Major changes introduced to widen the age and earnings scope of automatic enrolment
The UK Parliament has passed a significant piece of legislation that will result in a wider pool of employees being eligible for automatic enrolment into their workplace pension schemes.
Following its introduction as a Private Member’s Bill, the Pensions (Extension of Automatic Enrolment) Act 2023 (the Act) was passed on 18 September and provides for:
- the abolition of the Lower Earnings Limit (LEL) threshold as it applies to automatic enrolment; and
- the reduction of the eligibility age for being automatically enrolled into a qualifying workplace pension scheme.
Since its original inception in October 2012, the purpose of automatic enrolment has been to help workers save towards their retirement and oblige employers to enrol all of their employees (who satisfy certain criteria) into a qualifying workplace pension scheme, with the employer paying a minimum contribution of 3% towards a total minimum percentage of an employee’s ‘qualifying earnings’. The auto enrolment landscape has been the subject of much discussion, as many have found the criteria underlining its operation unsatisfactory in terms of the easements and exemptions available.
The changes brought in by the Act have been the result of ongoing consultations and discussions on measures proposed in the Government’s Automatic Enrolment Review 2017. Their introduction has been long-awaited: however, what do these changes mean in practice?
Removal of the LEL
The Act provides for the reduction in the LEL (currently standing at £6,240: pension contributions are calculated based on earnings above this amount but below the Upper Earnings Limit of £50,270), with the intention being that regulations will require contributions to instead be calculated from the first pound earned. This change will undoubtedly boost the pension savings potential of those who are in lower-paying jobs, or who currently work multiple jobs.
Reducing the eligibility age for being automatically enrolled
Secondly, the reduction in the age eligibility criteria from age 22 to 18 will bring into scope a significant proportion of the population. While this change may seem small, it will give those who are younger the chance to start contributing towards their pension pots earlier and to benefit from their employer’s contributions under automatic enrolment. Currently those workers over 16 and who earn over £10,000 are categorised as ‘non-eligible’ jobholders, who have a right to opt in and, only if they do so, to benefit from an employer contribution.
It is unlikely that we will see any immediate changes following the enactment of the Act: however, it does provide the Secretary of State with the requisite powers to carry out these extensions. To allow employers and employees some time to adjust to increased contribution obligations, we are likely to see a phased implementation of around 2 to 3 years. We will provide updates as and when they are published.
The introduction of this Act has provided a clear insight into the shifting landscape for pension saving and for the future of UK pension provision. It is key that employers and employees alike must take note of these changes and prepare for the implementation of these extensions – including, from an employer’s perspective, budgeting for the likely increased staffing costs and reviewing any existing contracts. As such, if you believe you could benefit from expert advice relating to these changes, please do not hesitate to get in touch with our Pensions team.
This article was co-written by Christi Hannah, Trainee Solicitor.
