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Automatic Enrolment – extension of thresholds

Hot on the heels of Pension Awareness Week (11-15 September), new legislation abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled from 22 to 18 years old received Royal Assent on 18 September 2023.

Penny Cogher, Pensions Partner, delves into the Pensions (Extension of Automatic Enrolment) Act 2023.

Firstly, employers will be required to automatically enrol employees as soon as they reach 18 rather than the current age of 22.

Secondly, employers will have to apply the statutory auto-enrolment contributions to earnings ‘from the first pound’ rather than only to those above lower earnings limit of £192 a week. This means that pension contributions will be due on all income up to £50,270, rather than on income above £6,240.

When will the changes become law?

We don’t yet know when employers will have to comply with these changes, but we understand the DWP will launch a consultation on their implementation soon. We expect that the usual statutory rules will apply for these new categories of workers, allowing employers to postpone auto-enrolment for new joiners for a period of up to three months to assess their eligibility for auto-enrolment.

What can employers be doing now?

While we’re waiting for the consultation, we recommend planning ahead to ensure you can comply with the new requirements when they do become law. You should consider your own workforce and your current pension arrangements, as follows:

How many of your current workers are likely to be impacted by these changes?

Do you have workers who are earning at or just above the lower earnings limit? Is this on a regular or irregular basis?

Are they temporary or permanent workers?

Are they your workers?

Do you have summer students or internships? Would they be impacted? How long are their placements and what are they being paid?

Do you operate pension salary sacrifice or salary exchange? If so, you should consider whether you want this to apply in relation to these two new categories of potential pension scheme members. 

Salary sacrifice or exchange is where the worker voluntarily gives up/exchanges a proportion of their salary in return for the employer paying the employee’s pension contributions. This is advantageous for workers as it reduces their tax and national insurance contributions. It also lowers the employer’s national insurance contributions.   However, the reduced salary has to remain above the national minimum wage. Also, an individual’s state pension is based on their national insurance contribution record. This means that if the individual pays less national insurance contributions because of salary sacrifice this may adversely impact their state pension. It may also adversely affect other state benefits to which the individual might otherwise be entitled.  

What sort of additional cost might there be to your business in terms of implementing this change?

You should also ask your current pension provider how ready they are for this and what changes they anticipate making to their systems for it.

Will these changes help with the pension savings gap?

While this reform was first proposed in 2017, it took a private member’s bill, sponsored by Jonathan Gullis MP, to put the changes on the statute books. Speaking in March 2023, the Minister for Pensions, Laura Trott, said the reform would “make a meaningful difference to people’s pension saving over the years ahead.”

The DWP Press Release (19 September 2023) states that “the changes to Automatic Enrolment, combined with the Mansion House Reforms announced by the Chancellor in July, could see the average earner’s pension increase by nearly 50% if saving across their entire career, while a minimum wage earner could see their pension pot increase by over 85%.”

Expanding the ambit of auto-enrolment to the very young and the very lowest paid will certainly go some way towards a positive cultural shift for more pension saving. Research shows that you are never too young to start saving for a pension and that the requirement for workers to opt out of auto-enrolment as an inertia tactic really does work so overall these changes should be beneficial in terms of increasing pension savings for everyone, even in a cost of living crisis.

However, more still needs to be done to help manage the big “undersaving” problem that is brewing. Data published earlier this year from the DWP shows that 12.5 million people (38 per cent of the working age population) are not putting enough money aside for retirement for even a modest standard of living in retirement.  Whether the Mansion House reforms will help bridge this gap is still a moot point.

Finally, the Government will also have to find a way around the £10,000 earnings trigger in the Pensions Act 2008.

Remember – auto-enrolment is regulated by the Pensions Regulator, and they will name and shame for non-compliance, so compliance is always important. If in doubt, please contact the author, Penny Cogher, for further information or your usual contact at Irwin Mitchell LLP.