Motion to Consider
My Lords, this order, which was laid before the House on 8 February 2016, reflects the conclusions of this year’s annual review—required by the Pensions Act 2008—of the automatic enrolment earnings thresholds. The review considered both the automatic enrolment earnings trigger, which determines the point when someone becomes eligible to be automatically enrolled into a workplace pension, and the qualifying earnings band, which determines the earnings levels in relation to which the enrolled employee and their employer have to pay contributions into a workplace pension.
The order sets a new upper limit for the qualifying earnings band and is effective from 6 April 2016. The earnings trigger and the lower earnings limit are not changed within this order. The lower earnings limit remains as set in the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015. The earnings trigger also remains that set in the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014.
Automatic enrolment continues to make workplace pension saving the “new normal”. The proportion of those enrolled who later choose to opt out remains low, at 9%, according to the Employers’ Pension Provision Survey 2015, which is well below the original programme assumption of 28%. Our new awareness campaign, launched in October 2015, Don’t Ignore the Workplace Pension, builds on previous campaigns that sought to normalise pension saving among individuals and is designed to prompt employers—small and large—to find out about their duties and the process of automatic enrolment.
Automatic enrolment continues to bring into its target group those least likely to save for retirement. Low-paid workers and women, who are often likely to be low earners, have traditionally been underrepresented within workplace pension savings. Since 2011 the private sector has seen a 24-percentage-point increase in eligible female participation in workplace pensions, and in 2014 there was no gender gap in participation, with 63% of both eligible men and women participating.
This positive trend is expected to continue as we enter automatic enrolment’s most significant stage: the phased rollout to small and micro employers from now on. Last year saw the successful staging of the first tranche of small and micro employers. Over the next 12 months, more than 700,000 small or micro employers are projected to have started enrolling their employees into a workplace pension. Many tasked with this legal duty are not commercial enterprises but individuals who employ single members of staff, such as nannies, home helps or personal care assistants. At this crucial stage of implementation, it is therefore more important than ever that when deciding the thresholds for joining and contributing to a workplace pension we strike the correct balance between minimising the administrative burden on employers and ensuring that as many people as possible save in a workplace pension.
To describe the impact of the order, I turn first to the qualifying earnings band. This sets the earnings levels within which an automatically enrolled employee and their employer have to pay a proportion of the employee’s income into a workplace pension. Past reviews have generally linked this to the national insurance bands and this has been uncontroversial. As I signalled in my Written Ministerial Statement on 15 December 2015, the lower limit for the qualifying earnings band will remain unchanged and aligned with the national insurance lower earnings limit of £5,824. This order will align the qualifying earnings band upper limit with the new national insurance upper earnings limit of £43,000. By maintaining the alignment with the national insurance thresholds, both at the point where contributions start for low earners and are capped for higher earners, the overall changes to existing payroll systems are kept to a minimum. This decision therefore both ensures simplicity and minimises the administrative burden of compliance for employers in 2016-17.
The order does not change the earnings trigger. This remains at the value set in the 2014-15 order. This trigger is the earnings level at which individuals are eligible to be automatically enrolled into a workplace pension scheme by their employer. We have decided to maintain the existing automatic enrolment earnings trigger for 2016-17, so it will remain at £10,000. Due to anticipated wage growth, and with maintenance of the earnings trigger, we expect that an additional 130,000 individuals will now meet the earnings criteria and be brought into the automatic enrolment population. Of these, we estimate that 71%, or around 91,000, will be women. Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still have the option to opt into a workplace pension and benefit from their employer contributions, should they wish.
In conclusion, the decision to maintain the earnings trigger at £10,000 will increase the number of low earners and women who meet the earnings criteria, and who are therefore automatically enrolled into a workplace pension. This decision will increase the total numbers saving into a pension and total savings. It is expected to further increase the number of women eligible to enrol, or be re-enrolled, into a workplace pension.
The decision to maintain the alignment of the lower and upper earnings qualifying bands with national insurance contributions thresholds maintains simplicity, and ensures that there are no new potential administrative burdens on employers at a crucial stage of the programme’s wider rollout. The order therefore ensures that automatic enrolment will continue to provide greater access and opportunity for more individuals to save into a workplace pension with the help of their employer, and those enrolled will have a chance to build up meaningful pension savings. I commend the order to the Committee.
My Lords, these regulations provide an annual event for me. While I consistently recognise the success of the department in rolling out auto-enrolment, and we have all been pleased by the power of inertia to sustain low levels of opt-out, in previous years I have been increasingly frustrated by the number of women being excluded from auto-enrolment because of the rather aggressive way in which the earnings trigger was increased. Last year I came with a little more humility and was pleased to see that the earnings trigger was being maintained at £10,000 rather than tracing the tax threshold, and of course I am pleased that it is being maintained at £10,000 again. Those are the positives, and I am a “half full” person, but even a “half full” person still wants the extra half-glass that remains empty. I continue to remain concerned that only 38% of the eligible auto-enrolment population are women. In my view, that is still too low. A core principle in designing the new private pension system was that it should work for women, and I do not think that that principle is being met with in that percentage level.
Whenever there has been a discussion with the Government on the earnings trigger and why they chose to put it so high, three reasons have been put forward. One is that small amounts of savings may be inefficient for the industry; I will not dwell on that, other than to say that I find it an intensely irritating argument. The second is that the earnings trigger being set at the level of the income tax threshold makes it administratively easier for employers, but that reason has not held for the past two years. By freezing it at £10,000, more women have been brought into auto-enrolment than would otherwise have been the case.
The key argument that keeps dominating this debate as to where the earnings trigger should be is that low earners, when they retire, will get sufficient replacement income from the state so they do not need to save. I have three problems with that reasoning. Many women who earn below £10,000 will not work part-time all their lives but will have patterns of employment where sometimes they work full-time and sometimes part-time, and their persistence in saving during those periods when their earnings fall is very important. Many women on lower earnings are in households where the household income can clearly support them in their saving.
I believe fundamentally that women on low earnings should still be able to build up a pot of long-term saving in their own right. I really do not buy into the argument that being on low earnings somehow gets a mental wrap of “pin money” around it, because their savings will be supported by an employer contribution and may well be supported by the tax credit system. The argument for women on lower earnings being able to build up a pot of savings in their own right is even more powerful now that we have pensions freedom because, with auto-enrolment, funds go into a long-term savings product, not into a pension product as such.
So I make my annual plea: I still think that the attitude towards low-income women that is brought to bear in the private pension system is wrong and still excludes too many women. Obviously, I am pleased that the earnings trigger is being held at £10,000—that is a positive—but too many women are excluded from auto-enrolment.
My Lords, I thank the Minister for introducing this order. We support the progress which has been made on auto-enrolment and we should take this opportunity to pay tribute to those who helped to create it. My noble friend Lady Drake was there at the start, or indeed before it, and she has expressed her concerns that the system still does not seem to be dealing adequately with the concerns and needs of low-paid women. It will be interesting to hear the Minister’s response to all that.
In her introduction, the Minister referred to the fact that those between the LEL and qualifying earnings can opt into the system. Do we have any data about how many actually do that? I think she cited that there was equality in 2014, in so far as 63% of eligible men and 63% of women opted in. The trouble is that the numbers of men and women were not equal, which meant that many more men opted in, so her statistic was a bit unfortunate.
As my noble friend Lady Drake has recognised, freezing the earnings trigger for a second year has a modest impact in drawing more people in and will help women, who are of course disproportionately represented among the lower paid and have missed out on auto-enrolment previously. One of the effects of freezing the trigger at £10,000 is a widening gap between the contributions and the income tax threshold, which means that, as a practical matter, those who are on the net pay tax relief arrangements are not actually getting effective tax relief. There are, of course, two ways in which you can get your tax relief: one is through the net pay arrangement and the other, the name of which escapes me—
It is indeed relief at source. I am grateful to the Minister. What is happening to try to ensure that those people who are subject to the net pay arrangements are getting their tax relief? I am not quite sure what the arrangement with NEST is. I think that relief at source, which generally operates for NEST, will obviously cover a good many people, but how many people are missing out? These are people at the low end of the income scale who are not getting their tax relief, which was an important ingredient of the overall arithmetic.
Has there been any progress on aggregating mini-jobs for the purposes of the trigger and qualifying earnings band? If our noble friend Lady Hollis were here rather than in the debate on the Housing and Planning Bill, she would be on her feet extensively.
It was about people with mini-jobs being able to aggregate to reach the thresholds. We understand some of the practicalities, but has any progress been made on that?
I have another question to which I genuinely do not know the answer, about the impact of zero- hours contracts and fluctuating earnings on take-up arrangements. Looking at the varying pay periods, how does this work when somebody is within a pay period and above the threshold for one month but not for the subsequent period, so that they fluctuate in and out of the system? I think those were all the questions that I had. We will obviously not be opposing these provisions, and I look forward to the Minister’s response.
My Lords, I thank the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, for their excellent contributions. I certainly join in the tribute paid to the noble Baroness by the noble Lord for her role in setting up and being responsible for the successful programme of auto-enrolment.
I am delighted and welcome the fact that the noble Baroness welcomes the decision to freeze the earnings trigger. I am also delighted that she is as pleased as we are with the low opt-out rate and that, so far, this programme has indeed been a real success. All the points raised by the noble Baroness are valid, and are ones that I have raised in the past. However, there is a further reason why we have to be mindful of where we set the earnings trigger, and be very careful as we move forward with this policy not to derail what is already such a success. Part of the reason why it is such a success is that there is widespread consensus among employers as well as the pensions industry that this is the right thing for the country. Employers have accepted—willingly, in many cases—the idea that it is normal, and should be normal, for an employer to be responsible for not only the national insurance and tax of their employees but also a pension for their workforce.
However, as the noble Baroness knows, that consensus was hard won. It was the result of a very long period of negotiation and renegotiation, part of which concerned the costs to the employer. Although the earnings trigger is higher than might have been expected a few years ago, we have put other burdens on employers. Were we to reduce the earnings trigger significantly at this stage, given that we have the rollout of the national living wage, the apprenticeship levy and other elements that will impact on employers’ labour costs, it would be right to be mindful and careful about how quickly we move to include significantly more people in pension saving. However, notwithstanding that, as I said, 130,000 more people will be brought into pension saving—71% of whom are expected to be women—as a result of keeping the earnings trigger at the £10,000 level rather than moving it up, as was one of the considerations.
The noble Lord, Lord McKenzie, also referred to women. I once again confirm that the coverage of pensions for eligible workers is the same for women and men. As most noble Lords are probably aware, I would certainly like to see more women being brought into auto-enrolment. In time, I am sure that we will be able to do that. Of course, they can now opt in anyway if they are earning more than £5,824 a year and receive an employer contribution. That still means that they do not get the same behavioural nudge, but I can report that the latest figures suggest that 5% of those who are not eligible and are earning below the relevant figure are opting into their employers’ pension scheme. It is a start. I hope that, in time, we will go further as we establish this as the norm and as more workers become aware of the fact that this could be effectively free money from their employer, and that a significant extra contribution on top of their own pension savings is on offer if they wish to take it up. Of course, it takes time for those messages to come through.
As the noble Lord may well be aware, the issue of net pay arrangements is something significant that I have raised since I became aware of it a few months ago. Clearly, it is not acceptable that the very lowest earners might be required to pay about 20% to 25% more for the same pension as someone who earns more than them. That is the potential result of their employer choosing to use this net pay arrangement-type of scheme rather than a relief-at-source scheme.
I have been very clear, and the regulator has made this much clearer on its website, about helping these small and micro employers that are coming into auto-enrolment now to understand what this all means for their lower earners. It is not unreasonable to expect that large firms, which employ advisers and have their own HR departments, would understand the implications of this, but for a smaller employer coming in now, who in many cases has probably never heard of pensions or had their own, it is really important that they choose the right scheme for their staff. If they have no low earners, it is not a problem, but if they do then the regulator is making it much clearer on its website that a net pay scheme will cause those lower earners to pay a lot more for their pension. Of course, a net pay arrangement is better for higher earners.
I can confirm that NEST offers only a relief-at-source scheme. In the past few months, the People’s Pension has decided that it will default all employers that do not choose into a relief-at-source scheme, although it offers both. It is important for us to ensure that we all help low earners, who probably do not understand how this works and who are at the mercy of their employer, which chooses the scheme on their behalf, to move themselves and to have the best possible chance to accrue the best possible pension if they choose to stay in, or even if they are choosing to opt into, their employer’s scheme.
The issue of multiple mini-jobs is one that is exercising me, not just from the pensions perspective but from other perspectives as well. I assure the Committee that we are working on these issues. However, with pensions it is not easy to see where the responsibility could lie. If an individual does not earn more than £10,000 in any single job, even if they earn more than that in total in more than one job, who would have to pay the contributions and how would that be assessed? Each employer may not know what the worker earns with another employer; they know only what the worker earns with them. The worker themselves, as I have said, can choose to opt in if they are earning enough and want to take advantage of this employer contribution to their pension. The analysis from the Department for Work and Pensions for the year 2014-15 shows that 490,000 workers with multiple jobs who have total earnings above the automatic enrolment earnings trigger are aged between 22 and state pension age, and just 160,000 of those are ineligible for automatic enrolment because they earn less than the earnings trigger in any one of their jobs.
We have an opportunity to get clear messages to those—generally women—who have more than one job to encourage them to opt into their employer’s scheme. Again, that is under consideration as another phase of our public messaging to explain and promote automatic enrolment as we move forward. However, we have an enormous amount of work to do on automatic enrolment already as we roll forward and try to ensure that these 1.8 million small and micro employers, which have yet to start between now and 2018, successfully do so without being fined and without letting their workers down, and manage to cope with the auto-enrolment system.
The issue of female participation in pension schemes is of course skewed to some degree by public sector pension schemes, where coverage for women is so much higher than it is in the private sector. However, I have been very encouraged to see that the coverage for women in the private sector is increasing so much faster than for men. We are closing the gap; I am not saying that there is not a gap, but we are closing it. I therefore hope that the noble Baroness and the noble Lord will take comfort from the fact that we seem to be moving in the right direction.
On the issue of zero-hours contracts, I am happy to write to the noble Lord but, as I understand it, workers who are on variable incomes can be reassessed each month so that those who qualify above the required trigger can be opted in one month, but if they do not earn sufficient the following month they may not be. This is a payroll issue, and I would like to come back and write to the noble Lord with more specific details.
I thank noble Lords for their contributions to this debate and for the constructive approach that they have taken, once again, to today’s proceedings. This order increases the automatic enrolment upper qualifying limit to £43,000 and therefore maintains the automatic enrolment qualifying earnings bands, both at the top and at the bottom ends, with the limits for national insurance contributions. Both the lower qualifying earnings limit and the earnings trigger remain at their existing levels so they are not uprated in the order.
The combined effect of these decisions is that the number of individuals saving through automatic enrolment will increase, bringing more low earners and women into workplace pensions. As a result, total pension savings will also increase, which is of course important and an example of the success of the current programme. Our approach aims to be administratively simple, which is important, as I have said, as automatic enrolment reaches the smallest employers across the country, who are least able to manage pensions complexity.
I hope that I have set out for the Committee the need for this order and have responded to the matters raised. I commend this draft order to the Committee.