Auto-Enrolment Thresholds 2012/13Tuesday, March 27th, 2012
The Pensions Act 2011 required that Government annually reviews the auto-enrolment Earnings Trigger and Lower and Uppers bands of Qualifying Earnings. This ensures that the auto-enrolment process continues one of its objectives of targeting the lower-paid, whilst ensuring that as many people as possible are saving for their retirement. Also, the annual review ensures that the figures remain valid in terms of their financial impact on businesses and the pensions industry. At present, the Trigger and Bands are set in different pieces of legislation but are aligned with recognisable PAYE and NICs thresholds.
In December 2011, the DWP consulted on their proposals to review these figures and The Learn Centre was please to contribute to this consultation, which closed on 26 January 2012. The consultation responses are now available on the DWP Website and the revised figures will be laid before Parliament as The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012. In more detail, the consultation considered:
The Earnings Trigger
Simply, this Trigger is the level of qualifying earnings in the pay reference period above which a worker is considered for auto-enrolment. The Pensions Act 2011 set this as an annual figure of £7,475, recognisable as being in line with the Personal Allowance.
The Consultation proposed three possible ways in which the Trigger could be set for 2012/13:
- Remaining in line with the Personal Allowance, i.e. £8,105
- Alignment with the Primary Threshold for NICs, i.e. £7,605
- The existing Trigger £7,475 increased in line with the Consumer Prices Index (CPI) as at September 2011 (5.2%), i.e. £7,864
The Learn Centre recommended that the Trigger remained aligned with the instantly recognisable PAYE Personal Allowance. However, we recommended caution in the future, given the Coalition’s objective of raising the Personal Allowance to £10,000 by the end of the current Parliament in 2015. If the Trigger remained aligned, this would have a significant impact in taking increasingly greater numbers than expected out of auto-enrolment altogether, as they would not meet one of the ‘eligible jobholder’ criterion. This would be totally against one of the concepts of auto-enrolment, which is to encourage pension saving amongst the lower-paid and ensure as many people as possible are saving for their retirement.
DWP recognised exactly the same considerations in its response and concluded that, for 2012/13, ‘the most relevant review factor for the recalculation of the automatic enrolment earnings trigger is the PAYE threshold’. This proposal also took into account the recommendation by the 2010 Making Automatic Enrolment Work (MAEW) Review that thresholds should be aligned with recognisable payroll figures, where possible.
The Qualifying Earnings Band (QEB)
The QEB represents the minimum band of earnings on which the employee and employer must pay contributions. The Pensions Act 2008 originally set the Lower limit as £5,035, aligned with the Earnings Threshold (now the Primary Threshold (PT)). The Upper limit was set in the Act as £33,540, in line with the Upper Earnings Limit (UEL). These figures are, again, instantly recognisable and mean that the earnings on which the employee pays NICs at the highest rates is the minimum earnings on which contributions must be taken under Auto-Enrolment.
The MAEW Review in 2010 recommended that the Lower limit remain aligned to the PT but that the Upper limit be increased in line with the CPI rather than be aligned to the UEL.
With regard to the Lower threshold, the Consultation proposed four ways for setting it in 2012/13:
- Aligned with the LEL, i.e. £5,564
- Aligned with the Primary Threshold, i.e. £7,605 (as per MAEW Review recommendations)
- 2008 Pensions Act rate increased in line with average wage increases, i.e. £5,983
- 2008 Pensions Act rate increased in line with the value of CPI in the years to 2012, i.e. £6,055
According to the consultation response, the majority of respondents recommended alignment with the LEL. If the alignment with the PT was continued, this would reduce the point at which contributions were payable, given the substantial increase since 2008 to the point at which NICs become payable.
The Learn Centre also recommended alignment with the LEL and this figure has been accepted by DWP as the Lower threshold for 2012/13.
With regard to the Upper threshold, the Consultation proposed four ways for setting it in 2012/13:
- Aligned with the UEL, i.e. £42,475
- 2008 Pensions Act rate increased in line with average wage increases, i.e. £39,853
- 2008 Pensions Act rate increased in line with the value of CPI in the years to 2012, i.e. £40,332 (as per MAEW Review recommendations)
The Learn Centre strongly recommended against a threshold that was NOT set in line with the UEL for NICs. Whilst we agreed that our proposals for the Lower and Upper limits were wide (i.e. the LEL to the UEL), we did not see that this would impact on one of the main groups targeted by the legislation, which are the lower – medium paid who are, unlikely, to be earning in the region of the UEL. Therefore, their employers would not be faced with increased contributions, as they were not earnings near this threshold in the first place. The DWP have also recommended alignment with the UEL.
Following a review of all the responses, the DWP concluded by saying that their recommendations for reviewing the Lower and Upper limits are for them to be in line with the LEL and UEL. However, they mention that alignment in 2012/13 ‘does not set a pattern for the future’.
In summary, the Trigger and Thresholds in the draft legislation for 2012/13 are as follows:
|Threshold||Current (as per legislation)||Proposed 2012/13|
|Earnings Trigger||£7,475 (Pensions Act 2011)||£8,105|
|QEB Lower Limit||£5,035 (Pensions Act 2008)||£5,564|
|QEB Upper Limit||£33,540 (Pensions Act 2008)||£42,475|
Although these are not as recommended by the MAEW Review in 2010, I think that the review of thresholds has produced a sensible balance of instantly recognisable payroll-related figures coupled with relevant thresholds for the first year of auto-enrolment. Note, however, DWP’s comment that what is set in 2012/13 is not necessarily an indication of what they will be set at in the future.