4.AE was a key recommendation of the Pensions Commission, commonly referred to as the Turner Commission, which reported in 2004 and 2005. The policy, which stops short of compulsion but makes most employees part of a pension scheme by default, is designed to address “severe under-saving” for retirement. The policy is given effect by the Pensions Act 2008, which places a duty on employers to automatically enrol certain employees into a qualifying pension scheme, making contributions both for and on behalf of the employee.
5.Contributions are based on qualifying earnings. In 2016-17, these are earnings between a lower threshold of £5,824 per year and an upper threshold of £43,000. The contribution rates are gradually being increased. Currently, both employee and employer contribute 1% of qualifying earnings. This will increase to 3% employee, 2% employer in April 2018 and then 5% employee, 3% employer in April 2019.
6.An employee who works in the UK under a contract of employment and is aged between 22 and state pension age must be automatically enrolled providing they earn at least a trigger level of earnings. In 2016-17, this earnings trigger is £10,000 per year. Unless the employee opts out, the employer must pay contributions. Employees aged between 16 and 74 earning at least £5,824 per year, the lower qualifying earnings threshold, may choose to opt in to the pension scheme and the employer must pay contributions. Employees earning less than that threshold have the right to join a pension scheme but their employer does not have to pay contributions.
7.AE has been implemented in stages according to the number of people the business employs. The process for large and medium employers is complete. Requirements began to extend to small and micro-employers in June 2015 and are due to be complete by February 2018. The Pensions Act 2008 gave the Pensions Regulator (TPR) a new statutory objective to maximise employer compliance with the employer duties and employment safeguards associated with AE.
8.By March 2016, 6.1 million people were enrolled in a workplace pension as a result of auto-enrolment, in addition to the 9.6 million people who were already part of a qualifying scheme at the date their employer was required to comply. 110,000 employers have declared compliance with AE requirements. Opt-out rates have been lower than anticipated. Around 10% of eligible workers have opted out, compared to the DWP’s initial assumption of 28%, with young employees less likely than average to opt out. Unsurprisingly, AE has been declared a success by pension providers, employers, trade unions and Government.
9.We were cautioned, however, against complacency about this success continuing. The Department recognised that, in being extended to small and micro-employers, AE has “entered its most challenging phase”. NEST concurred, describing the period as the “acid test” of the policy. We consider extension to smaller employers, along with other risks, in the coming chapters. As The People’s Pension, a master trust, summarised, “so far, so good, but there are risks ahead”.
10.Automatic enrolment (AE) has so far been a tremendous success. It has resulted in more than six million people being newly enrolled into a workplace pension scheme. Rates of opting-out have been lower than expected. AE is on schedule to have a transformative effect on private pension saving, but it is now at a crucial and risky stage of its development. It is imperative that it is not undermined by other government-sponsored forms of saving.
2 Pensions Commission, First Report, , 2004
3 This schedule was announced in the 2015 Autumn Statement. The increases were previously due to occur in October 2017 and October 2018. The change aligns the increases with the tax year.
5 DWP (). Small and micro-employers are those with fewer than 50 employees.
7 DWP, ()
8 Prospect (PAE0053), CBI ()
9 DWP, ()
10 NEST (), CBI (), (), PLSA ()
11 The People’s Pension ()
Prepared 13 May 2016