2018 marks 10 years since auto-enrolment was first debated in 2008. As the new financial year approaches, we look at what April 2018 has in store for workplace pensions.
What is auto-enrolment?
Introduced into law in 2011, auto-enrolment will be in its final roll-out phase this year. This means that, from April, eligible employees from all sizes of business should be included in a workplace pension (unless they have chosen to opt out).
Eligible workers are those who:
- Are aged between 22 and the current State Pension Age (which you can check here)
- Meet or exceed the earnings limit. This is currently £10,000 or more each year/£833 per month/£192 per week, but this is reviewed yearly and may to change
- Have a contract of employment (i.e. subcontractors and non-contracted partners will not count)
Employees who do not fit these criteria can ask to join the workplace pension on an individual basis.
The end of the five-year phase-in period
Since auto-enrolment came into effect, nine million people have been enrolled; one million of whom joined during 2017. (Source: Department for Work and Pensions (DWP)) During the first few months of 2018, small businesses will be joining the ranks as part of the final stage of auto-enrolment’s introduction.
February 1st is the final phase-in deadline. After which, all employers will be under immediate duty to enrol new staff members who are eligible.
Perhaps the biggest change we’ll see, is the change to the minimum contribution levels. Currently they are:
- 1% employer contribution
- 2% total contribution (meaning at least 1% employee contributions if the employer pays 1%)
From April, the minimum contribution levels will rise to:
- 2% employer contribution
- 5% total contribution (meaning at least 3% staff contribution if the employer pays 2%)
12 months later, in April 2019, these minimum contributions will increase once again to:
- 3% employer contribution
- 8% total contribution (meaning at least 5% employee contribution if the employer pays 3%)
Many companies and experts have expressed concern that raising the minimum contribution amounts will encourage employees to opt out of their workplace pension.
Currently 10% of people opt out, but experts have warned that the number could rise to 21.7% in 2018 and 27.5% in 2019 (source: Your Money).
However, it appears that those worries may be unfounded, as just 4% of people have made up their mind to leave their workplace pension when the increase comes into effect. Fortunately, half of employees are committed to their scheme:
- 50% will definitely stay in their workplace pension
- 34% are unsure what path they will take
- 12% will consider leaving their scheme
- 4% will definitely opt out
What’s almost certain, though, is that those who opt out will face a financially difficult retirement.
Other potential changes
In late 2017, the Government indicated that they would extend auto-enrolment to those aged 18 and over. However, this won’t happen until the mid-2020s. Currently, employees who are under the age of 22 must request to join their employer’s workplace pension. While those under the age of 18 will not usually be eligible for employer contributions to their scheme.
It is estimated that lowering the minimum age threshold will mean that 900,000 more people will be automatically enrolled into a workplace pension.
If you are a business owner, employer or employee, to discuss how the pension changes might affect you, feel free to get in touch.