The Government has a statutory obligation to carry out a review of the automatic enrolment workplace pensions legislation in 2017. With over 7 million people across the UK enrolled by nearly a third of a million employers since the regime roll-out in October 2012, automatic enrolment has been a great tale of success so far. By 2018, it is expected that nearly 10 million people will be saving for the first time or saving more, generating around £17 billion a year more in workplace pension saving by 2019/20.
Supported by an external advisory group including experts within the pensions industry and those representing the interests of both members and employers, the automatic enrolment review will be led by the Department for Work and Pensions. In broad terms, the objective of the review is to ensure that the reforms continue to meet the needs of savers as well as explore ways that the policy can be further developed to continue to encourage more people to save into a workplace pension for their future.
The review will conclude at the end of 2017 via a report to Parliament. Any implementation will most likely begin in the second half of 2018 but some changes could be enforced sooner.
The Pension Schemes Bill, although not part of the statutory review, will have an equally large impact on the auto enrolment market as it's main purpose is to improve the regulation of Master Trusts and will most likely result in some pensions being transferred to other providers.
What will the automatic enrolment review 2017 cover?
- Ensuring that the pension automatic enrolment regime continues to meet the needs of individual savers which will be the main focus of the review.
- A review of the existing coverage of the policy and taking into consideration those individuals who are currently excluded and that could benefit from auto enrolment, e.g. employees with multiple, part-time jobs who do not meet the criteria for automatic enrolment in any of their jobs, those who are self-employed and possibly those who work within the ever expanding, new 'gig economy'.
- An analysis of the technical operation of auto enrolment to ensure that it is functioning as intended and to see whether there are any certain groups or different categories of employers that are disadvantaged by the operation of the policy therefore requiring simplification.
- A review of the components that define the auto enrolment thresholds: the earnings trigger, which is currently £10,000 and the qualifying earnings band; which, for the year 2017/2018, is set at £5,876 for the lower limit and £45,000 for the higher limit, along with the age criteria at which eligible workers are automatically enrolled (currently age between 22 and the state pensions age). A yearly review of the earnings trigger and the qualifying earnings band is required as per section 14 of the Pensions Act 2014.
- An examination of the current charge cap. Not only will there be a review of the level of the charge cap but also a discussion as to whether some or all transaction costs should be covered by the cap.
- Finding evidence to support whether future contributions should rise beyond the 8% planned for 2019 in order for members to achieve an adequate level of savings for their retirement.
- A look into how to increase member engagement and their sense of ownership of their savings in order for them to better understand and maximise their retirement funds.
What is the charge cap for auto enrolment workplace pension schemes?
In April 2015, the Government introduced an annual charge cap of 0.75% (which covers all scheme administration and investment costs) as a means of improving value for money for members and applies to those who invest their contributions into an auto enrolment pension scheme's default investment fund option.
Why will there be a review of the pension charge cap?
Damian Green, the Secretary of State for Work and Pensions, confirmed that the current charge cap will form part of the wider 2017 statutory pension auto enrolment review. There will be an examination of the current charge cap which "will assess whether the level of the cap should be changed and whether some or all transactions costs should be covered by the cap".
What are auto enrolment transaction costs/fees?
Transaction costs are those that are charged to investors in order to recoup not only the cost buying and selling shares but also to cover the taxes that the Government levies on these transactions. Transactional fees are often seen by many as 'hidden fees' as providers are currently not required to report or disclose such costs to the investor, which can prove to be very difficult in obtaining a full breakdown of costs.
According to Damian Green, 'This government is committed to building a country which works for everyone, not just the privileged few, and now is the right time to consider who else – beyond the 10 million already set to benefit – could gain from automatic enrolment.'
View from Dan McLaughlin (@Dan2Mac)
Public Affairs and International at Smart Pension
"2017 is certainly a hectic year for auto enrolment that will hopefully lead to better outcomes for savers and employers. The sheer number of issues in-play does create a level of uncertainty and unease but as long as all the different choices add up to a strategically coherent narrative then auto enrolment should carry on its extraordinary successful path.
The automatic enrolment review 2017
As part of the 2017 review, the coverage theme will rightly get a fair chunk of the limelight. One of the big considerations is the £10,000 earnings trigger and I agree that we all need to think very carefully as to whether it should change and if so, which way. There are pros and cons to any level with arguments for an increase or decrease well-reasoned but, on balance I lean toward for it to be slightly more inclusive. With wage increases there is an additional flow of workers that become entitled but there are also those with multiple jobs who continue to miss out (from the auto opt-in anyway). We know that 70,000 people earn more than £10,000 when jobs are combined and, perhaps importantly, more than one of those jobs earns more than the lower qualifying earnings band.
A very high percentage of these people are women so a change to the earnings trigger should involve using an aggregate income to calculate whether a worker is at or above the earnings trigger. This would disproportionately support women to save for retirement suggesting they are currently disproportionately disadvantaged.
I think there is an overwhelming case to include the self-employed in auto enrolment and the momentum indicates this is likely to happen. Minister Harrington has suggested as much during the passage of the Pension Schemes Bill. Smart Pension is already on record with our evidence based view as to why self-employed people should be included in auto enrolment having contributed evidence to the Pension Schemes Bill and DWP Select Committee inquiry into the gig economy. It is well documented that self-employment is at record levels having reached 4.75m in the UK; one-third are women (an emerging theme anyone?); and, worryingly 1m intend to rely on the state pension in old age and make no private pension arrangements at all. Policy makers and the industry in equal measure have a responsibility to design out disadvantage – this change seems an excellent candidate.
Another biggie is the charge cap and as part of the whole review process the Government will be considering the level and scope of the cap particularly whether transaction costs should be included. We are of the firm belief that the charge cap should be frozen but with some changes that lead to better outcomes for savers. There is some discussion on the merits of a reduction to the charge cap but this will most certainly destabilise the auto enrolment industry as the costs and standards of running a scheme are set to increase following the introduction of the Pension Schemes Bill and as auto enrolment reaches a peak of employers. Any reduction will surely begin to erode the capital base of workplace pension providers, stifling innovation and hampering the ability to spend enough on the investment proposition and on good administration to meet and exceed regulatory standards.
Our proposal is a pretty straightforward one. Freeze the charge cap at a definitive 0.75 per cent but also include transaction and admin costs.
As currently designed, combination charges are permitted but they are confusing, making it difficult for savers to make comparisons. They also have the potential to front load charges onto hard-working people in the shorter term, and possibly less secure, contracts. DWP made a similar observation that for those who save for a short period of time, combination structures can result in higher charges than would have resulted under a single charge structure. Additionally, in the case of small deferred pots, combination charges can not only dramatically eat away any growth, the costs imposed by some providers can actually swallow some or all of the lump sum itself. For example, based on a deferred pot size of £500, with inflation at 2 per cent and growth set at FCA-recommended 5 per cent, under some schemes, the percentage of growth eaten by fees can be as high as 105 per cent.
So, I'd raise a glass for the charge cap to be a straight forward single percentage that remains at 0.75% but also includes all the additional administrative charges and transaction costs so savers can easily understand the true cost of their workplace pension provider.
This proposal is in step with a push for greater clarity and transparency of fees and costs and is in-line with the principles of fairness and transparency required by the FCA.
Smart Pension, has always explicitly stayed within the charge cap of 0.75% and compares very well having never charged any extra admin fees to savers or extra costs to employers. Our fees are fully transparent. If the DWP is seriously thinking about amending the charge cap, then it must be in the spirit of the FCA's interim report on its asset management market study which Minister Harrington promised Parliament he would implement. This alluded to improvements including an 'all-in-one' fee.
Pension Schemes Bill
Alongside the review is the Pension Schemes Bill which we warmly welcome. The Bill will lead to increase standards across the industry through the master trust authorisation route. We have campaigned that the Master Trust Assurance accreditation framework should be used as a basis or in full for the authorisation process. It was great news when The Pensions Regulator supported this view encouraging schemes that are going to apply for authorisation in 2018 to obtain master trust assurance. It is also great news that in the Spring 2017 Budget papers, HMRC are amending the tax registration process for master trust pension schemes to align with The Pensions Regulator's new authorisation and supervision regime.
This is an important step to reduce the additional supply of potentially low quality master trusts and will help boost consumer protection and improve compliance.
As a rapidly growing player in the auto enrolment market, we will be playing an active part in the review and look forward to working with a wide range of stakeholders to get the best outcomes for savers and employers."