Steve Webb examines auto enrolment so far and explains the impact of the upcoming statutory phasing increases on your clients.
Since the autumn of 2012, employers and advisers up and down the land have been engaged in a huge programme to get millions of workers started on saving for their retirement.
Over the last five years more than 800,000 employers have enrolled over eight million workers into workplace pension schemes. The programme has been a huge success; with opt out rates far below those that were originally expected. One year on from the introduction of automatic enrolment, research with employees found that most reported feeling ‘relieved’, knowing that they needed a pension and grateful that their employer and the government had helped to get them started. Advisers, employers and pension providers deserve huge credit for their partnership in getting us this far.
This first phase of bringing in employers, starting with the largest, is now nearing its completion. By the end of 2017/18, pretty much every employer will have reached their staging date and will have had to comply with their duties under automatic enrolment.
But this is only the beginning. The next step is to get workers saving more, especially those who have been enrolled at the statutory minimum contribution rate.
As the law stands, a total of 2% of ‘qualifying earnings’ has to be paid into a pension scheme for each employee, with at least 1% of this coming from the employer. Qualifying earnings refers to the slice of earnings between a floor of £5,876 and a ceiling of £45,000, so it does not have to be 1% of the total earnings of the employee.
In April 2018 the rules will change, and the minimum contribution rate will rise to a total of 5% of qualifying earnings, with a minimum of 2% from the employer. In April 2019, there will be a further increase to 8% (or 7% if contributions are calculated on all earnings) with a minimum of 3% from the employer. If employees are already contributing above these levels then nothing needs to be done.
With employers only able to afford limited pay rises, some employees may find money is tight and may choose to opt out of pension saving altogether. Whilst this is likely to be a minority, it is important that employees understand that if they opt out they are losing the very valuable contribution that their employer makes to their pension.
Workers need to understand that if they do not have a pension of their own then their only income in retirement is likely to be a State Pension worth only around £8,500 per year. If they want to be able to afford to retire and have a good quality of life in retirement then they will need an additional income and a workplace pension offers them a very cost-effective way to achieve this.
Not only do they benefit from an employer contribution into their pension but they also get tax relief from the government on the money that they put in.
Where your clients have chosen a phased approach to their pension contributions, we will contact you and your client by early February to let you know the steps you need to take. Throughout February and March we will write directly to scheme members to tell them what is changing and why and to reiterate the benefits of savings into a pension.
The April 2018 and April 2019 increases in contribution rates are a vital part of the whole process of automatic enrolment as we seek to get people moving towards more realistic levels of retirement saving.
Our Member Communications team can provide employers with posters and postcards to help raise awareness of the forthcoming contribution changes amongst staff. We look forward to working in partnership with you and your client to make sure that the next phase of automatic enrolment is as successful as the first one has been.
Contact the member communications team with details of the scheme, address and quantity of posters and postcards required.