Despite auto enrolment being new to small businesses, it was first introduced in 2012 and was a glint in the Department for Work and Pensions’s eye for a long time before that.
So, while it feels rather strange that a lengthy review is already taking place, it’s really not a bad idea to make sure it’s all going to plan.
But the Auto Enrolment Review is coming at the most critical moment in the auto enrolment calendar for small businesses.
This year, my firm Smart Pension, is enrolling 1,000 employees every working day into its MAF (Master Trust Assurance Framework) accredited pension scheme.
That means we’re setting up a new employee pension every minute and helping an independent business create a scheme every seven minutes.
This dramatic boost in numbers comes in the context that 2017 was always expected to be the biggest year for smaller employers in the auto enrolment calendar - with an estimated 800,000 businesses reaching their staging date, more than doubling the number in the previous 12 months. That figure rises to more than a million by April 2018.
We’re also supporting over 100,000 unique workplace pension-compliant pay slips a month, with almost half (48%) of its members paid weekly compared to 31% paid monthly with this number set to surge as the glut of new clients upload their employees onto the Smart Pension platform.
So is all this going in the right direction and doing what it needs to do? What the government will be looking at is:
- Coverage: is it bringing enough people from all age groups and from all income bands into the initiative to save for their retirement?
- Engagement: do enough people understand the underlying message that if they don’t save for their retirement, the state pension alone will not provide a comfortable living? Do they know for example, that their employer also pays into their own pot?
- Contributions: are people paying enough into their pensions for them to provide a comfortable living?
Experts suggest the current minimum age of 22 is fair and should remain in place, but opinion is moving towards making it possible for employees beyond the State Pension Age continue to make contributions.
The earnings trigger is £10,000. Most consider this is fair, although the net pay arrangement used by some providers at the moment means those earning more than £10,000, but below the personal allowance (£11,500 in 2017) will not benefit from tax credit on their contribution. We’d hope to see the review recommend that an arrangement with HMRC could mean a tax credit could be paid directly into member pots, avoiding the lower-paid losing out tax-wise.
We also expect to see some work to ensure those with multiple jobs that collectively add up to an income that does trigger pension eligibility. This has been found to disproportionately affect women.
In terms of engagement, the dry nature of pensions and distant return on investment has made meaningful engagement has been a challenge. The review is likely to recommend more communication around benefits such as employer contributions and how to grow a pension pot as well as allowing members to log into their accounts online.
Contributions are set to rise to a minimum of 8% by 2019 which is absolutely the right thing to do – in fact we support a move to 15% to ensure a comfortable income for employees on retirement. But there’s a delicate balance to be drawn between making pensions affordable and ensuring pension pots grow enough to adequately cover retirement.
That’s why we’re calling for the review to consider the role of the charge cap, which limits the fee added for early withdrawal of funds from a pension scheme. At the moment it is set at 0.75%, but there is some suggestion it should be reduced.
We want to see it remain the same, and for transaction and administration charges to employees come under that 0.75%. This would mean employees would get more for their money, maximising pension pots.
The review is set to conclude later this year.
If you are going through auto enrolment, workplace pension provider Smart Pension has published a helpful free ebook called Auto Enrolment – The Essential Guide for Small and Medium Businesses. Download it here.