What’s this about?
If you’re aged between 16 and 21, your employer will not currently automatically enrol you in their workplace pension. But you have the right to join if you want. You and your employer will both contribute. You would also get a contribution from the government in the form of tax relief.
If you are enrolled , pension contributions are currently calculated on a part of your earnings, the so-called lower earnings limit (LEL), which means pension contributions are calculated only on the portion of a worker’s salary above £6,240. The removal of the LEL will mean that contributions will count from the first pound earned.
Since 2017, the Government has promised to make changes and yesterday Laura Trott, the Minister for Pensions gave Government support to a private member’s bill which will mean anyone employed and earning over an earnings threshold (currently) £10,000 and between the ages of 18 and state pension age (currently 66) will be auto-enrolled.
The quiet revolution
Laura Trott , talking with Jonathan Stapleton of Professional Pensions said there had been somewhat of “a quiet revolution in pensions” throughout the recent decade.
The extensions in this Bill could unlock a new chapter in that quiet revolution.
Assuming the Bill is enacted, which now looks likely, it will mean people will get an extra £500 or more a year paid into their pension , at least half of which will be paid by the taxman or the employer.
Aviva have calculated that abolishing the lower qualifying earnings threshold would increase total pension contributions by £9.60 per week for everyone who earns more than £6,240 a year – an amount that could mean up to an extra £115,700 in pension pots at retirement.
A report published by think-tank Onward suggested the measures – combined with ditching the earnings band so every pound earned qualifies for a matched employer contribution – could boost pension savings by almost £2.8trn. This is no small step.
Why has the Government changed its position?
This private member’s bill was introduced by MP Richard Holden on January 5th last year. At the time it was dismissed by pension experts as likely to be washed up at the end of the parliamentary session and never heard of again. You can read here Holden’s original speech introducing the Bill 15 months ago!
Indeed it did not get its second reading which was due more than a year ago (Feb 25th 2022) and is only now being taken on by another Conservative MP – Jonathan Gullis. Most of us had forgotten all about it. You can follow the progress of the Extensions of Automatic Enrolment Bill from this link.
The announcement from the Minister for Pensions has come like a bolt from the blue to pensions and payroll people. For years it had been assumed that the Treasury would block any bill that extended the loss to the tax-payer in tax-revenues from auto-enrolment.
Whether it is a change in personnel at the DWP, the Treasury or both. there appears to be a definite thawing in relations over pension tax incentives which is very welcome news.
I have predicted such an improvement since the announcement of the new DWP team following the latest ministerial reshuffle. With Mel Stride , a former Treasury Select Committee Chair now Secretary of State at DWP, with former pension minister Guy Opperman in his ministerial team and with Laura Trott, a rising star of the party, in place as Minister for Pensions, the DWP at last has broken what has become a frustrating blockage.
But let’s not get carried away – we are not there yet
These measures will not prove cheap, if enacted they would result in a meaningful reduction in tax revenues which is why we should still be cautious about the timing and extent of these changes. They will also make auto-enrolment more expensive to employers who will be enrolling more staff with higher contributions both for them and for existing savers. For those who see auto-enrolment as a back-handed tax to support the state pension – enacting these proposals will not be welcome.
Fortunately, the proposals will not be enacted before 2024 meaning that lower earners who are currently missing on their incentive to save – because they happen to be in net-pay schemes, will not see the injustice extended by these measures. From 2025 they will receive money in their pockets in lieu of the incentive and this will be calculated on 2024 earnings. Nevertheless, the extra strain on low earners finances of having to find half the extra contributions from their take-home , has to be considered at this time.
The intention is that the provisions in this Bill will not result in any immediate change but will give the Secretary of State powers to amend the age limit and lower qualifying earnings limit for Automatic Enrolment.
There will be a statutory requirement to consult and report on the outcomes to inform the implementation approach and timing, before using these powers. This will help ensure the strong consensus that underpins the success of automatic enrolment is maintained.
David Robbins, Director of WTW reminded readers of the FT that, as a policy, reforming automatic enrolment “has always been kept out of fiscal forecasts on the grounds that it is not a firm commitment”. Robbins added “Changing that would be a stronger signal that change is coming than passing a law”.
Despite being dismissive of Holden’s Bill, Steve Webb is now sounding a lot more chipper, telling Professional Pensions
“This is truly a landmark day for UK pensions. With pensions policy having been stuck since the 2017 review there was a real risk that the gains from AE would be stalled. Now that the government is backing the necessary legislation the way is cleared for younger workers to be brought in and for lower earners in particular to build up pensions more quickly. The new minister, Laura Trott, deserves huge credit for her role in unlocking this logjam”.
On twitter he was more cautious and – I suspect – speaking with the voice of an experienced politician
How interesting – the Commons has just approved (with no debate) the 2nd Reading of the Bill to extend Automatic Enrolment. Other private bills were blocked, but government chose not to block this one. Maybe they want it on the statute book for when the time is right?!
— Steve Webb (@stevewebb1) March 3, 2023
On politics and pensions, it pays to listen to Steve Webb
DWP sent through some social links to support this article. If you’d like to see Laura in action, they are all worth watching.