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Auto enrolment will be extended to every worker over the age of 18, from the “first pound of earnings” by the mid-2020s.
The government laid out its ambition to scrap the scheme’s £10,000 lower earnings limit and reduce the minimum age to 18. The move will bring in an extra £3.8bn in contributions, according to ministers.
The extension of AE’s scope to include younger savers and all of a worker’s salary has been well-received in some quarters, but there’s been some conjecture as to why these reforms will be trotted out at such a glacial pace.
Ex-pensions minister Steve Webb said that Brexit and a minority government has limited parliament’s capacity to legislate. “The government doesn’t have a majority, so they’ll be wary of anything that might look controversial, that might look like them putting people’s taxes up.”
Webb is positive about the proposed changes, but he lamented the vague mid-2020s implementation goal. The DWP said this long run-up is to give the industry time to prepare, but Webb argued the government’s inertia does nothing to help what he called “the lost generation”.
“You’ve got a bunch of people in their 50s who never had a final salary pension,” said Webb. “They joined the company after that was gone. They’ve only started saving recently. If we do nothing until the mid 2020s, it’s too late for this group. They simply won’t be able to retire.”
Minimum contribution amounts are increasing, however. On April 6, 2018, the current minimum will climb from 2% to 5%. It’ll jump again exactly one year later, rising to 8%. Again, Webb welcomes this, but is dubious that it goes far enough.
“It’s the fact that AE will get to 2019, the law will require 8% of salary to go into a pension and then everything stops. There’s no further progression after that,” he said. Instead, he favours “automatic escalation”.
In the US, various schemes automatically increase your contribution as your salary increases. “It gently steps up when you can afford it,” Webb said. “That’s what we need.” This comes with the choice to opt out, of course, but Webb points out that the opt-out rates with AE have been very low.
It’s a point that current pensions minister David Gauke reiterated on the BBC’s Andrew Marr Show. Gauke admitted increasing AE contributions might “put people off”, but noted that “the evidence is that opt-out rates have been lower than people predicted”.
"This government has rebuilt the UK's savings culture," he said. "For an entire generation of people, workplace pension saving is the new normal, and my mission now is to make sure the next generation of younger workers have the same opportunity.