AE for millennials: Government scraps pensions age limit

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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.

Speaking to AccountingWEB, 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.

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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18th Dec 2017 15:04

Personally, I'm concerned that the low earners will suddenly find themselves hammered by deductions, at a time when interest rates and rent are increasing. Given that there is no mechanism to opt out in advance, that one month could prove to be a serious problem.

And if I'm honest, I'll probably opt out myself by then.

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to SteLacca
18th Dec 2017 15:43

Hear hear. For many people, the auto enrolment deductions will be a big hit. The prospect of "escalating" contributions is an appalling prospect. For myself I don't care much. I'm in my mid 50s and opted out out of my current workplace pension.
It's my children and their generation who are going to suffer because of all this Auto enrolment nonsense. They have no chance of ever getting on the property ladder because they won't have any money to save after it's been taken from their salaries by the AE pension providers.
By the time they're in their 60s or 70s they won't be able to retire because the pension funds won't be big enough for them. Better to save while they're working and scrub the auto enrolment nonsense.

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to SteLacca
18th Dec 2017 16:36

Really interesting point, SteLacca. Agree with you re: not sure how viable an 8% deduction is for a low wage earner. Also, can small businesses afford the employer deduction? I have my doubts.

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19th Dec 2017 10:36

It is the admin rather than the cost of AE that is the problem. The best reform would be to scrap the opting out nonsense. If contributions were a mandatory 8% from day 1 of employment for everybody with no opt outs possible then that would simplify the admin massively.

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to jon_griffey
19th Dec 2017 10:52

Sorry Jon but I totally disagree. It might simplify admin but it will be a sucker punch each week/month for employees and will be absolutely worthless once they come to retire.
Anyone with any sense would demand that their wages would have to increase to compensate them for the loss of their net take home pay, driving up inflation etc etc.

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to Peter Cane
19th Dec 2017 11:14

That's a fair point. I suppose the way to deal with it is to make the employer pick up the whole 8%.

The trouble with the whole pension thing is that the people who really need to be building up a pension are those least able to afford to and most likely to opt out, i.e. low earners.

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to jon_griffey
19th Dec 2017 11:26

True. Sadly I think many employers might see it as a further burden, given they're already deducting 13.8% of employees' pay in order to fund their state pensions (at least was the original idea!)

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to jon_griffey
20th Dec 2017 11:57

When the social costs of employment rise too high the level of employment drops, see France as an eg

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to jon_griffey
19th Dec 2017 11:43

Hi Jon, thanks for the comment.

The problem is that it would be politically disasterous if they did this. It would turn AE into a tax hike for young and low earners.

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19th Dec 2017 16:10

I fail to see why paying peanuts into a rubbish pension scheme with high charges really helps the employee.

If you have low wages member of staff cutting into minimum wage doesn't sound very bright to me, and compulsion forcefully widens again the gap between employment vs self employment and puts pressure on people to come out of employment structures.

If its NIC's+pension thats a very big gap indeed.

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20th Dec 2017 11:31

Well, so far, none of my clients have any "opted in" staff at all. Not a single one. The clients have set up the systems, paid the set-up fees, issued the statutory letters to staff etc., but not a single employee wants to participate.

Maybe it's because all my clients are small firms with just a handful of staff? I'd have thought there'd have been some interested - I never expected too many, but for none at all has really surprised me.

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20th Dec 2017 11:32

I have a real difficulty in understanding what's going on here.
We already have an autoenrolement pension scheme paid for by workers and employers - its rolled up into National Insurance.
If HMG are saying that the DWP Pension Ponzi schema is no longer robust then they should be transferring the proportion of the NI they collect to the private sector [possibly also adjusting the rates marginally] OR removing the Pension element from the NI collected and 'adding' to this new imposition.
The whole thing is a dogs breakfast of addled thinking.
Looking at the 'private' pensons industry as a whole, and given the outlook in the next decade(s) for interest rates etc., looks like moving our funds from a HMG scam to a private industry scam overall.

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to dgilmour51
20th Dec 2017 11:54

The problem with that is that any Government scrapping the state pension will be ripped to shreds, no matter how well they do it, so that's just not under consideration. They have to do something as the state pension is not enough any more, but imposing enrolment on everyone would be no different to increasing NI rates, which is another political no-no.

The stepped contributions idea is necessary as no lower-paid employee would afford 5% taken off them in one go, they'd all opt out, which spoils the point of AE. Even 8% overall is not going to get those employees much of a pension when they retire, and I worry that I'll fall into that bracket Steve Webb mentioned who won't be able to afford to retire as the state pension gets squeezed and retirement ages go up.

I'm surprised that Ken has nobody with employees staying in an AE scheme - when you say 'opt in', do you mean every employee that was AE'd has opted out? That's far from my experience in a payroll bureau.

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20th Dec 2017 11:38

The government have no idea of the admin this scheme is causing small firms or couldn't care less. I have a number of clients who have had to go through the whole laborious process only for the few eligible staff to opt out. I had one client who went through the process and on this occasion the employee wanted to stay in. Total monthly contributions 26p! Two months later she left. I kid not. The clients bookkeeper spent days on this.

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By kjevans
to martinhayward
20th Dec 2017 12:15

I had one employee on a fixed term zero hours contract, so had to set up scheme and ended up paying one month's contributions in all before end of contract - took a lot more than days to do and was very stressful as the scheme didn't want to deduct correctly from someone on a zero hours who was down as being paid intermittently even though the total earning for the year made employee eligible. Fees and time and phone calls made this very expensive. I'd rather have paid £40 into t a savings account for the employee.

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20th Dec 2017 11:39

My view is that if this is going to fuel wage increases then the consumer will suffer as they will have to pay for Billy to buy their pension. No one has bought my pension .... so why am I having to buy someone else's????? Why am I paying twice

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20th Dec 2017 11:41

In New zealand that have calculated that 17% has to be contributed for a worthwhile pension. The current rates wont work and running AE is expensive as mentioned by Jon earlier because of all the rules.

As a country we dont have a choice because if contributions are not made we will have a lot of very poor pensioners who will hope that the state will pick up the slack. Realistically the State Pension should be £12000 per annum. Its not because the state cant afford it so something has to give.

AE should be compulsory and the only opt outs should be for those with a fund of £1m. Self-employed should also have to pay and their rate should be the equiv of employer + employee.

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20th Dec 2017 13:00

Stopped paying money into pensions when Gordon Brown started taking money out. Worked out well so far.
It should not be beyond the powers that be to reorganise the State Pension to produce a "liveable" income - maybe with a mix of personal top-ups. Admittedly not easy because, as said above, the existing State arrangement is essentially a ponzi scheme. At some stage, some politician is going to have to admit that the existing State scheme will not work any longer - I suspect that's why someone thought up the auto enrolment fiasco - first step towards eventually saying there will be no more State pensions? .

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By kay33
22nd Dec 2017 11:43

So, if we enforce these pension obligations, which are unaffordable without massive tax increases or massive cuts to state and local services (or both), virtually everyone who can afford to move to jurisdictions without such obligations, will do so. They’ll sell their property (and if they can’t sell it, they’ll donate it charity), even at something of a loss, and cut all their ties to the high tax states.

That’s all perfectly legal and perfectly reasonable on the individual level.

But, what then? If the 10,000 or so largest taxpayers leave the state, it will devastate income tax collections and, as property values collapse and as people don’t have the income to pay property taxes, states will lack the money to pay these pensions.

They won’t be able to raise taxes much at that point, and they can’t do a damned thing about people leaving the state. Pay the pensioners in scrip? The states can’t issue their own money, but they have issued ious in the past.

My writerssense is that the states ought to give the pensioners a choice now: 1) switch to 401(k) and defined contribution plans NOW, 2) accept substantially reduced benefits, or 3) get paid in scrip, which may or not be accepted by anyone outside of government, and which may or may not trade at a discount.

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27th Dec 2017 12:18

The comment has been made that the contributions are unaffordable but so is the tax deducted from income if you speak to the self-employed.

As a country we cant afford to ignore the large number of people who wont have sufficient to provide a worthwhile income. I dont know any other fix than to get employees to contribute alongside employers.

If it is paid for out of taxation then somethingelse would have to give. NHS contributions? - as much as I like the idea of a modest contribution to stop abuse this is political suicide.

I look forward to seeing others ideas for raising funds for pensions.

If you want to look for blame look at politicians and civil servants who in the past decided that state pensions and public service pensions should be paid for out of future income. Not only does this not fit with more retired people iving longer but the benefits offered were excessive. We have to do something but what.

With regard to the state pension the retuirement age has to be moved to a point when it can be a decent

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