Three-quarters of a million micro employers could end up with an average of only one member of staff each in their pension scheme as a result of auto-enrolment, fuelling the debate over eligibility.
A report released today stated that the government’s increases in the amount of income needed to become eligible for a pension under auto-enrolment reforms has left 40 per cent of staff out of scope at organisations with between one and four workers.
How the ACA came to its prediction
The organisation took government estimates on the number of employers with 1-4 employees, which comes in at just over 750,000 employers with 1.7m employees between them (source: Department for Business, Innovation and Skills figures from 2013).
In 2010, broadly 40 per cent of these were earning below £10,000 a year, according to figures from the Department of Work and Pensions. "That figure we don't think will have changed very much," said Robertson. "There has been very little change in average earnings."
Assuming opt-outs of 20 per cent – which is higher than the 10 per cent experienced by larger companies – this leaves just around 800,000¹. Allowing some earnings growth ahead of when employers begin to auto-enrol, the ACA concluded an average of one employee per micro employer would stick with a scheme.
The Association of Consulting Actuaries has projected that, assuming a "modest" level of people rejecting their pension once enrolled, the reform will only bring one person onboard per micro employer (see box).
The organisation has called for a policy review next year of the impact of auto-enrolment on smaller companies. The ACA's head of secretariat David Robertson said: "We are not saying you should give up on the micro sector but certainly if you don’t do something about the trigger level you are going to have a bigger problem, particularly if they are going to move it up much beyond the £10,000 mark.”
The Labour party held up the figures as justifying its policy to extend auto-enrolment to 1.5m lower earners, calling upon the government to “grasp the nettle”.
Shadow pensions minister Gregg McClymont said: “Labour has repeatedly warned the government that it risks eroding the legitimacy of auto-enrolment by reducing eligibility.”
Pensions minister Steve Webb rejected the view that the earnings threshold should be lowered. "This course of action would see people on low incomes paying potentially pennies a week into a workplace scheme, all in the name of subsidising a state pension already set higher than what they are earning," he said.
He pointed to the creation of the state-sponsored pension scheme Nest, set up to give the smallest employers a cost-effective option for pension provision.
The lower level for eligibility for auto-enrolment has been linked to the personal tax allowance, meaning that as it has risen to £10,000 lower earners have been excluded from the reform. The prime minister has promised a further raise in the tax threshold to £12,500.
The government has previously stood behind the current trigger, but earlier this month launched a consultation on how the level should be set in future.
¹The original version of this article had the opt-out figure at 15 per cent, and the enrolled population at 600,000. This was corrected shortly after publication.
