Despite the early successes of auto-enrolment, there is still a long way to go, reports Maggie Williams
Since its introduction in 2012, seven million people have joined pension schemes through 300,000 employers as a result of auto-enrolment. By most measures, the early stages of the legislation can be considered a success.
But while the first auto-enrolment battle may almost have been won, the war against inadequate pensions provision is far from over. Small and micro businesses have yet to reach their staging date, minimum contribution rates are pitifully low with no mandatory increases until 2018, and many workers are still excluded from the scope of auto-enrolment.
A scheduled review of auto-enrolment in 2017 is well timed, then, to review progress to date. The written statement released by the government on 12 December gave the details of what that review would entail.
One of the review’s biggest aims is to address the parts of the workforce auto-enrolment currently cannot reach. Reconsidering age limits, getting to the self-employed and helping individuals with multiple low-paying jobs will all be areas of focus. Darren Philp, director of policy and market engagement at The People’s Pension described it as a chance to “deal with issues such as excluded groups, burdens on schemes and employers, and whether the various thresholds continue to be appropriate.”
In its recent review of auto-enrolment, pension provider Aviva estimated that there are around 10m people who are currently excluded from auto-enrolment, including the self-employed, so the impact of the review could be wide-ranging.
With salaries flatlining, we may need to consider going further.
However, bringing the self-employed into the picture will need careful handling. “There is no employer contribution to act as an incentive for them to save,” said Rachel Vahey, product technical manager at platform provider Nucleus. “We should be very careful about employing other tactics such as raising National Insurance and using the additional amount to act as a mock employer contribution.”
The overall earnings threshold for auto-enrolment will remain frozen at £10,000. The government believes that by retaining the current limit, rather than increasing it to £11,500 in line with the income tax threshold for 2017/8, the move represents “a real-terms decrease in the trigger”. It estimates the freeze will bring a further 70,000 people into the auto-enrolment target population.
While freezing the threshold should drive more individuals to start saving into a pension Kate Smith, head of pensions at Aegon warned that, “with salaries flatlining, we may need to consider going further”.
She suggested: “One simple way to increase contributions would be to gradually move to a position where the 8% [contribution] is on all earnings with no initial earnings excluded.” That would mean a shift from the current position, where the National Insurance Contribution Lower Earnings Limit of £5,876 is used as the qualifying earnings trigger.
However David Robbins, senior consultant at Towers Watson, was less convinced of the case for expanding eligibility. With the new state pension providing an income of around £8,000 a year, “it’s not an open and shut case that people with earnings around that level should be encouraged to transfer income from the present to the future.”
While the statement also describes the review as “an opportunity to strengthen the evidence around appropriate future contributions”, no decisions on contribution rates beyond the planned increases in 2018 (to 5%) and 2019 (to 8%) are expected. Joanne Segars, CEO of the Pensions and Lifetime Savings Association called on the government to create an independent commission to explore how contribution increases might be applied in the future, and at what point.
She added that, although the review is “an opportunity for the government to set a direction for the next decade of auto-enrolment,”, there is still more immediate work to be done if the first stage of the battle really is to be considered a success. “We need to focus on the immediate job in hand: bringing hundreds of thousands of small employers and millions more savers into workplace pensions.”