Motion to Consider
My Lords, I am pleased to introduce this instrument, which was laid before the House on 19 January. I am satisfied that it is compatible with the European Convention on Human Rights.
The order amends the automatic enrolment figures that will set minimum savings levels from April of this year. The automatic enrolment earnings trigger sets the automatic entry point to determine who saves in a workplace pension. The qualifying earnings band then determines how much people save and sets employer minimum contribution levels. These figures must be reviewed annually; indeed, this is the fourth such annual debate we have had.
Given that automatic enrolment is in its fourth year, I think that it is a good time to take stock. To date, more than 5.1 million workers have been automatically enrolled by around 43,000 employers. Automatic enrolment has been a significant success, with opt-out remaining significantly lower than expected, but there are still important challenges ahead. Next year, small and micro employers will be brought into automatic enrolment for the first time. It remains as important as ever that automatic enrolment and the figures we are debating today remain easy to explain, understand and administer. It is also important that we target the right people. There is a balance to be struck between those who should save and those who can decide to save. As such, the Government decided that the timing was right to conduct a formal consultation as part of this year’s review. We wanted to learn about employers’ experience of live running and to test whether it remained right to maintain alignment between the earnings trigger and the income tax personal allowance in the light of proposed increases to the allowance and lower than expected earnings growth. The earnings trigger is key to targeting and striking the balance that I have outlined.
Automatic enrolment is a tailored policy. It does not force pension saving on to everyone, regardless of earnings. Our overall aim in setting the figures in this instrument is to maximise the number of people saving who can afford it, while excluding those who cannot. The new state pension full rate of nearly £7,900 per year is a significant factor in determining who should save. The Pension Commission suggested that for those earning around £10,000 a year, a sensible replacement rate in retirement would be 80%. As my honourable friend set out in another place, once you disregard national insurance, those earning under £10,000 will already receive around an 80% replacement from the new state pension. Therefore, this order does not amend the earnings trigger and it remains frozen at £10,000 for 2015-16.
As part of the consultation and review, we considered some alternative options for setting the trigger, including increasing it in line with the income tax threshold, as we have done in previous years. This option has the benefit of administrative simplicity for some but, given the above inflation rises to the tax threshold, we did not believe it was the right approach in 2015-16.
In the recent debate in the other place, it was suggested that the trigger should be lowered. We disagree. Automatic enrolment should continue to exclude low earners for whom saving, on top of the pension they will get from the state, may not make economic sense, and they should be relied on, instead, to opt in. It is important to stress that we are not excluding people from pension saving; people earning under the threshold can choose to opt in or join a pension scheme. It has also been argued that we should enrol everyone and rely on opt-out instead. Again, there is a balance to be struck. As I told noble Lords earlier, opt-out is currently somewhat unusual. The risk of having a much lower threshold is that opt-out will become much more common and start to undermine the principle of automatic enrolment. Opt-out also comes with an administration overhead. Employers have to refund moneys and unwind membership. High opt-out rates increase nugatory work, so we firmly believe that it is better not to enrol people who are likely to walk away.
I am aware from previous debates on this issue that noble Lords will be interested in the impact that this instrument will have on the number of women savers. Freezing the trigger at £10,000 represents a real-terms decrease in the trigger, resulting in around 20,000 extra people being brought into automatic enrolment in 2015-16. Fourteen thousand, or 70%, of these are women.
The automatic enrolment earnings trigger does not exist in isolation. It is the entry point to pension saving that works alongside the qualifying earnings band. The band sets a minimum definition of pensionable pay. If you earn £10,000 a year, you will pay pension contributions on anything over £5,824. The qualifying earnings band also needs to cap minimum employer contributions for higher-paid staff and let existing arrangements cater for this market. The Government believe that aligning the qualifying earnings bands with the national insurance lower and upper limits remains the right approach.
The Secretary of State has a lot of discretion to determine the right level for the automatic enrolment thresholds and what factors to consider. This year, we consulted on these factors and on a number of options for setting the earnings trigger. Freezing the earnings trigger in 2015-16 strikes the right balance between administrative simplicity for employers and ensuring that the right people are brought into pension savings. Continuing to align the qualifying earnings band with national insurance thresholds ensures that people continue to build meaningful pension pots. It is straightforward to administer and caps minimum employer contributions for higher-paid staff. I commend this instrument to the Committee.
My Lords, each year with some predictability, I am sorry to say, I contribute to the debate on the relevant statutory instrument to express my concern that in linking the earnings trigger for auto-enrolment to the income tax threshold it is being set too high, and that too many women are excluded such that only one in three workers targeted for auto-enrolment is female. So many women are excluded because their earnings are below the level required to trigger the new employer duty to auto-enrol a worker into a pension scheme.
Given my persistency in raising this issue, it would be lacking in grace not to say that I am therefore pleased that the Government have chosen to freeze the trigger at its current level and not increase it further. I understand that as a consequence 20,000 people, 70% of whom would be women, will no longer be excluded from auto-enrolment when they otherwise would have been. Therefore, the Government’s decision to break the link between the earnings trigger and the income tax threshold is welcome.
I am also pleased that the Government’s decision supports the argument that it is wrong always to say that simplicity for employers, by linking the trigger to the tax threshold, is worth the price of excluding yet more thousands of women from the benefits of auto-enrolment.
I also welcome the Government’s decision that it is not right to maintain the alignment between the earnings trigger for auto-enrolment and the income tax threshold in the light of the proposed increases and the relatively low earnings growth. Low earners are likely to have lower earnings growth, and the UK has a greater concentration of low-wage jobs than some other advanced European economies, so the earnings trigger remaining linked to a rising income tax threshold would exclude even more workers over time. Those excluded, who are mostly women, would suffer a loss in lifetime pay because they would not have received the employer contribution, but they would still lose out due to any general reduction in wage levels that flowed from the cost to the employer of automatic enrolment contributions. Those are my positives, and they are three or four things that I welcome.
However, I remain concerned that, even with the freeze on the trigger at £10,000, far too many people will still be excluded from auto-enrolment. I would have liked to have seen it decreased under Section 14 of the Pensions Act 2008, as is permissible. I do not agree with some of the arguments which have been deployed by the Government for retaining it at its current level. The Government have argued that low earners for whom saving on top of their state pension does not make economic sense, and because the state pension gives them a high replacement income in retirement, should be excluded from auto-enrolment, but earnings are not static for many workers—men or women. They can change significantly over a lifetime. Most low earners go on to earn more—a point confirmed in the Johnson review commissioned by the Government. Therefore, auto-enrolment would be beneficial because it would increase persistency of pension contributions over their working lives.
Millions of women have a life pattern in which periods of full-time work are interspersed with periods of part-time work when caring responsibilities are at their greatest. But the effect of a high earnings trigger is a policy which asserts that women should not be auto-enrolled when they are working part-time and caring. That is in fact the consequence, and the figures confirm it. Almost half of those in the lowest earnings group are in couples where one works part time and the other full time. Most very low earners are women who live in households with others on higher earnings and they are receiving working tax credits. As the Johnson review confirmed—it is his analysis as much as my observation—these are precisely the people who should be automatically enrolled in saving, yet they are excluded.
The Government argue that if people on low earnings are auto-enrolled, they will build up their pots in pennies, not pounds, and that anyway the state pension gives them a sufficient replacement rate. But the problem with that argument is that pension savings are no longer reserved for pensions or replacement income. Freedom of choice means that the purpose of private pension saving is wealth accumulation. People can do what they wish with their money. There is now a complete separation between pension saving and securing a replacement income, which makes the Government’s support for a high earnings trigger even more tenuous. Why should low earners not be allowed to accumulate assets to build up their pot of wealth for their personal use? Why should an asset accumulation facility be available only to the better off?
Talking about “pennies, not pounds” resonates with that outdated and now unacceptable argument that women working part time are doing it only for pin money. It is possible to lower the earnings trigger below £10,000 without running up against the pennies argument. If, for example, the lower value of the qualifying earnings band is £5,824 and the earnings trigger is £8,000, then on a default contribution of 8% this would produce pension savings of £174 per annum. Taking a nominal value, this would produce £1,740 after 10 years and £5,220 after 30 years. For persistent low earners, that is a pot worth having, and it is arrogant to apply an analysis that because you are on low pay, asset accumulation even of that modest pot—which to them will not be modest—should not be available. That is simply a base case. It assumes a persistent low earner with no other changes but ignores that many employers are contributing above the minimum statutory level and that most low earners go on to earn more. I am sure that, over time, the employers’ statutory minimum contribution will rise. Excluding so many low-paid workers from auto-enrolment is another example of the weakness of public policy in assisting low-paid workers to accumulate capital or assets.
The Government argue that a lower auto-enrolment earnings trigger will increase opt-out rates, but there is no clear evidence that setting a trigger at, say, £8,000 will produce significantly higher opt-out rates. Attitude surveys do not necessarily confirm what actual behaviour will be—that is a speech in itself. For women who move from a full-time to a part-time job with another employer when they become carers, the higher trigger will take them out of the previous pattern of persistent saving.
The Pensions Minister in the House of Commons, Steve Webb, referred to the attitude surveys on pensions and said that they indicated that at about £5,000 the opt-out rates would be 30%. I was surprised that it revealed that that level would still deliver a participation rate at 70%, so at an £8,000 earnings trigger the participation rate is likely to be much higher. The evidence on these financial decisions also shows that when you apply inertia, participation rates are higher than the evidence produced by attitude surveys.
As a consequence of raising the auto-enrolment earnings trigger, we can go through the years—this is in the impact assessment from the department—showing the number excluded from auto-enrolment: 600,000 as a result of the trigger in 2011-12, 78% of them women; in 2012-13, another 100,000, 82% of them women; in 2013-14, another 420,000, 72% of them women. In 2014-15, the increase to £10,000 excluded another 170,000, 69% of them women. At least some of those excluded, even if not all, could be re-embraced by a modest reduction in the earnings trigger to, say, £9,000 or £8,000 a year. That could still pick up more than half a million low-paid workers into auto-enrolment in pensions.
The population targeted to benefit from workplace pension reform now comprises approximately two men for every woman, which, as I consistently say, breaches a basic principle that the private pension system should work for women. If you maintain a higher earnings trigger, although women can go from full-time employment to lower pay during their working life, thousands of women are carved out of the UK private pensions system. I will continue to argue that with passion, because it is such a weakness in the design of the private pension system to set an earnings trigger that delivers one woman auto-enrolled for every two men.
To end on a positive note, I am pleased that the trigger has been frozen and that the Government have not maintained the alignment between the earnings trigger for auto-enrolment and the income tax threshold. At the very least, I hope that they do not consider raising the trigger for a few years to come.
My Lords, I thank the Minister for his explanation of this order and my noble friend Lady Drake for a characteristically forensic and impressive contribution. Like her, I welcome the fact that the Government have seen the light—there is more rejoicing in heaven over one sinner returned, et cetera. I am delighted that they have accepted our long-standing argument that the trigger threshold for auto-enrolment should not simply be tied to the personal allowance, as it has been hitherto under this Government.
We on these Benches have argued for many years that the problem with the approach taken by the Government is that it undermines the basic consensus on which auto-enrolment was built: that it should be a mass pension system encompassing as many people as possible, a point made clearly by my noble friend Lady Drake. It should encompass the low-paid as well as the better off, women as well as men and those in multiple part-time jobs as well as those in single, steady employment in one job. Viewed from that perspective, the Government’s tying of the auto-enrolment threshold to the personal allowance has had significant weaknesses.
When we debated these orders last year, my noble friend Lady Drake built a completely damning indictment of the effect of the Government’s approach to setting the threshold, which I suspect may have contributed to their change of heart. We recalled last year that the original idea proposed by the Pensions Commission, chaired by the noble Lord, Lord Turner, and of which my noble friend was such a distinguished member, was that the qualifying earnings band should start at the primary threshold for national insurance purposes and finish at the NI upper earnings limit. The previous Government said in their 2006 pensions White Paper that they would adopt broadly that approach, so the lower and upper limits of the qualifying earnings band were set at £5,035 and £33,540 respectively, with provision for them to be increased in line with earnings.
When this Government brought in the Pensions Act 2011, though, they introduced an earnings trigger for auto-enrolment at a level higher than the lower equivalent of the qualifying earnings band, and every year since then we have seen more and more people excluded. For 2011-12 the trigger was set at £7,475 rather than the planned threshold of £5,035 and 600,000 people were excluded, 75% of them women. The next year 100,000 people were excluded, 82% of them women. In 2013-14, 420,000 people were excluded, of whom 72% were women. Last year, when the threshold rose to £10,000, it excluded another 170,000 people, of whom 69% were women. So although I genuinely welcome the decision to freeze the threshold, and the confirmation from the Minister that the measure will bring 20,000 more people into the system, 14,000 of them women, does he accept that by tying the threshold to the personal allowance for the last four years more than 1 million low-paid people, most of them women, have been excluded from auto-enrolment?
I want to ask the Minister about the coverage of women by auto-enrolment. Can he remind the Committee how many people the Government now estimate will be covered by auto-enrolment, when it is fully rolled out? Does he accept the figure given by my noble friend Lady Drake that one in three of the target enrolment population are now women? If so, do the Government regard that as a problem? Last year I noticed that the Government had offered the defence that so many women are affected because they work part-time and are likely to earn less than men, so they are disproportionately represented. That is true, of course, but it is not a defence; it is simply a description. Do the Government regard it as a problem that so many women are excluded?
The other defence offered by the Minister was that workers paid below the earnings trigger, as the Government have set it, were likely to be able to achieve their target replacement rates through the new state pension if they remained low earners. Presumably, therefore, it is not beneficial to direct income from working life into workplace pension savings—and, presumably, that applies particularly to low-paid women. But, as has recently been widely discussed, when it kicks off in 2016 only 45% of those who reach state pension age will get the new state pension, so there is a significant issue there.
I will not detain the Committee any further at this point. Labour invented auto-enrolment but the Government deserve credit for having rolled it out. We all think it is a good thing. I am very pleased that the Government have broken their ill advised link between the trigger threshold and the personal allowance, but I look forward to hearing from the Minister a better account of how the Government will ensure that the benefits of auto-enrolment can reach the masses for whom it was designed.
My Lords, I thank noble Lords who have participated in this debate on the clearly important issue of auto-enrolment and the trigger. I shall seek to deal with the points made by the noble Baronesses in the order in which they were raised. The noble Baroness, Lady Drake, was extremely gracious—at least initially—in welcoming the change, and I welcome her welcome. I appreciate that the noble Baroness, Lady Sherlock, would want to go on a historical journey rather than review the current good news in the present order, but 20,000 more people being brought within auto-enrolment, 70% of whom are women, is of course good news.
On the issue raised by the noble Baroness, Lady Drake, of whether the trigger should be set at a lower limit, such as the national insurance limit—I think that she used £8,000 as another example—it is worth restating that this does not prevent people opting in to a pension. Auto-enrolment means that they will not be automatically enrolled, but it does not stop them saving. If they are above the national insurance limit they can opt in to their scheme and their employer will be obliged to contribute the 1%, as they currently are. Those figures are on an upward trend. I will ensure that I write to noble Lords about the percentage figures in future years because they are set to go up for employees and employers. That is an important point to nail. Also, if your earnings go above the threshold in a particular year, you will of course be automatically enrolled. The assumption is then that you can opt to stay in the pension, even if your earnings dip. You are not automatically de-enrolled; if you want to stay in, you can. That is a significant point to make, and one that I am perhaps able to clarify here.
On the fluctuating income argument, if you are above automatic enrolment in a particular year you can stay in the scheme if you want to do so, provided that your income does not dip below the national insurance limit. You could even stay in then, but you would not be entitled as a right to the employer contribution—although, anecdotally, quite a few employers pay it if an employee is in the scheme. It is a relatively low cost and while that is not a statutory obligation, it is happening. There is some good news there. We have clearly broken the link with the income tax threshold, so there is of course no question about whether we can break it. We will look at the experience of this.
We should restate that auto-enrolment has been a massive success. It has been supported by all parties; I pay tribute to the support that has been given. The priority now is to make sure that small and micro-employers are brought within the system. As noble Lords would expect, we will look at the evidence on how it is progressing. In answer to the noble Baroness, Lady Sherlock, on how many people will be covered by automatic enrolment, we estimate that 8 million to 9 million will be newly saving or saving more. I will write to her on the percentage of women; of those, I think that it is roughly 3 million.
I think that is borne out. I will write with a more detailed figure if we have it. I thank the noble Baroness for her helpful intervention. As I was just saying, we believe that it is roughly 3 million, which I think would be consistent with the figure that she presented.
With that, if there is anything that I have missed I will write to noble Lords who have participated in the debate. I thank them for the general support and welcome for what we have done this year and commend the order to the Committee.