association, TISA, provider Aviva, Now Pensions, and others. For it to be successful, the industry is calling for the government to act now.

“Our concern is unless you lay that plan out now... the mid-2020s will become the late-2020s or early-2030s. What we are proposing is a gradual approach to that change... that’s all we’re asking for and that’s the reason why it hasn’t changed [yet],” said Critchley.

How can the industry prepare for any changes to be successful?

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