Pension auto-enrolment reform
The Department for Work and Pensions has announced reforms to the pensions auto-enrolment regime, following a review of the existing system and the needs of individuals not currently benefitting from auto-enrolment.
Under the current auto-enrolment regime, all employers must ensure that eligible jobholders are automatically enrolled in a qualifying pension scheme. A jobholder is someone working under a contract in Great Britain, between 22 years of age and state pension age and who is paid qualifying earnings during a relevant pay period. In the 2017/2018 tax year, qualifying earnings are those between £5,876 – £45,000. Pension contributions are calculated by reference to qualifying earnings. In addition, the jobholder must be ‘eligible’, meaning they must have earnings exceeding an earnings trigger in the relevant pay period. The earnings trigger in the 2017/2018 tax year is £10,000.
The DWP’s review was published on 18 December 2017 and identified three key problem areas:
- A significant proportion of the working age population are still not saving enough for retirement. Further, too many low paid, part-time and younger workers do not benefit from auto-enrolment at all.
- Three are significant gaps in pension savings for the self-employed which the current regime cannot address.
- Many individuals do not actively engage with their pensions.
To address these issues, the DWP is proposing the following reforms “in the mid-2020s”:
- The lower age threshold for auto-enrolment will be reduced from 22 to 18. The DWP estimates that this will cover an additional 900,000 people and result in additional employer contributions of £1.4 billion.
- The lower earnings limit for qualifying earnings will be removed. This will mean that pension contributions are calculated from the first pound earned. This reform is also designed to encourage workers with multiple part-time jobs to opt-in.
The DWP concluded that it was not possible to extend the auto-enrolment regime to self-employed individuals, however it has committed to testing other approaches during 2018 designed to increase pension savings within this group. More information about these trial approaches is expected during the course of this year.