The lower paid could opt out of workplace pensions, but still receive financial contributions from their employer, under radical industry proposals to reform the auto-enrolment system.
The industry-body TISA (the Investing and Saving Alliance) has suggested ways in which the AE system could be improved to ensure better retirement outcomes for all.
It proposals also include increasing AE contributions for those on higher salaries. TISA has previously suggested AE contribution rates should rise to 12 per cent of qualified earnings. Its latest report suggests this should be split evenly between employee and employer, and should be phased in from 2023.
However its most radical proposal concerns those on lower earnings. TISA suggests those who are financially insecure could opt of their personal AE contribution, while still receiving employer payments into a pension plan.
As part of its ‘Getting Retirement Right’ campaign TISA says research indicates that many lower earners struggle to pay their personal AE contributions. However this hasn’t translated into widespread opt out, suggesting the financially insecure are increasing personal debt levels instead.
TISA says this proposals would apply to those who earn less than £17,500 a year, under the current Department of Work and Pensions current definition of ‘low pay’. This threshold would be reviewed on an annual basis.
Currently, AE contributions are set at 8 per cent of qualified earnings. This includes a 5 per cent contribution from the employee and a 3 per cent contribution from the employer.
This latest proposals follows on from early suggestion to boost overall AE contributions for those on average earnings, and aboe.
The first research paper, published in February 2020, concluded that for a median earning household, a contribution level of 12 per cent of whole salary may enable families, when combined with full state pensions, to achieve a moderate retirement.
The proposals published today recommend that to reach the optimal 12 per cent, contributions should be split evenly between the employer and employee and should be phased in over a period of six years at a rate of 0.5 per cent per year, commencing in 2023.
The net pay anomaly is also an issue which hits the lowest earners. In line with the Net Pay Action Group, TISA recommends the anomaly should be corrected through an HMRC end of tax year reconciliation progress using RTI data. This would ensure a bonus, representing any tax relief forgone to those impacted, is automatically paid.
TISA head of retirement Renny Biggins says:“We are pleased to present phase two of the campaign which sets out our proposals to progress AE and ensure that everybody has the opportunity to save for their futures. AE has been a bigger success than anyone could have imagined but, nearly 10 years on from its inception, changes need to be made to ensure it continues to develop and serve hard working people in the UK.
“Research has shown that opt out levels have remained consistently low, lower than predicted, which is excellent news but may also have a detrimental impact on the lowest earners. This could result in levels of debt reaching unsustainable levels, yet it is also vital people are saving for their futures.
“We hope to continue working closely with the Government to realise these proposals, most notably to protect the lowest earners and to ensure contributions reach the necessary 12 per cent of pensionable salary for the majority, which will allow people and households to retire on a moderate income as set by the PLSA Retirement Standards.”
‘Getting Retirement Right’ intends to help inform and influence the debate on AE contribution levels. It is run by TISA in collaboration with major pension and investment firms.