Under the 2010-2015 UK coalition government, new laws regarding pensions were introduced. Today we discuss the details of the reforms, how successful the programme has been and consider some of the future possibilities for the accountants in charge of payroll and pensions.
2012 Pension Reforms
Called ‘auto-enrolment’, the scheme – as you may have guessed – automatically enrols employees on employer-led private pension schemes. In the past, many employers had optional private pension schemes; after 2012, employers were required by law to enter all employees into their schemes. Each party, both employer and employee, was asked to contribute towards the total – initially, this was capped at 1% minimum for the employer and a 1% minimum for employees; the current contribution stands at a 2% minimum for the employer and a 3% minimum for the employee.
The automatic enrolment depends on several conditions; the employee must be working in the UK, must be at least 22 years old (but not over the state pension age), and must earn more than £10,000 a year for the 2018/19 tax year.
Why Were the Reforms Introduced?
The reasons for the introduction of the reforms are somewhat difficult to confirm. For the government, it was to “create greater choice and flexibility” by allowing for potential early retirement by saving early; for others, however, it was clearly introduced to reduce the long-term burden of pension payments on the taxpayer, with the removal of state pensions being the ultimate aim. Another potential reason for the reforms was to filter money back into the UK’s private pension schemes after the sector was severely damaged following the 2008 financial crisis. With confidence in private pensions at a particularly low point after the crash, the government introduced reforms to protect individuals’ pension funds alongside the introduction of auto-enrolment. The Pension Protection Fund (PPF) was created to pay compensation to members of an eligible pension scheme when, for example, a company becomes insolvent. The most famous example of the PPF in action was perhaps British Home Stores’ insolvency.
Uptake – Has the Scheme Been Successful?
In short, yes, the scheme has been very successful. The Office for National Statistics produced a report based on a 2017 survey on pension schemes; the report showed total membership is at its highest ever recorded level. The government’s plan made and continues to make use of the so-called ‘nudge theory’; the government has engineered a context in which the choice of having a pension is both obviously beneficial and easy. Like AAT Comment said back in 2013: “Who says apathy is a bad thing?” Nudge theory works by creating an environment in which the obvious choice has a positive outcome, and the choice of opting-out of such schemes involves taking action.
What’s Next for Auto-enrolment?
Although we don’t know the exact direction auto-enrolment is heading in, we do know that the government is planning to reduce the age limit to 18 by the mid-2020s; this would add an estimated 900,000 into the scheme when launched. Likewise, private pension scheme Now:Pensions confirmed that from April 2019, contributions from employees will rise to a minimum of 5% of employee wages, and contributions from employers will rise to a minimum of 3%. What we remain unsure of is the role the state pension will play in the future; are we to expect a gradual pushing back of age-eligibility and, eventually, a complete phasing out of state pensions? Of the £711 billion of taxpayers’ money spent in 2017, a sizeable £111 billion went on state pensions, which is head and shoulders above healthcare spending.
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