Auto-enrolment Bill becomes law – better pensions for low earners and the young
- MORE PENSIONS FOR LOW EARNERS AND YOUNG WORKERS AS LORDS PASSES AUTO-ENROLMENT EXTENSION BILL INTO LAW.
- Improves coverage and adequacy of workplace pensions as next step in success of auto-enrolment.
- Consultation and regulations will follow to provide much larger pensions for lower earners and ensure workers under age 22 will be auto-enrolled.
The Extension of Auto-enrolment (No.2) Bill passed into Law in the House of Lords yesterday. It is an important next step in the success of workplace pensions auto-enrolment, to improve both coverage and adequacy of workplace pensions. The Government has promised to issue a consultation soon on its two measures:
- extending auto-enrolment to workers under age 22
- increasing pension funds for the lower-paid by removing the £6240 lower earnings contribution limit so that contributions start from the first £1 earnt.
The Government committed to implement these measures by the mid-2020s, following the 2017 Auto-enrolment review and Tory MP Jonathan Gullis introduced a Private Members Bill to fulfil that commitment.
Auto-enrolment has been a celebrated pension policy success. Pension auto-enrolment, based on Pension Commission recommendations that harness behavioural theory to ‘nudge’ people into pensions, has been a tremendous success since it started in 2012. It has brought over ten million more people into pensions and establish the principle – which will be extended to younger employees too – that workers in this country can expect their employer to cover tax, NI and pension for them.
Removing the legal minimum age requirement from auto-enrolment to include under 22s: This Bill ensures new regulations will be introduced, after consultation, to decide whether any minimum age, such as 18, is needed, although I would much prefer removing the lower age altogether. Why should 16 and 17-year olds be excluded?
At least 600,000 young people will start saving sooner and receive better pensions: Official statistics suggest over 600,000 workers age 18 – 21 would benefit or even more if the minimum age is removed altogether. This can embed the pension saving habit earlier, rather than requiring younger people to ‘opt in’ to a pension, which means many do not bother. The earlier people start paying into a pension fund, the longer they have to benefit from the compounding of investment returns over time and build better pensions in later life. Currently, only around one third of those aged 18 to 22 are paying into a pension at work, whereas nearly 90% of the over 22s are remaining auto-enrolled once they are put into the scheme by their employer automatically. Clearly, the behavioural nudge of auto-enrolment policy has a dramatic impact.
Removing minimum age altogether would simplify administration, lower opt-outs and improve inclusivity: Replacing age 22 with age 18, still requires pension administrators to check when some reaches their 18th birthday, which adds complexity and entails a risk of more young workers opting out of pensions as soon as they turn 18, if their take-home pay falls once they start pension contributions.
Pension funds of workers on £10,000 a year would more than double: Employer contributions for lower earners who want pensions will be significantly higher. Instead of someone earning £10,000 a year receiving contributions on just the amount above £6240, i.e. on only £3760 of earnings, the full £10,000 will be used to calculate their own and the employer contribution. Rather than just £300 going into their pension fund each year, £800 will go in. Their employer will pay more if the worker is happy to contribute to the pension scheme.This will help lower earners – especially women who lose out so much in the gender pensions gap, build much bigger pensions.
Net Pay problem needs to be addressed to ensure safer start for these measures: Too little attention has been given in recent years to the injustice of lower earners being unwittingly forced to pay an extra 25% for their pensions, if their employer uses a ‘Net Pay’ pension scheme, rather than one that administers tax relief via Relief at Source. It is taking so long to sort this out, but the Treasury has promised to introduce new systems to make top up payments to low earners in Net Pay schemes, but it will only be introduced for contributions from 2024/25 onwards. The introduction of this new legislation’s measures is likely to be timed to coincide with these tax relief changes.
Still more to do – such as enrolling those earning under £10,000 a year, helping self employed and reducing numbers of small pots: Improving pensions for the lower earners and the young is welcome news but, of course, there is more to do. This includes ensuring all workers who earn below £10,000 a year, particularly people – mostly women – with more than one job, each paying under £10,000 a year who currently miss out altogether on auto-enrolment. Also, extending nudge principles to the self-employed to encourage them to start a pension and helping people consolidate small pension pots which are left behind and sometimes forgotten when workers change jobs. The idea of developing one ‘lifetime’ pension fund which people take ownership of could be a next stage. The Government is consulting on measures to address this problem.