The DWP’s long awaited review of auto enrolment finally landed on doormats a week before Christmas. For savers, and would-be savers, it bought some welcome Christmas cheer.
The two headline grabbing announcements were that auto enrolment would be extended to 18 year olds and that auto enrolment minimum contributions would be calculated on every pound of earnings up to £45,000pa. Currently, the first £5,876 of earnings is excluded.
Extending auto enrolment to younger people is a complete no-brainer and something we’re very supportive of.
Currently, legislation only requires employers to automatically enrol those aged over 22, earning more than £10,000 a year or £192 a week. Those aged under 22, can opt in but very few choose to do so. This means that inertia, which auto enrolment harnesses so effectively for those over 22, currently works against young employees.
A survey of 500 16-21 year olds conducted by us revealed two thirds (66%) are not currently contributing to a pension. Despite this, 69% think being auto enrolled by their employer into a workplace pension before the age of 22 is a good idea to help them save for their retirement. This rises slightly to 70% amongst 18-21 year olds.
Of those surveyed, 64% say if they were auto enrolled they would remain in the scheme and wouldn’t opt out. This rises slightly to 66% amongst 18-21 year olds.
The message is clear – young people want to save for their future and auto enrolment would make it easy for them to do so.
The timetable for extending auto enrolment to 18 year olds is still to be decided. The government has said its aim is “mid 2020s” so they can assess the impact of increased contributions. We hope it’s sooner rather than later to give as many people as possible the chance to start saving.
The removal of the lower earnings band is also something we’ve long campaigned for.
Basing auto enrolment minimum contributions on every pound of earnings sounds like a small technical change but it’ll result in a huge improvement to savers’ pension pots as analysis we commissioned from the Pensions Policy Institute starkly illustrated.
It’s a complete nonsense that the first £5,876 of a worker’s salary isn’t included when calculating auto enrolment contributions. This lower band of earnings affects most auto enrolled savers but is particularly damaging for low paid and part time workers, the majority of whom are women. It means that for somebody earning £10,000, just £4,124 of their salary counts for the purposes of auto enrolment. So, when contributions increase to 8% of qualifying earnings in 2019, they will only be getting a contribution of just 3.3% of their total earnings.
This reform will mean that an 8% contribution will, for most people at least, mean 8%. But, with the upper earnings limit still in place, higher earners (currently those earning over £45,000) still won’t receive the full headline contribution. All savers should receive 8% so this upper band should also be reconsidered.
But, 8% still won’t be enough and the government can’t continue to bury its heads in the sand. A roadmap for increasing contributions beyond 8% needs to be set out, and this needs to happen sooner rather than later.
Nonetheless, basing pension contributions on every pound of earnings means that when we do begin to consider what the future looks like, we are starting from a much fairer base.
Adrian Boulding, Director of Policy, NOW: Pensions