Workplace pensions will be reshaped from the mid 2020s, the government has announced, in a move that will bring millions more people – including younger workers – into the pensions regime and may increase both costs and complexity for employers.
Contributions will be calculated as a proportion of earnings for all staff earning up to the higher-rate tax threshold of £45,000, work and pensions secretary David Gauke announced. At present, the first £5,876 of earnings is excluded from pensionable income.
The move is designed to ensure that individuals in multiple jobs whose combined income totals more than £10,000 are enrolled into a pension scheme by their multiple employers, according to the Department for Work and Pensions.
The age at which employees can start building a retirement fund will also be lowered. In the mid 2020s – but not yet at a specific date – every employee aged 18 or over will be able to save into a workplace pension, as opposed to the present age of 22. This will pull an additional 900,000 people into a pension scheme through a widespread extension of auto-enrolment.
The moves were broadly welcomed by Charles Cotton, performance and reward adviser at the CIPD, given ongoing concerns about the level of saving among younger workers in particular. But others expressed concern about how employers would absorb the increased costs, and whether the changes would encourage greater opt-out of auto-enrolment schemes.
A better national financial wellbeing strategy is required to increase employees’ pension contributions, said Cotton. Describing the changes as “better than nothing”, he said the key to increasing contributions in the long term was to boost “employee productivity levels and reduce the major contributors to the cost of living, such as housing or childcare”.
Cotton said the lower saving age was positive given the need to save more for retirement. “Enrolling everyone in employment from the age of 18 helps achieve this, as does the change from banded earnings,” he said. But communicating the importance of pension saving for younger employees will be a new challenge for the industry and government. “To appeal to a younger audience, pensions may have to evolve to a more flexible savings arrangement,” said Cotton.
Earlier this week, Gauke said he wanted to get more people into the habit of saving, adding that the government was “committed to enabling more people to save while they are working, so that they can enjoy greater financial security when they retire”.
Former pensions minister Steve Webb, now director of policy at Royal London, called the pace of the amendments “shockingly lethargic”, and said they risk “leaving a whole generation of workers behind”.
A spokesperson for the Pensions Regulator said lowering the age threshold would mean “more people will have the opportunity to benefit” from saving for their retirement.
Jamie Jenkins, head of pensions strategy at Standard Life, welcomed the measures, and said they would ensure as many people as possible had the opportunity to start to build up pension savings. “Since auto-enrolment was introduced, it has enjoyed huge success and it is right that this is extended to include young workers, and those who might not have a standard employment set-up,” Jenkins said.
The reforms also include annual reviews of the trigger point for auto-enrolment – currently £10,000 or more – as well as contribution levels, and an exploration of the use of technology to encourage the self-employed to save for retirement.
In further pension changes, staff and employer pension contributions are to increase to 5 per cent between the two parties from April 2018, with employees putting in a minimum of 3 per cent of annual salary. By April 2019, these levels will jump again to 8 per cent – 5 per cent for employees and 3 per cent for employers.