‘Real test still to come' for pensions auto-enrolment
27 January 2016
The Public Accounts committee finds the Department for Work & Pensions has successfully implemented auto-enrolment for larger employers, but "the real test is still to come" as smaller employers enrol staff between 2016 and 2018.
- Report: Automatic enrolment to workplace pensions
- Report: Automatic enrolment to workplace pensions (PDF 160KB)
- Inquiry: Automatic enrolment to workplace pensions
- Public Accounts Committee
The Committee is concerned the Pensions Regulator cannot yet access real-time information that would aid this roll-out, and highlights the "potential burden" on smaller employers.
"Simplifying the process will be critical"
The Report says: "Smaller employers have fewer resources to administer automatic enrolment and simplifying the process will be critical to the success of the programme."
The Committee finds the Department has still to resolve important questions affecting the value of workplace pensions and that "there is a risk that people will be disappointed with their pension if they continue to pay minimum contribution rates".
It is also concerned the National Employment Savings Trust (NEST) does not know when it will repay the loan used for its establishment—standing at £387 million at 31 March 2015—or how much this will eventually cost the taxpayer.
The Report calls on the Department to write to the Committee in 12 months, updating it on progress both in implementing auto-enrolment and against the Committee's recommendations set out below.
Meg Hillier MP, Chair of the PAC, said today:
"Auto-enrolment is entering a critical stage which will affect 1.8 million additional employers and their staff. It is vital people can understand, implement and have faith in the system.
The Department for Work & Pensions must watch and learn from the experience of small employers and ensure easy-to-use tools are in place to support them. At the same time, swift action is required to ensure the Pensions Regulator can access accurate information.
There must be greater clarity on outcomes for employees—for example, those with multiple small pension pots—and also over the substantial loan, funded by the taxpayer, which was used to set up NEST.
Auto-enrolment is a huge undertaking with implications for millions of taxpayers but our Committee does not believe its success or failure can be properly evaluated in isolation.
The Department will in time conduct its own review of the programme and we would stress it is crucial this fully considers the impact of wider reforms that could affect people's income in retirement.
We will be following the Department's progress closely over the next 12 months and will expect it to respond effectively to the recommendations detailed in our Report as the roll-out proceeds."
Automatic enrolment aims to reverse the long-term decline in the number of people saving into a workplace pension. Employers will have to enrol workers into a workplace pension scheme if they are working in the UK, earn more than £10,000 per year, are over 22 years old and are under State Pension Age.
5.4 million people in new pension
Workers can choose to opt out, but automatic enrolment builds on evidence of inertia in people's savings decisions to encourage more people to save for retirement. By the end of August 2015, 58,000 employers had enrolled 5.4 million people into a new workplace pension. Opt out rates have been between 8% and 14%; significantly below the Department's expectations.
From January 2016 automatic enrolment will be extended to 1.8 million small employers. Minimum contribution rates are set to rise from 2% of qualifying earnings (currently) to 5% from April 2018, and then to 8% from April 2019.
The Department for Work & Pensions designs the policy and manages the programme, The Pensions Regulator provides guidance to employers and ensures compliance with automatic enrolment rules, and NEST runs a pension scheme available to all employers, as do several other providers.
Since the introduction of automatic enrolment in October 2012, almost all larger employers have enrolled their workers in a workplace pension, thereby increasing the number of people saving for retirement. Employer compliance has been high and the proportion of people choosing to opt out from automatic enrolment has been lower than expected.
The Department for Work & Pensions, The Pensions Regulator and the National Employment Savings Trust and other pension providers are now facing the more difficult task of supporting 1.8 million small employers through automatic enrolment.
Monitor the experiences of small businesses
They will need to monitor the experiences of small businesses—including 900,000 employers with only 1 or 2 employees—and minimise administrative burdens, while also ensuring that increased enrolment translates into adequate incomes in retirement.
We will be returning to this subject, which is of vital importance to both employees themselves and to future governments as they plan for pensions, and we have asked the Department to update us on progress over the next 12 months.