The figures since the October 2012 introduction of auto-enrolment, which was a provision in the Pensions Act of 2008, reveal a tenfold rise in total membership of defined contribution (DC) occupational schemes from 2.1 million in 2011 to 21 million in 2019. Actively contributing membership rose from a low of 0.9 million active members in 2011 to 10.6 million members in 2019.
Auto-enrolment was phased in by size of employer, starting in October 2012 with large employers then small employers until February 2018. Minimum contribution rates were also implemented in stages, reaching their full amount of eight per cent of earnings, in April 2019. Under the scheme, employers must now contribute a minimum three per cent and employees five per cent, part of which includes tax relief.
In our view
At MHM, we think that auto enrolment was originally over-engineered to some extent (e.g. qualifying earnings) but nevertheless we believe it represented a good start by opening the door for employees to learn about the benefits of long-term saving and to make their own decisions about increasing their own contributions to achieve their financial goals in retirement.
For employers, the original driver may have been the need to comply with the new legal requirements and the (possibly unwelcome) cost of paying pension contributions for their employees. However, more recently, many have seized the opportunity to enhance their benefits package in a tax-efficient way, possibly paying more than the minimum rates of contributions and using salary sacrifice/exchange to enhance benefits and deliver savings.
The next steps
Concerns remain that many employees are still not saving enough for retirement. A research briefing for parliament published earlier this year noted that a review of the policy in 2017 recommended lowering the age threshold for auto-enrolment from 22 years to 18 years and removing the lower limit of the qualifying earnings band, so that contributions were paid from the first pound earned.
The government has indicated that it wants to implement these changes during the current decade. In September last year, the then pensions minister, Guy Opperman, said the government was committed to “implementing the 2017 auto-enrolment review ambitions in the mid-2020s.” He said the 2017 review had been clear that implementation would be subject to learning from previous workplace pension contribution increases, discussions with employers and others and finding ways to make the changes affordable.
The need for changes to enable low earners to benefit from tax relief in “net pay” schemes has been addressed but is unlikely to be introduced until 2025, while the matter of supporting the self-employed to save for retirement, given that auto-enrolment does not apply, remains unresolved.
If you would like to discuss options to review and improve your workplace pension scheme, do not hesitate to contact us on 01423 229029 or email george.bentham@sandccarsalesharrogate.co.uk.