The government is lowering the age for auto-enrolment of workers into workplace pension schemes from 22 to 18-years-old, and changing the way pension contributions are calculated.
These are some of the measures to be introduced by mid-2020, according to the auto-enrolment review published today (17 December) by the Department for Work & Pensions (DWP).
Lowering the age threshold will bring 900,000 more workers into saving an additional £800m through a workplace pension.
David Gauke, secretary of state for work and pensions, said: “We are committed to enabling more people to save while they are working, so that they can enjoy greater financial security when they retire.
“We know the world of work is changing, so it is only right that pension saving does too. This ambitious package will see more people than ever before helped onto the path towards building a secure retirement.”
Workplace pension contributions will be calculated from the first pound earned, instead of the £10,000 lower earnings limit.
This will bring an extra £2.6m into pension saving, according to the DWP, improving incentives for people in multiple jobs to opt-in and simplifying the way employers assess their workforces and calculate contributions.
This pedestrian pace of reform risks creating a ‘lost generation’ of people in their late forties and fifties who will simply be unable to afford to retire.
Sir Steve Webb
Introduced in 2012, auto-enrolment has now reached nine million people, with opt-out rates of less than 10 per cent.
Regarding self-employed workers, which was one of the biggest themes under this review, the government is going to test a series of ‘targeted interventions’ to explore how technology can be used to increase their pension saving, the DWP review stated.
These will include working with organisations who act as ‘touch points’ for the 4.8 million self-employed people, such as banks and those who contract labour.
Pensions minister Guy Opperman recently confessed “there is no simple solution” for including self-employed people in auto-enrolment.
The lower earning trigger will remain the same for 2018 to 2019, and from now onwards will be subject to annual review.
The contribution levels – which will increase to 5 per cent in 2018 and 9 per cent in 2019 – will be reviewed after the last increase has been completed, the DWP stated.
Sir Steve Webb, director of policy at Royal London and former pensions minister, said there are some great ideas in the review, such as lowering the minimum age and the changes in the pension calculations.
However, “the proposed pace of change is shockingly lethargic,” he argued.
He said: “Talking about having reforms in place by the mid-2020s risks leaving a whole generation of workers behind.
“Those who never got to join a final salary pension and who have only recently come into pensions through automatic enrolment need urgent action to help them build up a decent pension pot.
“This pedestrian pace of reform risks creating a ‘lost generation’ of people in their late forties and fifties who will simply be unable to afford to retire.”
The DWP explained, in a statement, that the timeline is due to the fact that it “will be working in partnership with employers and the pensions industry, learning from the contribution increases in April 2018 and April 2019.”
A spokesman for the DWP said: “This will ensure that businesses and savers have time to plan for the changes and that we continue to build on the foundation already in place in an effective way.”
Rachel Vahey, product technical manager at Nucleus, said this review was an important step “in clearly showing contributions need to be raised above their current level to give people the money in retirement they both expect and need.”
She said: “The DWP now needs to move forward and put in place plans to start increasing contributions.”
Darren Philp, policy director at workplace provider The People’s Pension, praised the review, saying that the “government has listened to growing calls from the pensions industry to strengthen auto-enrolment”.
According to Mr Philp, “it is bizarre that since the inception of auto-enrolment, people’s contributions have not been based on their entire salary.”
He said: “The People’s Pension has long-called for this to change as we believe it is nonsensical and adds an unnecessary layer of complexity to an already complex system.
“We are pleased to see that people will now be supported to save more as contributions will now start from the first pound of someone’s pay packet.”
According to Nathan Long, senior pension analyst at Hargreaves Lansdown, the measures announced “will transform people’s retirement prospects”.
He said: “Not only does this mean retiring with more income, it means having greater control over leaving work. These measures mean someone with average earnings could increase their pension pot at retirement by over £60,000.”
However, Mr Long said he is disappointed with the recommendations made by the DWP to include the self-employed in saving for retirement.
He said: “Policy makers must be prepared to use the tax return system to automatically enrol this group to truly solve their pension problem.”