Articles - The clock is ticking on auto enrolment thresholds

Levelling up. It’s a term little-known just a few years ago but one that’s now reshaping the country’s political debate, sharply evidenced in the creation of the new Department for Levelling Up, Housing and Communities. There’s debate about what the term means, and how best to deliver it, but pensions are one area where levelling up could become a reality. Auto-enrolment (AE) has been hugely successful in ensuring more people save for their retirement, bringing over 10 million more people into workplace pensions.

 By Dale Critchley, Workplace Policy Manager, Aviva

 Yet the young, the low-paid, and part-time workers – who are often women - are being left behind. Surely those central to the levelling up agenda. This is recognised by Richard Holden MP, who has submitted a Bill calling for changes to AE thresholds.

 The current AE system, which treats the first £6,240 of annual pay (£120 a week) as non-pensionable, means those who are paid the least have the smallest percentage of their salary paid into their pension.

 An employee who works two days a week earning the National Living Wage, and who opts into their company pension scheme, would receive an employer pension contribution of just 15 pence per week. That’s just £7.80 per year - or 0.12% of their earnings.

 By contrast someone earning an annual salary of £50,000 would receive £1,313 per year - or 2.6% of their earnings.

 It’s a system that disproportionately disadvantages women, who are more likely to work part-time, contributing to a yawning gender pension gap1. Workers with multiple part-time jobs see the £6,240 contribution threshold deducted from each employment leading to a gaping hole in their retirement saving, despite earning as much as a full-time worker.

 Young people aged 18-22 are also disadvantaged. AE starts from age 22, meaning that younger people who enter the world of work in preference to higher education don’t automatically benefit from pension contributions. This can have a huge knock-on effect on the size of their pension pot down the line.

 The Government recognises the issue and has committed to abolishing the lower qualifying earnings threshold (LET), and lowering the age threshold to 18, by the “mid 2020s”. This is welcome and will have a huge impact on the size of people’s pension pots at retirement.

 If we look at lowering the age threshold, automatically enrolling an employee into a workplace pension from age 18 - instead of 22 - means they would contribute to a pension for an extra four years. As the first contributions work the hardest this could result in an 11.5% increase in their total pension savings at retirement (assuming 4.5% investment growth, 2.5% inflation and 0.75% charges)2.

 For those on the lowest levels of pay, starting early would make a real difference.

 Looking at the lower earnings threshold, things are even starker. Removing the lower earnings threshold would increase pensionable pay by up to £120 per week, and total pension contributions by £9.60 per week for everyone who earns more than £,6240 a year. It means everyone in a scheme currently based on qualifying earnings would have more in their pension pot, for someone enrolled at 18 that could be £115,700 more (based on the same assumptions as above)3.

 There is of course understandable concern about loading additional costs onto business and individuals, particularly considering the pandemic and an increase in the cost of living. To my mind this brings in two requirements.

 The first is the need for a gradual phasing out of the LET, rather than a big bang approach which risks creating shock waves for employers and individual finances.

 The second requirement is a clear roadmap to delivering the changes. Employers need time to plan, particularly those who employ the largest proportion of part-time workers. Setting a clear roadmap will help to avoid timescales slipping. Any delay in implementation represents further foregone pension savings for those who need them the most.

 If we are to truly ‘level-up’ and ensure that the young, the low-paid and part-time workers can enjoy a decent retirement, then reforming auto-enrolment thresholds should be central to the Government’s policy programme.

 1 House of Commons Library | Women and the Economy | 02 March 2021: Women made up the majority of part-time employment (38%), compared to 13% of men.
 2 Assumes additional contributions are paid on earnings from age 18 to 22 based on qualifying earnings. Salary and thresholds increase by 2.5% per year, investment returns are 4.5% per year and charges 0.75% per year. For example, an 18 year old is enrolled earning £15,000 per year, contributions of £58.40 per month are paid, increasing at 2.5% per year until age 68. This provides for a fund of £162,457 based on the investment growth and charges above. The same person enrolled at age 22, when we have assumed their earnings have increased to £15,909 will see contributions of £64.46 paid, increasing at 2.5% per year until age 68. This provides a fund of £145,638. By enrolling at 18 an additional fund of £16,819 is provided which is 11.5% more than the £145,638 provided by being enrolled at 22.
 3 Assumes an employee earns at least £6,240 per year and opts to join the pension scheme at age 18 and taking benefits at age 68. Threshold and earnings increase annually in line with inflation at 2.5%. Investment returns are assumed to be 4.5% per year and charges 0.75% per year.


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