For the gardeners and plant lovers amongst us, we can all remember growing our first plant. Getting a nice plant pot, setting the soil and paying attention to the plant over time as it tries to grow. My first plant grew well, but perhaps not as big as it could have been – perhaps I didn’t give it enough sunlight or perhaps I should have watered it more?

In September 2023 the Pensions (Extension of Automatic Enrolment) Act 2023 received royal assent, which gives the government the power to make a few notable changes to auto-enrolment:

• Reducing the entry age criteria for jobholders from 22 to 18; and
• Removing the lower earnings limit on contributions.

Whilst these changes may seem minor, they can have a significant impact on the size of a person's pension pot at retirement. For members that are impacted by both changes, our modelling¹ suggests a higher projected pension pot on retirement of 52% for an 18 year old today based on an average salary of £25k². For a 40 year old who is only impacted by the second change, our modelling suggests a higher projected pension pot on retirement of 8% based on an average salary of £40k³. These figures are estimates and are not guaranteed, and individual circumstances will change how much of an impact this may have on each individual, but the changes are a step in the right direction. Bringing us back to my gardening analogy, members who are auto-enrolled from a younger age will have more time invested in markets to get investment returns (sunlight), and all auto-enrolled members will have more contributions going into their pension pot with the removal of the lower earnings limited (water). These changes will collectively help their pension pots grow and bloom into better projected retirement outcomes.

With change comes additional challenges and opportunities for Employers, Trustees and Governance Committees. These changes won’t come into force for a while, as the Department of Work and Pensions will be conducting a consultation which will be open to the vast majority of UK employers to respond to. This gives time for Employers, Trustees and Governance Committees to consider both the proposed changes, but also if they can take further actions to drive even more positive impact on their members and employees. I have listed below three rhetorical questions that Employers, Trustees, and Governance Committees should consider ahead of these changes.

Employers:

• What are the associated costs of these changes? Both changes will likely have a cost impact for the majority of UK employers, which will vary depending on the employer, and these can largely be estimated at this stage. There will also be a cost for Impacted employees as they will be required to contribute more into their pension and this could be significant to those individuals who are struggling the most in a cost-of-living economic climate.
• Is your current auto-enrolment structure fair for all of your employees? With the upcoming changes to auto-enrolment, this may be an opportunity to make your auto-enrolment structure more equitable, such as considering whether you should use contractual enrolment to pick up employees outside of the enrolment definition (such as part-timers or under 18s)
• Can your auto-enrolment process be more effective? Processes for auto-enrolment were set up without any prior experience of how they would work in practice; as auto-enrolment systems will need to be updated for the change now is a good time to review the process to make it more efficient and streamlined.

Trustees / Governance Committees:

• What is the impact of additional younger employees being re-enrolled into your scheme? Trustees and Governance committees should liaise with the employer to determine whether the impending changes will introduce many newer, younger members into the scheme. For Trustee boards, administration costs could increase and for both Trustee boards and Governance Committees, additional members could provide a strain on administrator capacity. Enrolling a large number of younger employees may also amplify the issue of a large number of small pots in schemes and Trustee boards should consider how to address this. 
• How will your members fare with the removal of the lower earnings limit on contributions? Whilst the changes will have an impact on projected retirement outcomes, this will also come at a cost to members. Trustees and Governance committees should engage with members to communicate the benefits and monitor the level of opt-outs of the scheme as a result of the changes.
• Is now a great opportunity to review communication strategy? Auto-enrolled members are typically less engaged than their main scheme counterparts; is now a good opportunity to review communications strategy and consider ways to engage specifically with your auto-enrolled membership?

Whilst these changes will take time, it's a great opportunity for employers, trustees and governance comittees to review the impact of auto-enrolment and consider any changes that can overall have a positive impact on members and employees. I’d be happy to have a conversation on how we are supporting both trustee and corporate clients on these changes.

¹For modelling purposes, we have completed 5,000 projections based on our model of future market performance as of October 2023. All figures listed throughout are the median projection. Modelled members follow a typical lifestyle strategy, investing in 100% in global equities up to 10 years to retirement, transition to 100% diversified growth fund at 5 years to retirement and transitioning to an at-retirement allocation of 75% diversified growth fund and 25% cash. Members are assumed to retire at age 68.

²Assumptions for the 18 year old modelled include: starting salary of £25,000, no starting fund size, salary increase rate of 3% p.a. and a contribution rate of 8%.

³Assumptions for the 40 year old modelled include: starting salary of £50,000, starting fund size of £40,000, salary increase rate of 3% p.a. and a contribution rate of 8%.

Disclaimer

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.