How to prepare for more inclusive auto-enrolment in the future

Employers still have a part to play if auto-enrolment is to reach more employees.

Auto-enrolment (AE) has been a huge success in getting the employed saving for later life, but the level and breadth of saving is not enough.

There is so much more to be done to make AE more inclusive too.

Hymans Robertson’s analysis shows that only 1 in 3 defined contribution (DC) pension scheme members are expected to reach the “moderate” retirement living standard, with the adequacy gap remaining a major issue.

There’s also a gender pension gap to be closed; men currently expect more than 25% higher pensions than women.

As AE evolves, how can employers prepare for changes that will address these issues and improve retirement outcomes for all employees?

What changes are currently expected?

On 19 September 2023, the Pensions (Extension of Automatic Enrolment) Act 2023 gave the Secretary of State the power to:

Lower the age limit for auto-enrolment from 22 to 18. This will bring younger workers into the system earlier.
Remove the lower earnings limit for qualifying earnings. This will ensure contributions are made from the first pound of earnings. Not calculating pension contributions from the first £1 of income currently has a disproportionate impact on the savings of lower paid individuals.

While these changes were expected within two to three years of the Act’s passage, no confirmed timeline has been provided.

The government has also delayed phase two of the pensions review, which was expected to look at additional reforms.

This includes reviewing the minimum level of savings that employees and employers should save to tackle pensions adequacy concerns.

This has left many employers uncertain about future changes to AE and possible timelines for change.

How can employers prepare for changes?

To prepare for reforms which may make AE more inclusive, employers should focus on three key areas:

Adequacy
Accessibility
Affordability

1. Adequacy: ensuring sufficient contributions for all employees

The adequacy of retirement savings is a growing concern and one that is likely to be considered as part of any review of AE by the government.

How employers can improve adequacy:

Review saving levels. The current minimum contribution of 8% is likely to be insufficient for many. Employers should consider how increased saving rates beyond current AE minimums could support better income in retirement. This could be through reviewing the default contribution employer and employee rates, or more generally encouraging staff to save more.
Provide financial guidance. Offering educational resources, workshops, or one-on-one financial advice can help employees make informed decisions about how much they should save.

2. Accessibility: expanding access to pensions for all employees

Upcoming changes to AE will likely bring younger workers and those earning below the current qualifying earnings threshold into the system. Employers must ensure that pensions are accessible to all employees.

How employers can improve accessibility:

Remove barriers to entry to encourage saving amongst all staff. Reviewing eligibility criteria for being a member of the pension scheme may identify that some staff are not automatically included at present, for example due to current earnings/age.
Review scheme design for unintended barriers. Other barriers in your scheme design or pension offering may prevent employees from saving. Consider doing an analysis to understand who isn’t saving and why. For example, do you offer a range of investment choices that suit the beliefs of all your members, or should you consider extending the range?
Keep it flexible. Flexibility is key when considering the different needs of employees. Employers should assess how they can offer employees more control over their contributions. For example, allowing staff to save into more flexible vehicles (akin to a “side car” easy access savings pot) to enhance shorter-term financial security may support employees to not opt out of saving all together and miss out on valuable employer contributions.

3. Affordability: ensuring pension contributions are financially sustainable

While higher contribution rates will likely be necessary, employers must ensure that pension schemes remain affordable for both employees and the business.

How employers can consider affordability:

Gradual increases and matching contributions. To ease the burden, employers can gradually increase employee contributions over time or consider aligning with key dates, for example at the same time as a pay rise. This can encourage higher savings without overwhelming employees.
Review the impact on lower-paid workers. For employees on lower wages, pension contributions should remain affordable. Employers can consider subsidising contributions during maternity or paternity leave or offering employee pension holidays in times of financial need.
Use tax-efficient structures. Employers can explore salary sacrifice schemes or other tax-efficient options to help employees save more without impacting their take-home pay.

Summary

As AE evolves, employers must be proactive in preparing for changes that will make pensions more inclusive and improve the adequacy of retirement savings.

By focusing on adequacy, accessibility, and affordability, employers can ensure their pension schemes are more future-proofed for possible reforms.

This will also foster a more inclusive and financially secure workplace for all.