The Government’s announcement that it is to extend auto-enrolment to 18-year-olds and calculate contributions from the first pound of income has received a broad welcome, though former minister Steve Webb has criticised the pace of reform as ‘pedestrian’ and other stakeholders have urged for higher contributions.
The reforms, which will increase contribution rates significantly, particularly for lower earners, are expected to be brought in by the mid 2020s.
DWP secretary of state David Gauke unveiled the proposals yesterday, moving forward on the recommendations of the auto-enrolment review conducted by Standard Life head of pensions strategy Jamie Jenkins, Peoples’ Pension trustee director Ruston Smith and PPI director Chris Curry.
The plans, which will require legislation, involve reducing the minimum age that employers must enrol eligible staff into a workplace pension scheme from 22 to 18 years.
Contributions will be calculated as a proportion of all earnings up to £45,000 – the threshold of the higher rate of tax – rather than the current system which calculates it as a proportion of earnings between £5,876 and £45,000.
There will be annual reviews of the £10,000 trigger point for automatic enrolment, with contribution levels also binge reviewed.
The Government has also committed to exploring the use of technology to encourage the UK’s 4.8 million self-employed people to save for retirement
The proposals will cost employers an extra £1.4bn a year, and the government an extra £600m in tax relief a year.
Webb says: “There are some great ideas in this review, including starting pension saving at age 18 and making sure that every pound that you earn is pensionable. But the proposed pace of change is shockingly lethargic. Talking about having reforms in place by the mid 2020s risks leaving a whole generation of workers behind. Those who never got to join a final salary pension and who have only recently come into pensions through automatic enrolment need urgent action to help them build up a decent pension pot. This pedestrian pace of reform risks creating a ‘lost generation’ of people in their late forties and fifties who will simply be unable to afford to retire”.
PQM chair Gregg McClymont says: “The review moves in the right direction by recognizing that contributions must rise to give people the chance of a decent retirement. However even when its proposals have been fully implemented, contributions will not be high enough to ensure a good retirement income.”
Association of Consulting Actuaries chairman Bob Scott says: “Yes, the announcement is positive news, but we would have liked to have seen both a greater commitment to bring more workers into the AE world and further phases announced to raise contribution levels, so both businesses and employees can plan ahead. We recognise that there are concerns about both opt-outs and costs in so doing, but that is why an holistic approach is needed, with Government playing its part by taking actions over the same time-frame to reduce costs falling on businesses and employees.
Barnett Waddingham senior consultant Malcolm McLean says: “It is rather disappointing that the Government does not seem willing to contemplate bringing in any of the changes until the mid-2020s. This is presumably partly motivated by a desire not to upset the apple cart until the current contribution increases, planned for April 2018 and April 2019, have been successfully implemented and given time to settle down. I sense there is already a certain jitteriness about how these planned increases will play out, with both workers and employers, and what impact they will have on the very good opt-out rates to date.
TUC General Secretary Frances O’Grady says: “This review is a mixed bag. It’s great that pension contributions will cover all of a worker’s pay packet – this is something unions have long called for.
“But the review has missed a vital opportunity to bring more low-paid workers into workplace pensions, leaving millions of women out in the cold.
“If the government doesn’t fix this problem, pensioner poverty will increase.”
CBI managing director Neil Carberry says: “Much of the original (AE) plan is still to be delivered, with contribution rates rising over the next two years. For firms who are facing rising costs across the board – and employees with other legitimate calls on their income – it is right to complete this first phase and let it bed in before making further changes. A timeline of the mid-2020s for new proposals would be sensible and enjoy business support.
“It’s right to take steps to ensure the self-employed can benefit from pension saving sooner rather than later, and the CBI will be happy to help the DWP address this issue.”