The proposal is to reduce the minimum age for employees to be automatically enrolled into their workplace scheme from 22 to age 18. In addition to this, the lower earnings limit (£6,240 per annum in tax year 2023/24) is to be abolished. The roll out of changes is anticipated to happen in April 2025, although that’s yet to be confirmed.
As someone who spends my days advising businesses on their company pension plans among other things, this felt like big news.
My clients however, have many more urgent priorities to deal with today, tomorrow or next week so it is understandable that, whilst this change will have a direct impact on many employers and employees across the country, there has been a muted response to the announcement so far. Part of my role is to draw attention to changes that require medium to long term planning and action well ahead of time to avoid unwelcome surprises.
Why should employers care now?
The degree to which a business should be worried about this will depend on the pension scheme contribution structure that is already in place, and also on the employee demographic profile with the biggest impact likely on those with younger workforces, in sectors such as hospitality or retail. For most employers starting the thought process of how to deal with the change and budget for the additional costs should begin as soon as possible.
How can employers mitigate increased Auto Enrolment cost?
An area of advice where we have been particularly busy lately is helping employers to communicate and implement salary exchange (aka salary sacrifice) to their pension scheme. Employers who do not currently utilise salary exchange could find that this will have the effect of offsetting the increase in costs that the new auto enrolment rules will produce.
A client that I am currently working with (who I’ve kept anonymous) illustrates this point perfectly.
Company X operates in the tech industry with 175 employees and an average salary of £60,000 per year.
The definition of pensionable pay adopted by Company X means that they will be impacted by the new auto enrolment rules which will result in an increase in employer pension contributions of approximately £32,750 per year.
Company X does not currently use salary exchange but if it did this could produce a saving of up to £61,650.00 per year in employer National Insurance Contributions. Almost double the additional pension cost.
Resetting the employee proposition
At a strategic level, this is an opportunity to reconsider the whole approach businesses take toward employee benefits and how they can assist with recruitment and retention of staff. In the post-pandemic world with a lot of employee movement dubbed “The Great Resignation”, business now seems to be returning to a more stable pattern with factors like the cost-of-living crisis and the battle to get employees back to the office reducing staff turnover.
Employers are not just looking at salary and a flexible working location to enhance their employee proposition. Increasingly, they’re turning towards making their employees’ benefit package as compelling as possible.
If pensions are not going to shift the dial for younger and lower paid workers, what would? How can they help them make better financial decisions and supplement services that add value to them?
They are the types of questions that the Workplace team at Wren Sterling helps our clients to answer every day.
Focus on education
Returning to auto enrolment, education is more important than ever.
What does a newly enrolled eighteen-year-old know about pensions? In my experience, very little. However, a new item will soon appear on their payslips showing money being deducted to be invested into something which they can’t access for forty years.
Ensuring that young people understand why this is happening, and engage with and understand, their pension scheme is essential at this point. Without clear communication, employers are likely to see newly enrolled employees opt out of the scheme, which will make retirement harder in future. There’s a lot of time for growth for an eighteen year old making their first pension contributions, which could lighten the load later in life.
As well as pension education, the forthcoming legislation provides an opportunity to relaunch financial education on all sorts of other topics including; budgeting, personal insurance and applying for a mortgage, all of which might be beneficial for younger workers in particular.
Does your business need a helping hand?
If your business would like support on any of the topics touched on here, please get in touch with your financial planner, or send us an enquiry at wrensterling.com/contact-us-workplace