The Department for Work and Pensions (DWP) confirmed it will support proposals to expand automatic enrolment, enabling millions of people to save more and to start saving earlier.
This comes days after the DWP indefinitely delayed the launch of the pensions dashboard.
MP Jonathan Gullis’ private members bill, backed the UK government, grants two extensions to auto enrolment – abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled to 18 years old.
Lowering the age at which eligible workers must be automatically enrolled into a pension scheme by their employers from 22 to 18 will make saving the norm for young adults and enable them to begin to save from the start of their working lives.
The removal of the lower earnings limit, supporting those with low earnings and multiple jobs will ensure they are saving from the first pound earned.
The DWP said that it intends to continue its work with thousands of employers and pension providers to “further boost the amount of people in a workplace pension and the amount they save for retirement”. It added that it will also continue its work on “empowering savers” to know their pension options by introducing products such as Pensions Dashboards and mid-life MOTs, providing accessibility and innovation in how people save for their retirement.
Laura Trott, pensions minister, said: “We know that these widely supported measures will make a meaningful difference to people’s pension saving over the years ahead. Doing this will see the government deliver on our commitment to help grow the economy and support the hard-working people of this country, particularly groups such as women, young people and lower earners who have historically found it harder to save for retirement.”
Gullis added: “Auto enrolment of pensions will benefit scores of young people in all four corners of the country, which is why I am delighted that minister for pensions Laura Trott is supportive of the bill. With all the evidence of the huge positive impact it can have, it is a no-brainer that we now need to extend auto-enrolment to those aged 18 and above. I am confident this bill will make a huge difference to people from Kidsgrove to Consett.”
Industry reaction
The pensions industry has given two thumbs up to the expansion of the auto enrolment scheme.
Kate Smith, head of pensions at Aegon, said: “It’s fantastic news that the government has confirmed its support for enhancements to auto-enrolment, originally put forward back in 2017. The next step is to agree a timetable for implementing these enhancements. With the next general election to take place not later than January 2025, we urge the government to start phasing this in from April 2024.
“Basing contributions from the first pound of earnings rather than on a band above £6,240 ($7,483, €7,047) will mean contributions from both individuals and employers increase. Employees pay 5% so this equates to £312 a year, but after-tax relief, this is just over £20 a month. But with employer contributions, this will be boosted to £499 a year extra. To avoid an overnight change, it will be important to introduce this gradually over a number of years, particularly as we emerge from the current cost of living crisis. Otherwise, someone earning £12,480 would see their contributions double overnight.
“It is also hugely welcome that those aged between 18 and 22 will in future be auto enrolled. This will get younger employees into the pension savings habit earlier and won’t ‘miss’ it from their pay. And it’s the contributions paid in the earliest years that have longer to grow with investment returns.”
Steve Webb, partner at consultancy firm LCP, added:“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 automatic enrolment 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.”
Gary Smith, director of financial planning at Evelyn Partners, added: “If these proposed reforms to auto-enrolment are enacted, it would dramatically boost the numbers of younger workers saving into a workplace pension and the amounts being saved by lower earners – by ensuring they are saving from the first pound earned.
“Given the powerful effects of compounded returns, early pension saving is hugely beneficial, and can prevent savers later in life having to make up for lost time by funnelling a large percentage of their monthly pay into their pension.
“As the data released earlier indicates, by retirement living standards measures, lower earners fare poorly and can face a straitened retirement relying almost completely on the state pension. This situation could deteriorate as the cost of living has ratcheted up, and while inflation might come down, it’s not going away.
“The DWP backing for this bill may go some way to remedying the low savings rate among lower earners and that’s to be welcomed. The self-employed are now the cohort who might get left behind in terms of private pension provision, unless the authorities devise some imaginative nudges to address that was well.”
