Is the success of auto-enrolment in your hands?
For adviser use only
Auto-enrolment, the government’s flagship policy to kick-start pension saving, so far has undoubtedly been a success. With more than 7 million new savers auto-enrolled into more than 340,000 (*1) employer’s schemes since 2012, along with a remarkably low opt-out rate of 9%, and low regulatory breaches, the signs are looking good. We’re over mid-way through auto-enrolment with the final batch of small employers due to stage in February 2018, but with thousands more still to stage and contributions set to rise to a total of 5% of a band of earnings in April 2018, then to 8% in April 2019, there’s still a long way to go.
It’s not all rosy, far too many people are only paying the minimum contributions of 1% of a band of earnings matched by a similar employer contribution (*2). For someone earning £25,000 a year, this is equivalent to an annual combined contribution of £384 and only £1,534 (*3) when contributions rise to 8%, which isn’t likely to provide an adequate income in retirement for most people.
Too many employers are seeing auto-enrolment as a compliance tick-box issue, and this is set to continue as contributions, and therefore employers’ costs, start to increase. Employers are pivotal to the success of workplace saving and we need to change mind-sets to help them to become much more proactive, driving up employees engagement with their pension savings. Advisers could help employers put in place practical initiatives to help employees make the most of their pension scheme. Including encouraging employees to review their pension in the workplace using online tools and putting in place “save more tomorrow” schemes which encourage employers to sign up to pay higher contributions from a future date perhaps to coincide with a salary increase or promotion. And employers could go a step further by matching employee contributions up to an agreed cap, such as the employer agrees to match employee contributions up to 5% of salary.
Auto-enrolment is a continuous process, new employees will need to be put into a pension scheme and employers are responsible for re-enrolling eligible employees who previously opted out of pension saving roughly three years after the employer’s original staging date(*4). This means employers with 2014 staging dates, will need to re-enrol opters out back into their workplace pension scheme this year. Employers can choose a re-enrolment date, this can be in a window anytime from three months before or after their third anniversary of the original staging date. Advisers can support employers through this process, by helping them to select a re-enrolment date and making sure data is up-to-date so the right employees are re-enrolled. It’s also a good time for advisers to help employers review their auto-enrolment pension provider.
A growing proportion of the working population is being excluded from automatic enrolment due to changing trends in how people work. Government statistics show that 1 in 5 workers are now in non-standard working arrangements (ONS). Self-employment, zero hours contracts, and the gig-economy are increasingly common and often associated with low wages and people taking on multiple jobs to get by. Nearly 30% of low-earning multiple job-holders earn less than £10,000 a year from a single employer, the auto-enrolment earnings trigger, so are ineligible for auto-enrolment and miss out on the employer’s contribution. The 2017 review of auto-enrolment is about to kick-off, and we hope it will look to look to widen the scope of auto-enrolment to future fit pensions policy so no-one is left behind.
Auto-enrolment has started more people saving, but we need to move from inertia to engagement, so people understand the value of pension saving and ultimately increase their pension contributions. Advisers along with the government, employers and the rest of the pension industry have a role to play in driving up engagement.
Tips for advisers
- Help employers to work out their staging date by using the Pension Regulator’s online tool
- Help employers to select a pension scheme
- Guide employers through their auto-enrolment responsibilities and making sure they register their scheme with the Pensions Regulator
- Make sure employers are compliant and avoid being fined
- Encourage employers to do more than the bare minimum and be more proactive about pension saving
- Support employers through the three-year cyclical re-enrolment process
(£25,000 - £5,824) x 2% = 383.52
(25,000 - £5,824) x 8% = £1,534
5,824 is the lower contribution threshold – this is likely to be different in 2019.