We today submitted our response to the Making Auto Enrolment Work Review. Please find below a copy of our submission which namely sets out three suggested changes to the proposed regime:

In responding, we have assumed that the review will start from the position that auto enrolment will go ahead in order to meet the Government’s aims of tackling pensioner poverty and maximising voluntary private savings.  We have also been mindful of the changing environment with the move to simplifying the state benefit structure and the desire to minimise means testing in retirement.

We believe the desire to simplify should also be a policy feature of the way auto enrolment is implemented; that is, the impact on employers in terms of its administration should be minimised.  The administrative impact is greatest for employers with seasonal or transient workforces, such as those in retail, farming or hospitality industries, and where employees decide to opt-out; the opt-out process due to come into force next year is cumbersome and is not conducive to employer/employee relations.

These workforces should still be subject to auto enrolment but we suggest three changes to the proposed regime, two of which would significantly reduce the administrative burden whilst still maintaining the auto enrolment’s aims and one which will further those aims:

1. Introduce a three month waiting period;
2. Allow opt-out much earlier in the process;
3. Reconsider the thresholds.

These changes are discussed in more detail below.

Three month waiting period

By introducing a three month waiting period, new entrants to a workforce would not be subject to auto enrolment until they had been working with that employer for three months.  This gives time for the employer to properly communicate the pension arrangements with the employee, potentially reducing the opt-out rate or at least ensuring that any opt-out is a well considered decision by the employee.  In addition, it would reduce the unnecessary administration of auto-enrolment followed by refunds of contributions to those sectors of the workforce that are employed on a seasonal basis such as those in the retail, farming or hospitality industries where turnover can be as much as 40% or more.

To cater for different employers’ own administrative processes, this waiting period need not be determined too prescriptively.  For example, the requirement could be that an employee must be subject to auto enrolment / deduction / payment of contributions by the 4^th payment of earnings from the relevant employer.

For the avoidance of doubt, the introduction of a three month waiting period should not remove the existing postponement period option as the latter would still encourage employers to provide better qualifying schemes.

Earlier opt-out

We suggest that employees / potential employees should be able to opt-out at an earlier stage than currently envisaged.  If employees are given the option to opt-out at an earlier stage, this would avoid the unnecessary burden for both the employer and pensions administrator associated with refunding the first month’s contributions to an employee who is auto enrolled and who subsequently decides to opt-out.  A similar process could apply at the auto re-enrolment stage after three years.

Reconsider the thresholds

The imposition of an earnings threshold below which auto enrolment does not apply, the potential introduction of a de minimis level of contributions before auto enrolment applies and the specification of an age group, all seem to go against the auto enrolment stated aims of tackling pensioner poverty and encouraging voluntary savings.  They also complicate the administrative processes and make it harder to get employees and employers alike to understand.  However, we do advocate a more flexible regime for employers with less than five employees.  Taking these thresholds in turn:

The earnings threshold

Unless and until means testing is removed for those receiving a pension in retirement, for example through the provision of an adequate basic state pension for all, the lower earnings threshold at which auto enrolment applies should be increased to around £10,000 per annum, as up to this level there is otherwise a disincentive to save for a pension.  Indeed, to save and then to lose this through means testing could rapidly discredit auto enrolment and therefore its aims.  In any event, up to this level, the basic state pension and other benefits are likely to provide a sufficient replacement income in retirement.  This threshold could be linked to the statutory minimum wage for simplicity.  However, to avoid discrimination against low earners and indirectly against employees falling in this category, such as part-time working women and those with variable earnings, employees with earnings below this threshold should have the option to enrol and benefit from the employer contribution if they so wish.  This, for example, would avoid employees with more than one employment losing out.  For the avoidance of doubt, the offset of around £5,000 to earnings (perhaps linked to the Lower Earnings Limit used for National Insurance contributions) should still be used when determining the minimum contribution requirements.

De minimis level of contributions

If the higher earnings threshold is used then there should be little need to have a de minimus level of contributions except where employees work for a part period, for example an employee leaving service within a few days of the beginning of the month.  Accordingly, a de minimus level of around £25 could be set on the basis that it isn’t economical to invest anything less than this.

Age group

With the Default Retirement Age being abolished, it becomes untenable in our view for there to be a maximum age at which auto enrolment does not apply.  However, as HM Treasury currently bars contributions to schemes post age 75, age 75 should be set as the maximum age until this bar, if ever, is removed.  However, to avoid the problem of small pots of money for those fairly near to retirement now, we suggest that the upper age limit could be phased in, for example, start with an age limit of 55 and increase this by one year for each year that passes.

To avoid discrimination at the younger ages and to encourage voluntary saving from a young age, we would also suggest that the lower age limit should be removed or lowered to 16 (or whatever the school leaving age is at the time).  From an administrative viewpoint, removing the age limit should simplify matters and ensure that all people in employment above the school leaving age will be subject to auto enrolment; this could be aligned to the age thresholds used in determining National Insurance contributions.

Size of firm

In terms of maximising value for money for the Exchequer; one of the aims of this review, we believe that it is not cost effective for the Pensions Regulator to police the auto enrolment regime for small employers.  Accordingly, employers with less than five employees should be exempt from the auto enrolment regime (but may participate if they so wish).  This will take out, for example, corner shops, nannies etc where the administrative burden and cost of policing would be out of all proportion to any benefit gained.  However, employees should have the option to enrol and benefit from the employer contribution.

There is, of course, a high administrative cost associated with small contributions and as a result we think only NEST can or will be interested in fulfilling the role of serving the auto enrolled population where employers have been unable or unwilling to set up their own qualifying plan.  Accordingly, we believe auto enrolment will only work if NEST is present.

Our views above need to be considered as a whole.  We support auto enrolment but believe that it needs to be administratively much simpler to gain employers’ support, particularly the larger employers with seasonal / transient workforces.  To work better for both employers and employees, we believe there should be a three month waiting period, employees should be able to opt out before paying their first contribution and the thresholds should make sense in the context of minimum wages and post-retirement means testing.