Pensions auto-enrolment age to be lowered to 18
A review of the pensions enrolment system has confirmed that the lower age criteria at which employers are required to automatically enrol employees into a pension scheme is to be lowered from 22 to 18 years old.
Currently, to be eligible for automatic enrolment a worker must be aged between 22 years and State Pension age, and earn more than £10,000 per year.
For such workers, employers have to:
- contribute a percentage figure of their gross earnings between £5,824 and £43,000. The compulsory contributions are being phased in from 1% now, increasing to 2% in 2018 and 3% in 2019; or
- offer a suitable defined benefit scheme; or
- make alternative contribution arrangements satisfying certain minimum requirements.
The review by the Department for Work and Pensions, Automatic Enrolment Review 2017: Maintaining the Momentum, sets out proposals to maintain the momentum achieved so far and to build a stronger, more inclusive savings culture for future generations.
The lower age limit of 22 was originally based on National Minimum Wage (NMW) age criteria that applied prior to 2010, but these have since been superseded. This means that the lower age limit for automatic enrolment is now outdated and not meaningful in the context of the current minimum wage framework.
The review proposes that the lower age limit should be reduced to 18, stating:
“Automatic enrolment is normalising workplace pension saving for many workers in the UK, but younger workers are excluded unless they elect to opt-in. By lowering the eligible age criteria to 18, it will normalise workplace pension saving for more young people as they start work for the first time. This will help embed good savings habits earlier and allow more time to build up a meaningful workplace pension over an individual’s lifetime, while they balance work and other responsibilities. In addition, it will simplify the workforce assessment system for employers, advisers and intermediaries who already consider age 18 for NMW eligibility. For individuals it also improves alignment with many other areas of life, including leaving full-time education and universal access to benefits and mainstream services.”
Widening the age criteria would increase the total cost of pension contributions, alongside the additional costs that employers are already meeting following the introduction of the apprenticeship levy and National Living Wage.
Other proposals highlighted in the review include:
- Supporting those with low earnings and multiple jobs to save by removing the lower earnings limit so that contributions are calculated from the first pound earned and everyone has access to a workplace pension with an employer contribution.
- Implementing the government’s manifesto commitment to improve pension participation and retirement outcomes among self-employed people by testing a number of different approaches aimed at increasing the savings of self-employed people from 2018, with a focus on those with low to moderate incomes. This recognises that there are 4.8 million self-employed people in the UK for whom a single saving initiative is unlikely to work.
- Underpinning this with a package of measures, and a call upon the pensions industry, employers and wider government, to work together to deliver better engagement with individuals on the benefits of workplace saving.
The government’s ambition is to implement these changes to the automatic enrolment framework in the mid-2020s. However, the review’s authors comment:
“The government recognises that while the changes being proposed will bring future financial benefits for individuals and the UK’s longer term fiscal position, there are also significant cost consequences which will need to be shared between individual savers, employers and government.”