With the news that landmark changes are to be made with the expansion of pension auto-enrolment, younger people are among those that will benefit the most.
While timing is being confirmed, the change, which will predominantly affect young workers aged 18-21 and lower earners, means that millions more people will be able to start saving sooner.
So how did this come about and what does it mean for employers?
A review in 2017 by the Works and Pensions Committee analysed both the outcome of the pension auto-enrolment process and its effectiveness.
This was done to firstly assess its success in helping the UK population build retirement savings, and also to examine what adjustments or changes should be made in order to progress what has been universally accepted as a hugely successful step forward in helping the working population save towards a realistically funded retirement.
The ensuing five years have been a perfect storm of the impact of Covid, the current cost of living crises, not to mention the frequent change of Pensions Minister as first Guy Opperman’s resignation, then reappointment, a brief tenure from Alex Burghart followed by the recent appointment of minister Laura Trott.
This has all combined in delaying parliamentary consideration of key points raised in the review including factors such as increased funding, changes to eligibility and pensionable wage definition.
While it seemed it may be deferred for some time, a private members bill has since been tabled and passed through its second reading earlier this month (3 March 2023) seeking to make two main changes to the current automatic enrolment regulations.
Firstly, in a major change, the age limit to be auto enrolled into a pension will be cut from 22 to 18 years of age, so effectively allow individuals to save for retirement much earlier on.
In addition, individuals who currently contribute on qualifying earnings (that is on earnings above the lower earnings level) will have this lower threshold removed. This will of course be particularly beneficial for individuals who have several part time employments rather than a single occupation, as it will allow pension contributions to be based on total income.
While these proposed changes won’t happen overnight, they could be made law at some point over the next year, and start being phased in by April 2024.
Positively, they will bring people into retirement saving much earlier and allow even lower earners to save considerably more for their future.
Employers: Be prepared to pay
Supported by employers having to legally match this contribution, this will help ensure they achieve more realistic pension income levels at retirement.
Whilst we all recognize the benefits of these objectives for building member savings, there is of course as always another consequence arising from these changes. That is of course, the requirement for employers to match fund the contributions previously excluded by the lower earnings level.
In reality when both these changes are implemented employers will be funding staff members pensions for four years longer (as eligibility will reduce to 18 years old from 22 years old).
They will also be contributing on the wages that previously had been excluded as they represented the lower earnings level of currently £6,240.
So, from the employer’s perspective this would mean a significant rise in employers pension contribution in the near future.
However, even with this latest passing of the second reading the progress and enactment of this bill is not a given outcome, as there is still a considerable parliamentary process to complete before it is given assent.
Although, what is clear is that it has popular support within the House, as well as the backing of the DWP and Laura Trott.
So given the level of support for this private members bill, it looks very likely to be implemented in the foreseeable future particularly as it progresses the government retirement policy direction of travel.
Andy Eason is an Aberdeen-based director of Acumen Employee Benefits
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