More low paid part-time workers now eligible for enrolment…
In April 2014, an employee paid the minimum wage would have to work a little over 30 hours per week to be automatically enrolled into a workplace pension (rather than just having the right to opt in) [1]. From April 2024, under 17 hours will suffice. In that time, the main minimum wage rate will have increased from £6.31/hour to £11.44[2]. Meanwhile, keeping the automatic enrolment earnings trigger at £192/week (£10,000 a year) means it has fallen in real terms.
Some of the workers brought into scope are being nudged to put money aside for a time when their income should be higher than it is now: the earnings trigger will be 13% below the full New State Pension (NSP) in 2024/25, having been 23% above it when the NSP was introduced in 2016/17. If the earnings trigger remains frozen while the NSP is triple-locked, this gap will widen. State Pension levels were not discussed in the policy paper that explained the Government’s decision to freeze all automatic enrolment earnings thresholds in 2024/25[3]. Although Parliament included State Pension levels in the suggested list of factors that the Secretary of State “may consider”[4], he is not required to do so.
This jars with the classic case for pension saving – that it smooths spending power over a lifetime that includes years in work and years in retirement – but is not quite as crazy as it sounds. For example, low-paid, part-time workers may:
Ministers will also be sensitive to objections that most workers who would be excluded by a higher trigger are women (71%, if the earnings trigger were around one quarter higher, according to DWP).
Continuing to allow inflation to bring more low-paid workers within the scope of automatic enrolment may strengthen calls for it to include an “emergency savings” component, especially when a recent study pointed to a correlation between pension contributions newly due under automatic enrolment and borrowing[6]. The effect on take-home pay will also increase (by almost £5/week, for people paying minimum contributions and not affected by Universal Credit) if the Government implements its “ambition” of making everyone’s earnings pensionable from the first pound.
For now, though, the lower qualifying earnings threshold remains frozen, at £120/week (£6,240 per year). So does the upper threshold, at £967 (£50,270).
Freezing both thresholds while earnings grow makes statutory minimum contributions (8% of qualifying earnings, including at least 3% from the employer) a slightly higher percentage of total earnings for low earners and a lower percentage for high earners. Precisely how big a change this will be depends on how much higher median earnings are in April 2024 compared with a year earlier; the chart shows what the effect would be if they grow by 5% over the year[7].
Until recently, 8% of qualifying earnings was always a bigger fraction of 1.5 times median earnings than of median earnings, and a bigger fraction of twice median earnings than of half median earnings. 2024/25 should see gaps open up in the opposite direction.
The upper limit of the qualifying earnings band is currently aligned with the National Insurance Upper Earnings Limit and the threshold at which people in England, Wales and Northern Ireland start to pay the 40% rate of income tax. The Government’s review document says that this threshold “aims to distinguish the automatic enrolment target group of low to moderate earners and the statutory minimum contributions from earners in a higher tax band…[who]… might reasonably be expected to have access to a pension scheme that offers more than the minimum and are more likely to make personal arrangements for additional saving.” Freezing the higher rate tax threshold at its 2021/22 level, which is thought to have sucked an extra 2.2 million people into higher rate tax by 2024/25, seems not to have affected that assessment. While the requirement to hold a discrete review each year makes it hard to signpost future intentions, there is no sign that the Government would take a different view if, as the Office for Budget Responsibility projects, the number of extra higher rate taxpayers created by the freeze hits 3 million in 2028/29[8].
Large employers typically do not calculate pension contributions based on qualifying earnings: only 6% of employers in WTW’s 2022 DC Pensions and Savings Survey did so. For higher rate taxpayers, this decision could become increasingly valuable if current policy on the upper threshold continues.
