Automatic Enrolment in the Spotlight

It’s safe to say there were turbulent times in the market during the last quarter of 2022, with the Bank of England projecting a very challenging outlook for the UK economy. There is concern that the positive uptake of Automatic Enrolment (AE) may falter as people look to cut costs in any way they can. In fact, it was only last month that the government announced the thresholds for AE would be held at current levels until at least 2024.

AE Reforms

Prior to the recent economic turmoil, there were many in the pensions sector who had been calling for AE to be expanded to include more people and for the minimum rate to be raised. Even in September 2022, the Work and Pensions Committee asked for AE reforms as soon as Spring 2023. It found:

  • Many people were still not saving enough;
  • Low earners and the self-employed were missing out; and
  • People had to realise decisions taken today would have a major impact on their lives in the future.

I certainly wouldn’t contest any of the above, however given the current economic climate, this seems unlikely to happen, with almost 70% of low earners unable to afford even the current 3% minimum. In addition, companies themselves are facing additional burdens and some are concerned as to whether they would be able to afford an increase to the minimum employer contributions. No doubt a reason for the government’s decision to maintain current thresholds.

Currently, AE covers:

  • Individuals aged between 22 and state pension age; and
  • Those who earn more than £10,000 a year.

There is a low-earnings threshold (£6,240 in 2022/23) below which employer contributions are not payable. Individuals earning between £6,240 and £10,000 are not legally entitled to be automatically enrolled into a workplace pension scheme but they do have the right to opt in and receive the minimum level of employer contributions.

Employers beware of non-compliance

A recent survey from Nest Insight found that employers were not rushing to increase contribution rates, stating that complex pension provision and legacy systems were as much a barrier as the current economic climate.  They may have a point, recently The Pensions Regulator’s (TPR’s) AE inspections found a “number of errors” in compliance with AE, including miscalculation of pension contributions and miscommunication with employees.  TPR inspectors were looking to ensure employers were fully compliant but found “a number of common errors in respect of calculating pensions contributions and communications to staff.”

The errors found were largely technical in nature but there are ramifications:

  • Administrative errors could result in employees not receiving their full pension entitlement; and
  • Any mistakes have to be backdated, a process which is costly in terms of time as well as money, but may also suggest there are other non-compliance errors which could potentially be more serious and could come with larger financial penalties.

In the last few days, according to the Bank of England the recession is now expected to last just over a year rather than almost two, as energy bills fall and price rises slow. However, at this time it doesn’t appear that the government will have the appetite to review AE and indeed has held current thresholds.

One of my concerns for 2023 is that many individuals will not even be able to maintain what they have, and pension contributions are an easy win in finding some extra money each month, rather than thinking of the longer term… I think we would all want to buy bread today rather than ‘Jam’ tomorrow.   

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