No change: AE review raises more questions

More people are set to come under the scope of auto-enrolment after the government opted to freeze the earnings trigger at £10,000 for 2024-25.

The Department for Work and Pensions (DWP) announced today (6 February) that it had opted to make no change to the trigger or the upper and lower earnings limits for the auto-enrolment system following a review by the department and secretary of state Mel Stride.

It means that, due to wage inflation, more low earners will qualify for automatic enrolment into workplace pensions, with the government estimating that coverage will reach 15.8 million people as a result.

DWP data show that, as a result of the freezing of the limits, the total amount paid into auto-enrolment pensions by employers will increase by approximately 4.5%. Employee contributions are set to increase by 3.7%. Total annual contributions are expected to hit an estimated £76bn.

However, the decision also means the government has yet to enact the auto-enrolment extension bill that received Royal Assent in September last year. This paved the way for the earnings trigger to be abolished and the minimum age for participation to be lowered, but neither has yet been implemented.

In justifying its decision, the DWP said it “reflects the key balance that needs to be struck between affordability for employers and individuals, and the policy objective of giving those who are most able to save the opportunity to accrue a meaningful level of retirement savings”.

The department added that the decision also reflected a “need for stability in the light of the current prevailing economic circumstances” as well as providing consistency for savers and employers.

A balancing act

Jon Greer, head of retirement policy at advisory firm Quilter, said the decision to freeze the earnings trigger was “unsurprising” given the prospect of an election later this year and the ongoing cost of living crisis.

He added: “Following the success of auto-enrolment there is a growing sense that some changes need to be made to help the policy continue to help boost pension saving but the timing clearly is not right as reducing the earnings trigger or lower earnings limit could effectively amount to a pay cut when people are already struggling.

“While saving for retirement is key, low-income workers must balance this need with hanging on to as much of their money as possible to stay afloat in this economic climate. That said, we do need to have a timeline for tweaking this successful policy to ensure it works for people.”

The DWP said it would carry out a consultation on how best to implement the 2023 bill’s changes “at the earliest opportunity”, but did not specify a date or timescale.

It emphasised that the government “remains committed” to removing the lower earnings limit and reducing the minimum age for auto-enrolment. It added that the department would liaise with stakeholders to establish “the right implementation approach” that ensured affordability.

“We will pay close attention to the impact and costs in order to develop an optimal approach on implementation which balances the needs of savers, employers, and taxpayers,” the DWP said. “This will include giving employers and savers the time to plan for future changes to help minimise any risk of deterring individuals from continuing to save or undermining employer engagement.”

Kate Smith, head of pensions at Aegon, said the government's decision “seems sensible given that we remain optimistic that the government will implement the 2017 automatic enrolment reforms by the mid-2020s, hopefully from as early as April 2025”.

Issues to be addressed

Elsewhere in the supporting documents for the DWP’s review, the department acknowledged several issues facing low earners when asked about pension saving. As well as concerns about budgeting and the cost of living crisis, the department’s report found that low earners often wringly believed that they would lose access to benefit payments if they began saving for a pension.

On the whole, however, the DWP found that pension saving was considered “desirable and important for future security” by the people it surveyed.

Damon Hopkins, head of DC workplace savings at consultancy group Broadstone, said: “It reveals the two key issues facing the country’s pension system at present – engagement with and understanding of how pensions work and the macroeconomic impact on disposable incomes.

“It demonstrates a significant opportunity for employers to support the financial wellbeing of their employees through greater financial education and providing access to solutions which improve both short and long-term financial security.”

The department recommended further research work to help improve communication and guidance around pension savings and benefit eligibility.