Automatic Enrolment. What now?

Business Insights

Automatic enrolment is a great success story so far, with almost 7 million people having been enrolled into a pension scheme by nearly 300,000 employers.

This is expected to result in around 10 million people newly saving, or saving more by 2018, generating around £17 billion a year more in workplace pension saving by 2019/20.

Within a few short years the decline in workplace pension membership has been reversed and we are on the way to rebuilding and enhancing the UK’s workplace pension framework.

Despite this excellent start, there is still much more to do. The DWP’s 2017 review of automatic enrolment is an opportunity to take stock and also look to the future. So far automatic enrolment has been a success but there are major challenges ahead with both staging and phasing yet to be completed.

The government is keen that as many people as possible can benefit from their own long-term saving, topped up with employer and government contributions, to give them greater financial security in retirement.

The level of contributions currently requested is too low to achieve a comfortable income in retirement, so the scheme was set up from the start for the minimum level to contributions to increase gradually at set times, in order to improve future provision.

Beginning on 6 April 2018, the minimum contribution will increase from the current minimum of 2% of qualifying earnings to 5%, and in the following year, April 2019, the minimum amount will rise to 8% of qualifying earnings.

Employers may be required to increase the amount of their contributions into their automatic enrolment pension, while staff members will have to make up whatever shortfall remains of the new total minimum contribution.

The contribution levels will continue to rise until the employer is paying a minimum of 3% towards the pension and the total minimum contribution reaches 8% - with the member of staff making up the rest.

If the employer pays the same as the minimum total contribution then the member of staff will not need to pay any contributions, unless the scheme rules require a contribution.

Both the employer and staff member can choose to contribute greater amounts to the pension if they wish.

If the employer contributes more than their required minimum amount - but less than the total minimum amount - then the staff member only needs to make up the shortfall between the total minimum and the employer contribution.

Many industry professionals see this as a crunch time for the scheme, as many lower paid workers may feel unable to up their contributions to make up the minimum required, and some employers may be unwilling or unable to take up the slack, with the result that the employee drops out of the scheme.

All automatic enrolment pension schemes must apply the higher rates in order to remain as a qualifying scheme. If a pension scheme does not increase its minimum contribution levels in line with the legal requirements, it will no longer be a qualifying scheme for existing members and cannot be used for automatic enrolment which then means that the employer is in breach of their statutory obligations.

Implementing the increases should be straightforward, given that when a member of staff was first automatically enrolled, the letter they received from the employer will have set out that contribution levels will increase over time.

In order to ensure that the amount due under the scheme rules or governing documentation are paid across to the scheme on time, the employer's payroll will need to be ready to calculate and deduct the increased contributions when they rise in April 2018 and 2019.

It is important that pension schemes and payroll products support the contribution increases, otherwise the workplace pension schemes may no longer be qualifying, and the right contributions might not be deducted at the right time.

There are no additional duties under automatic enrolment for employers to advise members about the increases, though they may wish to do so anyway to help minimise queries, or reduce the number of workers subsequently leaving their schemes.

Employers should still be mindful of the need to consult their members if changes are made to the minimum contribution levels before the 6 April changes to contribution rates.

Secretary of State for Work and Pensions, Damian Green said:

”Pensioner poverty has more than halved since the late 1980s, which is a record to be proud of. We need to secure this legacy for future generations.

After years of people not saving enough, automatic enrolment is helping millions of people, many of whom are low earners, benefit from a workplace pension. This will continue to boost retirement pots and help safeguard people’s standard of living in later life.”