How changing auto-enrolment rules could benefit your employees as new bill gains Royal Assent
On 19 September 2023, the Pensions Extension of Automatic Enrolment Bill – having passed through the House of Lords – received Royal Assent.
The catchily named bill, which will lower the minimum age of enrolment and effectively remove the lower earnings threshold, is great news for employees.
Auto-enrolment has been a huge success since it launched more than a decade ago. The scheme has enrolled nearly 11 million UK workers, increased engagement among eligible employees from 55% to 88% and led to additional real-terms savings of £33 billion.
Industry experts have long been calling for improvements, but in the current economic climate, with a cost of living crisis persisting, is now the right time?
Keep reading to find out more about the financial and wellbeing benefits of the Pensions Extension bill for you and your employees.
The bill makes two significant changes to the pension arrangements for younger members of your workforce
1. Changes to the minimum age
From its inception in October 2012, auto-enrolment was limited to UK workers over the age of 22. (While workers aged 16 to 21 were permitted to opt into the scheme, it wasn’t “automatic”.)
The new rules lower this limit to age 18. This allows your younger workers to begin automatically contributing to their pension four years earlier than previously. Those aged 16 to 18 can still opt in.
Throughout a long career, the extra years of contributions, snowballing effects of compound growth, and the normalising of workplace pension savings could make a huge difference to your employees.
2. Changes to the minimum wage threshold
While employees earning £10,000 or more were auto-enrolled under the old rules, separate calculations existed for “lower earners”, defined as those receiving the below amounts, or less:
- £520 a month £120 a week
- £480 over four weeks.
These rules amounted to a minimum earnings threshold of £6,240, before its abolishment under the new bill.
The law change means that employees will automatically begin contributing from the first pound they earn, up to the current maximum of £50,270, if an employer bases contributions on Qualifying Earnings.
The changes could mean financial and wellbeing benefits for your employees
According to figures published by MoneySavingExpert, the changes could make a substantial difference. The report calculates that the average 18-year-old male, saving into a pension from now until retirement at 65, would have an extra £430,600 in their pension pot. This is compared to a comparable worker saving from age 22. A female would have an extra £378,900.
(Note: These figures are based on several assumptions, including 8% contributions in line with current auto-enrolment minimum contribution requirements and a salary that rises each year.)
There are some potential financial downsides too though. While there is never a “right” time to introduce new measures like these, automatically opting in 18-year-olds, potentially on lower incomes, during a cost of living crisis might not be ideal for everyone.
Paying your future self is key to a good financial plan, but these rule changes could leave younger workers with less money in the present.
- teach invaluable financial lessons;
- help to instil positive money habits; and
- promote complete financial engagement.
These factors will ensure your young workers are focusing on their lifetime goals from a young age.
A recent Legal and General (L&G) report found that financial stability is the ultimate dream for 94% of UK retirees, and these changes to auto-enrolment could help your employees to achieve just that.
Changes for employers too
The law changes won’t greatly alter your duties as an employer. The rules still apply from your employees’ first day at work, except that now, they apply from the first pound earned. You’ll also still need to check enrolment against all availability criteria, including age, but there is now a younger one.
It is also important to keep in mind the cost implications which may come with these changes. If you have a significantly younger workforce, your pension scheme costs are going to increase.
But, by helping your young workers begin saving for retirement, these law changes could provide a real wellbeing boost.
We know that engaging with your finances brings increased confidence, a sense of control, and a desire to learn more. This, in turn, promotes wellbeing, and alongside other measures and workplace benefits, and could help to:
- improve productivity and performance;
- lower staff turnover and reduce new staff training costs; and
- develop and nurture a positive company culture.
A workplace pension is a huge employee incentive and promotes improved wellbeing across your business. For this reason, the changes should be welcomed as good news.
Get in touch
If you’d like to learn more about auto-enrolment and what the recent change means to you and your employees, please get in touch.
Email email@example.com or call us on 0330 332 7143.
This blog is for general information only and does not constitute advice.