Following the Government’s publication of the Auto-enrolment Review, Mercer has commented on the report. The consultancy says that elements of the proposed regime will result in those paid around the eligibility threshold having to make difficult decisions.
The eligibility threshold
According to Dr. Deborah Cooper, Partner at Mercer, “Applying auto-enrolment to all earnings means that a small pay rise for workers just below the £10,000 threshold could leave their take home pay considerably smaller than before. This could result in some of those workers opting out of pension saving.”
Mercer has calculated that if an employee’s pay increases from £9,900 to £10,100, then under the Review’s proposals their pension contributions will cause their take-home pay to fall from £9,692 to £9,363. This is equivalent to a 250% marginal tax rate. By comparison, under current rules, where contributions are only paid on earnings above £5,876, which is also the pay threshold at which national insurance contributions become due (the lower earnings limit, or LEL), the employee’s take-home pay only falls to £9,656.
“An alternative that would avoid such high marginal tax rates would be to reduce the eligibility threshold to the LEL (i.e. make the threshold for the contribution and for eligibility the same),” noted Dr. Cooper. “However, this would be more expensive for employers, because more people would be opted in, but it would increase coverage, partly meet the needs of those with multiple jobs, and not result in a perverse incentive to opt out. Employers could be allowed to phase in the change over a period, for example, three years”.
Enrolling younger workers and penalising opt-out inductions
“The review recommends auto-enrolling people from the age of 18 into the system,” continued Dr. Cooper. “This seems attractive, since younger people are less likely to opt out, but at a time of low wage growth, high house prices and student debt, retirement savings are often not a high priority for younger generations. As a society, we should recognise that retirement saving is not the best thing for everyone in every circumstance.”
Brian Henderson, Partner at Mercer, noted that; “Auto enrolment legislation gives the Pensions Regulator powers to fine employers if they "induce" employees to opt out of pension saving. This helps protect workers against unscrupulous employers who seek to discourage pension saving in order to reduce their costs. But a growing number of employers recognise that younger workers have savings priorities other than pensions and provide valuable alternatives including support to pay down debt, or access to more liquid forms of saving, like ISAs. They should be able to do this without fear of regulatory censure.”
Enrolling freelancers, workers with multiple low paid jobs and the self-employed
The Review doesn’t have concrete proposals to draw the self-employed and those with multiple low paid jobs into auto enrolment. To some extent, the proposals to start saving at 18 and save on all pay (up to the cap) should help these groups: only part of their working lifetimes will be spent without access to auto enrolment and getting those eligible to contribute more, or for longer, will make auto enrolment work harder for everyone. Mercer said that with the rise of the ‘gig economy’ ensuring that auto-enrolment applies to these groups should be a priority.
“The report pushes reviewing the level of contribution rates into the long grass. Employers who introduce auto escalation of workers’ contributions invariably see significant increases in savings rates over time However many employers are wary of introducing auto escalation features, partly because they fear it might breach employment contracts” said Deborah Cooper. “We think the Government should consider changes to employment laws to make auto escalation easier to introduce”.
Notes to Editors
Mercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 43 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.