Just when we thought the dust had settled on Auto Enrolment…

The Government has, in the last week, committed to supporting measures that will broaden the automatic enrolment policy for workplace pension schemes.

A government review from 2017 recommended expanding automatic enrolment, but since then, no steps have been taken to put those recommendations into practice. The Government has now given its support to a Private Members Bill that will see these modifications go ahead if they are agreed upon by the House of Commons and the House of Lords.

What’s changing?

The main headlines are:

  • Automatic enrolment will be extended to workers from the age of 18, rather than the present minimum age of 22.
  • The 8% minimum (overall) contribution rate will apply to all wages, not just to those above the lower earnings threshold.

The precise date that the adjustments will take effect is not yet known, but they are expected to take place within the next year.

What does this mean?

Workers aged 18-22, and those with lower earnings, have always had the choice of opting into Auto Enrolment if they want to. However, inertia is a powerful motivator. If you expect people to go against the default process that applies to them and opt in voluntarily, then the take-up will inevitably be lower than automatically enrolling people and expecting them to make the effort of opting out if they want to.

Therefore, we would expect to see a greater take-up of workplace pension scheme savings among younger and lower paid workers, as many of them will be happy to simply ‘go with the flow’.

But this also places a greater burden on existing scheme members, who may soon be required to pay employee contributions on all of their salary, rather than just a proportion of it.

Equally, the cost implications will be felt by employers who will have to pay larger contributions too. In particular, within industries that employ a greater proportion of younger and lower-paid workers (such as hotels and leisure, shops, restaurants and bars) – many of whom are still recovering from the financial impact of Covid.

This comes on top of the significant rise in Corporation Tax from April 6 from 19% to 25% (a 31.58% increase in the tax on company profits), plus the increase in dividend taxation rates and the halving of dividend savings allowances, which will impact business owners’ personal earnings.

So, depending on who you are and on what side of the boardroom table you sit, these auto enrolment changes may or may not be welcome news.

The elephant in the room

All of these proposals – however they affect each of us – still don’t address the elephant that’s been quietly staring at us from the corner of the room since auto enrolment started.

We’re talking about opt outs. Or more specifically, the amount of people that choose to opt out of their Workplace pensions (and perhaps, are even being encouraged to opt out).

According to Government statistics, as of August 2022 just over 10% of eligible workers had chosen to opt out of their workplace pension schemes; an increase of 3.1% since January 2020. A rise in opt outs during the Covid pandemic was to be expected, but the numbers of those opting back in are not increasing in a hurry.

No doubt this is a direct result of the cost of living increasing significantly in the last 18 months, but these times of high inflation won’t last forever and we collectively need to make a concerted effect to encourage people back into their workplace pensions, before they become too reliant on spending the money that they would ordinarily have put by for their older age.

What can you do?

  • First and foremost, show that you’re a caring employer. Demonstrate that you are mindful of the financial wellbeing of your employees by helping them make good decisions when it comes to making provision for retirement. Taking this approach can make a big difference to employee retention within a company.
  • Communicate positively and regularly about your company’s workplace pension scheme. It’s a huge benefit to employees, and by opting out they are giving up ‘free money’ in the form of tax relief from the government, and employment benefits that they are entitled to. Perhaps discuss opting in with them during regular appraisals.
  • Many employees don’t have the means to pay for personalised financial advice, so they are reliant on the information and guidance that you provide to them around your workplace pension scheme. Fear, inertia and a lack of experience or understanding will often drive employees to disengage with the workplace pension scheme. Make sure any information you give them is clear, and signpost them to people and places where they can find out more if they are unsure on anything.
  • Remember that pension contributions are still the most tax efficient way to remunerate workers, and for business owners to draw profits out of the company. Even though it seems likely that the costs of auto enrolment will increase, there are still some advantages to this:
    • Employer pension contributions normally qualify as a business expense for Corporation Tax purposes, so even though the tax rate is increasing, your employer contributions should still be exempt.
    • No employer or employee National Insurance is due on the value of the contributions.
    • They are not a taxable benefit in kind for your workers.
    • Investments held within pension wrappers also benefit from exemption from tax on income and gains, which means that pensions tend to grow faster than investments held in any other tax wrappers.
    • Plus, pensions are normally exempt from Inheritance Tax, which makes them exceptionally good estate-planning vehicles.

In time, it’s inevitable that auto enrolment will evolve further. Commentators predict that contribution rates will need to increase to fund our ever-ageing population, and there is a good chance that the employer contribution rate will be (at least) equalised with that of the employee.

But this evolution is important and necessary, as it affects all of us and the next generations to come. Let’s embrace it and help each other provide for a comfortable life and enjoy a fulfilling retirement.