AE to directly impact wage growth - OBR

Written by Theo Andrew
31/10/2018

The “burden” of auto-enrolment will “ultimately be borne by workers” as the policy is set to directly impact projected wage growth, according to the Office for Budget Responsibility (OBR).

In a document published alongside this Budget yesterday, 29 October, the OBR said that wage growth is set to ease from 2019 as contribution rates rise “significantly”, which will then passed on by employers into workers’ pay packets.

Minimum employer auto-enrolment contributions rose from 1 per cent to 2 per cent in April 2018, and is set to rise again to 3 per cent in April 2019.

The OBR said: “We assume that the burden of these interventions is ultimately borne by workers, with wages lower than would otherwise be the case. Some of these effects will already be reflected in the out turn data, but a significant portion is assumed to occur in the second half of 2018 and 2019 as the contribution rates under auto-enrolment rise significantly.

“In the case of auto-enrolment, we have increased the assumed impact on earnings, because the latest estimates suggest that some employers have been making contributions below the lower earnings limit and some have contributed at fully phased in rates before they were required to.”

According to the OBR, wages are forecast to grow by 4.1 per cent over 2018, higher than inflation which is predicted to hit 3.5 per cent over the year.

However, this is expected to drop to 3.2 per cent from 2019 to 2021, while inflation will hit 3.2 per cent by 2021, on an RPI basis.

Furthermore, the OBR said that both adjustments would increase if it calculated the government’s proposals to increase the auto-enrolment age threshold from 22 to 18 and from the first pound owned, rather than from the lower earnings limit.

“The Treasury has told us that these remain policy ambitions so we have not included their effects in our economy or fiscal forecasts. Auto-enrolment in its present form is factored into our economy forecast as a wedge between total employee compensation and wages,” the OBR said.

Last month, Walgreaves Boots Alliance group director of pensions Julie Richards said that auto-enrolment could be in a “honeymoon period” following the low opt-out rates after the last contribution hike.

Richards said: “The thing with AE is, I’m not saying it’s a bad thing, I’m just saying that there is a danger we have oversold it. I don’t think you can judge its success until we see the April 2019 contribution increases go through.

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