All employers in the UK will be affected by the newly legislated pension bill, lowering the minimum age for employee enrolment to 18 and reducing the qualifying earnings threshold for employer contributions, helping employees save more into their pension from a younger age.

A Private Members’ Bill to help millions save more into their pension and start saving sooner has cleared Parliament and been granted Royal Assent. Royal Assent means the legislation within the bill will come into effect, although we don’t at this stage know when.

You will be familiar with Automatic Enrolment, the landmark pensions policy which sees eligible employees made members of their workplace pension scheme without needing to ask. The new Bill, introduced in the House of Commons by Jonathan Gullis MP and taken through the House of Lords by Baroness Altmann, creates powers to scrap the lower earnings limit and reduce the age when Automatic Enrolment is required.

This will affect all businesses in the UK, most notably as follows:

• The minimum age for future automatic enrolment will reduce to 18. It is currently age 22.

Many employers and employees will need to increase the amount they pay into their pension because:

• The minimum pension contributions will need to be calculated from the first pound earned. Many employers calculate pension contributions when earnings reach £6,240 and not below. This is known as Qualifying Earnings.

This will particularly benefit younger workers and those in lower paid employment. For many people they will benefit from an employer contribution from the first pound earned and from an earlier age, which will make a big difference to their eventual pension.

For example, take someone earning £23,000 per annum:

• Paying 8% on the qualifying earnings pension definition = £1,340 p.a.
• Paying 8% on their whole salary = £1,840p.a. an increase of £500 per year or 37%!

In a report published in June 2021, The Association of British Insurers (ABI) called on the government to lower the enrolment age to 18, to make it a requirement for payments to be calculated on the first pound earned and to increase minimum auto-enrolment contributions to 12% by 2031 - this being a mixture of 6% from employees and 6% from employers. Read more here.

Two out of the three recommendations have now been agreed and realistically we would expect some form of increase to pension contributions to be legislated far before 2031. Whilst we don’t know when the new rules will come into effect yet, it may be a good time for employers who will be affected to review their arrangements and consider if there is any benefit in introducing the changes sooner.

Could you gain favour with employees by implementing this before you are forced to?

If you would like to review your pension strategy and benchmark your current arrangements, contact us. We can help you prepare to meet the new rules and to design a contribution structure that will help your business. Also, if you do not currently offer pension salary exchange or sacrifice, this may be something to help offset some of the extra costs, as well as increase the take home pay of your staff.