Proposed legislation expanding auto-enrolment pensions to include thousands more employees, including younger workers and lower earners, could lead to higher costs for employers, experts have warned.
A bill was introduced to Parliament yesterday (5 January) that would see the minimum age for auto-enrolment drop from 22 to 18, giving employees an extra four years of savings towards their pensions.
The proposal would also scrap the £10,000 minimum earning threshold that currently triggers automatic enrolment, meaning that all workers over 18 would be enrolled.
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Think tank Onward, which supported the bill, estimated that lowering the auto-enrolment age would allow younger workers to save an additional £20,267 when they retire.
In a report published to coincide with the reading of the bill, Onward said that currently just one in five 16-21-year-olds has a workplace pension, making them five times less likely to have one than someone who is middle-aged.
But, while the expansion of auto-enrolment would be good news for savers, the bill could lead to higher costs for employers – who currently contribute at least 3 per cent towards employees’ pension savings.
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David Robbins, director at Willis Towers Watson, said employees with a large proportion of part-time staff were most likely to see significant cost increases under the proposal.
“The changes would reduce revenues by more than £1bn by diverting employers’ remuneration spend from taxable and [National Insurance Contribution]-able salaries to tax and NIC-relieved pension contributions, and by increasing the amount that employees contribute,” he said.
However, the change would help workers with multiple jobs, who currently have the earnings trigger applied separately in relation to each job, Robbins said.
“It could simplify the worker assessment process for employers, but also risks encouraging people to put aside money at a time when their total income is below what they can expect to get from the state in retirement.”
He added: “Officially, the government has an ambition to implement these changes by the mid-2020s, but this has always been subject to finding ways of making them affordable – here, the government will have an eye both on individuals’ pay packets and on the public finances.
In 2017, the government introduced proposals to reduce the age limit for automatic enrolment from 22 to 18 by the mid-2020s. It also proposed abolishing the qualifying earnings threshold – the point after which earnings become pensionable – which would mean employees’ pension contributions are calculated on earnings from the first point. Currently the qualifying threshold is £6,240,
However, these proposals have not been revisited by the government since 2017, and in its report Onward argued that businesses need a “more concrete roadmap” to prepare for the changes.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said the proposals shouldn’t come as a surprise to employers.
But she said: “As the economy struggles to recover from the pandemic, the government faces a tricky balancing act in that it won’t want to burden businesses with extra costs and admin at a time when many are still struggling to recover.
“On the flip side is the huge long-term benefit of getting more people contributing to a pension for longer. Building up a good pension gives workers options as to when they retire. Those who choose to stay on do so because they want to, so employers have workers who are motivated while still giving opportunities to younger workers.”