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UK increases earnings threshold for auto-enrolment, allows 90-day grace period

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  • UK increases earnings threshold for auto-enrolment, allows 90-day grace period

UK - The UK government has announced the results of its review of automatic enrolment and the National Employment Savings Trust (NEST), raising the minimum earnings threshold in line with income tax.

Employers will now be faced with having to enrol each worker automatically, with a recommended three-month waiting period.

However, an employee can chose to enrol at any point during these 90 days.

The review, Making automatic enrolment work, also warns that the issue of pension transfers should not be forgotten, saying that wholesale consideration on how they can be implemented should be made prior to the review date in 2017.

Under new proposals, only employees earning more than £7,475 (€8,504) will be automatically enrolled into the company pension scheme or NEST, but PwC said would exclude a number of part-time workers.

Peter Woods, a pensions partner at PwC, said: "The number excluded will increase further given the threshold will be nearer £10,000 by the time the smallest employers are forced into auto-enrolment, since the threshold is in line with the personal allowance."

However, the National Association of Pension Funds (NAPF) was more positive about the increase, saying it was pleased the government resisted calls to raise the earnings bar significantly.

The organisation's chief executive Joanne Segars said that with contributions payable from £5,000 at the £7,500 threshold, it would ensure that pounds rather than pence were paid into savings.

The threshold will strike the right balance between capturing the target market and not compromising those whose pay and benefit is at the lowest end of the scale, Steve Charlton of Mercer added.

Segars also greeted the news of a waiting period for enrolment as a positive move.

"Giving a three-month waiting period before an employee is auto-enrolled will help ensure managing auto-enrolment is straightforward for employers."

The flexible waiting period would relieve the cost and administrative pressure of the reforms, added Richard Parkin, head of DC proposition at Fidelity Investment Managers.

Examining NEST, the government's report warned that the contribution cap of £3,600 per annum would send the wrong message about "what constitutes a reasonable ceiling on the pension saving".

The DWP has therefore said that the cap will be removed no later than 2017, following the introduction of correct legislation.

However, George Ladds of the Fair Investment Company said the cost involved with running NEST could mean poorer value for money for those enrolled.

"With auto-enrolment, the government is forcing people into a scheme that will almost certainly be a second-rate option and is potentially opening up a future pension mis-selling scandal," he said.

The report - authored by Paul Johnson of Frontier Economics, as well as David Yeandle OBE and Adrian Boulding of Legal & General - also highlighted the difficulties of transferring pension pots from one scheme to NEST, currently prohibited in most circumstances.

Estimating that the average worker would accumulate 11 different pension pots over his lifetime, the review stated: "It is in this context that we believe that NEST should
be able to receive transfers in and pay transfers out."

However, any such transfers should only become possible once auto-enrolment has been established and the more general issue of pension transfers has been dealt with, it said.

It continued that allowing pension transfers was "critical" to the success of any reforms, as the fragmented nature of pension pots might otherwise act as a disincentive to savers.

The report explained that no such changes to transfer structures could be implemented until auto-enrolment was fully implemented, but noted that the issue must be examined by the secretary of state in 2017, according to the 2008 Pension Act.

Speaking of the review, pensions minister Steve Webb said: "I welcome the sensible and balanced proposals from the independent review team, which will help ensure automatic enrolment works. 

"Building on the consensus for pension reform, NEST will play its part as we transform the savings culture in this country."

The NAPF's Segars added: "We must move ahead at full speed to implement them to tackle the UK's growing retirement savings crisis."

The continued existence of NEST, which has been uncertain since the current government launched the review of auto-enrolment, was confirmed last week as part of Chancellor George Osborne's spending review.

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