Auto-enrolment: on a roll

The requirement to automatically enrol employees in a pension scheme in the UK was brought in from October 2012. Since then, over ten million workers (and counting) have been enrolled into pension saving in the UK, with the legislation widely viewed as a success. 

As auto-enrolment approaches its ten-year anniversary, I look at the current state of play, potential changes on the horizon and common issues that still crop up.

Keep on rolling

The Government recently confirmed that for 2022/23 it would hold the earnings threshold (above which certain people must be auto-enrolled) steady at £10,000. It also confirmed that the starting threshold (or “lower earnings limit”) at which employers need to start paying auto-enrolment contributions on earnings would remain unchanged for 2022/23 at earnings above £6,240. 

This would appear to kick the can down the road on the Government’s stated 2017 policy aim of removing the lower earnings limit in the “mid-2020s”. The original intention being to roll out pension saving to lower earners, who are most likely to miss out on pension saving for retirement. 

One does not need to look very far (Brexit, COVID-19, inflationary pressures, etc.) to see why the Government is not in a greater hurry to achieve this aim for now. A careful balance clearly needs to be struck on affordability to make auto-enrolment a continued success. This seemingly makes radical expansion of auto-enrolment less likely in the short to medium term – even if the overall trend is more enrolment, not less.

At the other end of the spectrum…

Stepping away from the key area of policy focus, a theme we are increasingly seeing is that auto-enrolment is having unintended consequences elsewhere due to its interaction with the tax regime.

In recent years, successive Chancellors have sought to rein in the generous tax reliefs available through pension saving. For the very highest earners, this has resulted in a gradual tapering down of the “annual allowance” - the amount that can be saved into a pension scheme each tax year without tax charges - from £40,000 to £4,000. In addition, the total pension most can now accrue in their lifetime without incurring a tax charge has steadily reduced in real terms (and is currently frozen at £1,073,100 until 2026). 

As these changes have reduced the attractiveness of pension saving for a (fortunate) minority, employers are increasingly having to consider how to structure competitive benefit offerings while still complying with the law. This often means that employers who offer alternatives to pension (such as cash in lieu) need to phrase employment contracts carefully so as not to breach the prohibition on encouraging members to opt out, while still being prepared to auto-enrol where necessary.

Another alternative for such employers is to look to available exemptions for auto-enrolment. While members who have lifetime allowance protections in place can be exempted, no exemption is currently available for members affected by annual allowance issues or for those near or over their lifetime allowance, but without those tax protections. 

The lack of an annual allowance exemption perhaps makes sense given current auto-enrolment minimum contributions are still under £4,000 (even for the highest earners), but this point could rise up the agenda if auto-enrolment is made more generous in future. In any case, however, members affected by annual allowance issues can unwind their initial accrual by opting out within a statutory deadline (even if all involved would rather do without the hassle!).

Other common exemptions to auto-enrolment which are sometimes overlooked include where an employee also holds a director role with the employer or where the employee has already opted out in the previous 12 months. 

Cross-border conundrums

Curiously, there is also still an exemption in the legislation relating to cross-border workers. Although the cross-border pension scheme regime fell away post-Brexit, this exemption has remained ‘untouched’ in the auto-enrolment legislation since then. The Pensions Regulator recently commented on this in updated guidance saying that in its view, this exemption no longer applies. Although the Regulator’s statement is not law, there is perhaps more risk for employers who continue to rely on that exemption and the literal wording in the legislation. 

That said, employers with international worker arrangements may still be able to exclude certain employees from auto-enrolment regardless, noting auto-enrolment only applies to those working or ordinarily working in the UK. This may mean that secondees to the UK or those who spend large amounts of time working abroad could be excluded, but this will often be quite nuanced and require a case-by-case analysis.

If you have any questions, please feel free to pick up with your usual Linklaters contact.