Motion to Consider
My Lords, this order was laid before the House on 2 February 2017. I give the Committee the usual assurance that the draft statutory instrument is compatible with the European Convention on Human Rights.
The order reflects the conclusions of this year’s annual review of the automatic enrolment thresholds required by the Pensions Act 2008. The review considered both the automatic enrolment trigger, which determines the point at which someone becomes eligible to be automatically enrolled into a qualifying workplace pension, and the qualifying earnings band, which determines those earnings of which the enrolled employee and their employer must pay a proportion into a workplace pension.
The order sets a new lower and upper limit for the qualifying earnings band and is effective from 6 April 2017. The earnings trigger is not changed and so no further provision is required in this order. The earnings trigger remains at the level set in the automatic enrolment threshold review order of 2014-15. Automatic enrolment continues to be a programme that works; nearly 7.3 million people have been enrolled, more than 400,000 employers have met their duties and the opt-out rate remains low at around 9%. We are now in the final year of rollout and the most challenging phase of automatic enrolment, with small and micro employers staging in peak volumes throughout 2017. Against this backdrop, it is more important than ever to maintain simplicity and consistency for employers. This year’s order will provide this through to the end of rollout in February 2018.
I am sure the Committee will share my enthusiasm about the very exciting juncture of automatic enrolment at which we find ourselves, with the review of the policy and its operation being undertaken by my department this year. With that review, it is time to reflect on the successes we have achieved so far, take stock of the current position and consider how to build on this so that automatic enrolment continues its success in helping to rebuild a culture of saving. As such, it is important that this year’s thresholds decision avoids pre-empting the outcome of the 2017 review but still delivers on the established principles of increasing the opportunity for people to make meaningful savings into a workplace pension while balancing costs for employers.
To describe the impact of the order, I turn first to the qualifying earnings band. As signalled by my honourable friend the Minister for Pensions on 12 December 2016, the order will, as previously, align both the lower and the upper limits of the qualifying earnings band with the national insurance lower and upper earnings limits of £5,876 and £45,000 respectively. 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 2017-18, while maintaining consistency for hundreds of thousands of small and micro employers implementing automatic enrolment over the coming year. As I said, the order does not change the earnings trigger, which remains at £10,000, as set in the 2014-15 order.
Automatic enrolment continues to bring into its eligible 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 in workplace pension savings. Between 2012 and 2015 the private sector saw a 30 percentage point increase in eligible female participation in workplace pensions, and in 2014 there was no gender gap at all in participation. In fact, 2015 has seen more eligible women in the private sector participating in a workplace pension, exceeding the participation of men with 70% to 69% respectively.
Due to anticipated wage growth and with the maintenance of the existing trigger, we expect that an additional 70,000 individuals will meet the earnings criteria and be brought into the automatic enrolment population, of whom around 75% are women. Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still be able to opt into a workplace pension and benefit from their employer contributions, should they so wish.
In conclusion, the decision to maintain the earnings trigger at £10,000 will increase the number of low earners who meet the earnings criteria and are therefore automatically enrolled in a workplace pension. The decision will increase the total number of people saving into a pension and the total savings. In addition, the decision to maintain the alignment of the lower and upper earnings qualifying bands with those for national insurance contributions maintains simplicity and consistency and minimises the burdens on employers at a crucial stage of the programme’s wider rollout. Taken together, that means that the total pensions saving is expected to increase by some £71 million. The order therefore ensures that automatic enrolment will continue to provide greater access and opportunity for individuals to save into a workplace pension and build up meaningful pension savings. I commend the order to the Committee.
My Lords, I thank the noble Lord the Minister for his instructive introduction to the order and for the fact that the number of women who are now enrolling has increased considerably. That is very good news.
I welcome the fact that the earnings trigger above which people will be automatically enrolled will remain at £10,000, which seems very reasonable. A lower threshold would bring more people into pensions, but, as the Minister indicated, with a state pension currently providing over £8,000 in retirement, there is obviously a limit to how far the Government want to be enrolling people who earn approximately £9,000, taking into account the cost to employers of setting up schemes, making payroll changes and so on. As has been indicated, the earnings trigger will undergo a fundamental review as part of the automatic enrolment review later this year. It would perhaps be better to wait for that and to look then at altering the trigger threshold.
The lower and upper limits for the band of qualifying earnings, on which contributions are due, are currently linked to the lower and upper limits for national insurance contributions. The order maintains that connection. However, I note that the Chancellor of the Exchequer raised the upper limit for national insurance contributions from £43,000 to £45,000. The order does the same and means that higher earners will be putting pension contributions in over a slightly wider band. That is welcome, but they can of course opt out if they wish to.
Although I welcome the regulations, I flag up my concern about people who have multiple jobs whose individual incomes will be below the threshold but cumulatively above it. They might earn £6,000 in one job and £5,000 in another. Such people are excluded from automatic enrolment; perhaps that can be considered on another occasion.
The Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2017/18: Supporting Analysis report, which was published in December 2016, refers to an important point about the 280,000 people who earn between £10,000, the automatic enrolment trigger, and £11,500, the current tax threshold, who get tax relief. However, they get their tax relief only if it is administered according to the relief-at-source tax system, but not if their tax relief is administered according to another system, the net pay arrangement. That arrangement is somewhat obscure and the Government have failed to address the issue in the order. Those are minor points, however, and I generally welcome the order.
My Lords, I remain concerned that the earnings trigger of £10,000 for auto-enrolment still excludes too many people, particularly women, from the benefit of a pot of savings supported by an employer contribution. I am also a little disappointed that the Secretary of State has not taken the opportunity of the annual review to reduce the trigger. Although it has been held at £10,000 for three years, it is still too high, although this approach is preferable to aligning it with the personal income tax threshold, as happened between 2011 and 2015, which excluded ever more women every year.
Of the 11 million workers in the eligible target population for automatic enrolment, only 36% are female, and 3.5 million workers are ineligible because they earn less than £10,000 in any one job. The impact assessment confirms the disproportionate impact on women, because it shows that simply freezing the trigger at £10,000 will bring an additional 70,000 workers into auto-enrolment, over 52,000 of whom will be women.
The impact assessment reasons that auto-enrolment is in a challenging phase with the rollout to small and micro employers, so the earnings trigger should be held at £10,000. That is an understandable argument but not one that can fairly hold over time as a reason for not lowering the trigger. DWP figures reveal that of those working for smaller employers with 10 or fewer employees, 61% meet the eligibility criteria for auto-enrolment, compared to 90% of workers for large employers with 500 or more employees, and 55% of people employed in the service sector—where there is a concentration of women workers—meet the criteria, compared to between 70% and 90% of workers in other sectors.
The DWP analysis suggests that these discrepancies between small and large employers are largely driven by workers not meeting the earnings threshold. That is a pretty predictable observation. There are nearly 15 million women in work, 42% of whom work part-time. The ONS figures show that the smaller the company, the lower the level of earnings for part-time workers. Sweepingly, anyone working 25 hours or less on the national minimum wage of £7.50 is ineligible for auto-enrolment. The DWP’s analysis also shows that reducing the trigger to the national insurance primary threshold of £8,164 would bring more than 500,000 women—and nearly 750,000 workers overall—into auto-enrolment.
An argument deployed by the Secretary of State in 2011 for excluding lower earners was that the state system itself delivered an adequate replacement rate of income. Indeed, that argument is deployed again in the current impact assessment, which states that the earnings trigger,
“should be set at a level that ensures as many people as possible are eligible for AE without disproportionately capturing those lowest earners for whom it makes little sense to save for retirement”.
Lowering the £10,000 trigger, however, would not disproportionately capture lower earners. Very often, low earners are not low-paid throughout their working lifetime. Earnings are dynamic, but persistency of savings throughout working life is very important. Many women who earn less than £10,000 will, during their lives, have periods of full-time employment on higher earnings and periods of part-time employment on lower earnings, when they are caring. Persistency of saving throughout both periods and retaining the employer contribution improves their financial outcomes in retirement. Many, or most, very low earners are women who live in households with others with higher earnings and/or receiving working tax credits. They may well be workers who should be automatically enrolled.
As to excluding lower earners because the state system delivers an adequate replacement rate of income, “freedom and choice” means that individuals are no longer required to secure even a minimum income stream, and are free to spend all their money as they wish from the age of 55. Securing a replacement income is no longer a requirement of private pensions policy. Excluding so many lower earners from a pot of long-term savings supported by an employer contribution and the tax credits system is not fair because it simply denies them the opportunity to accrue a savings pot and build financial resilience in later life.
As to the equality implications, there is no impact assessment of whether a design feature of the second-tier pension system—the £10,000 earnings trigger—is working well for the life pattern of many women, contributes to the lifetime gender pay gap or unfairly fails to assist lower earners to accrue assets. The arguments for extending the coverage of auto-enrolment by lowering the trigger are strong. The number excluded is significant and risks an unfair distribution of long-term savings.
The review of auto-enrolment this year provides an opportunity for the Government to indicate the future direction of policy. They have confirmed that the scope of the review will look at existing coverage and consider the needs of those not benefiting from auto-enrolment, and examine the thresholds for the earnings trigger and the qualifying earnings bands. I ask the Minister: as part of that review will the Government explicitly consider the benefit to a large number of workers of reducing the earnings trigger below £10,000?
My Lords, automatic enrolment has been a hugely successful example of public policy and once again I pay tribute to the role of my noble friend Lady Drake in helping to formulate its development and implementation.
The success of auto-enrolment has been built on rigorous research and assessment of the data, engagement with the industry and the building of a political consensus—legislated for by a Labour Government, implemented by the coalition Government and now sustained by the Conservative Government. Of course, that does not mean that we share an identity of view on every aspect of its implementation, as this discussion has already indicated. I will say more on this later. But it has undoubtedly been successful because it addresses a fundamental issue of chronic undersaving for pensions.
To date we are told—we have new figures today, I think—that some 7.3 million workers have been automatically enrolled by nearly 400,000 employers. The DWP review suggests, and we agree, that with all large and medium-sized firms having reached their staging times, the rollout for small and micro-sized employers is the most challenging phase. Of course, we are still in the 1%/1% contribution phase. DWP analysis suggests that by 2019-20 there will be an extra £17 billion of workplace saving per year as a result of automatic enrolment—a considerable achievement.
Of course, the success of auto-enrolment has run ahead of the necessary regulatory framework as it spawned the growth of master trusts. But this is being addressed in part by the Pensions Schemes Act, as I think it now is. Perhaps the Minister can give us an update on implementation plans for this legislation and its multitude of regulation-making powers.
The Minister will be aware that there are obligations on employers not only to automatically enrol workers but periodically—every three years—to re-enrol those who have not taken up the opportunity thus far. It is understood that there is a six-month window in which to do this. Given an October 2012 start date for automatic enrolment, employers will increasingly face this obligation. Can the Minister give us some data on how this is all going? How many workers have been re-enrolled and how many have opted out?
The order addresses the earnings trigger, which determines who is eligible to be automatically enrolled, and the qualifying earnings band, which determines the minimum level of contributions. The particular bone of contention with this order, as the Committee heard from my noble friend Lady Drake, is the earnings trigger, which is retained at this year’s level of £10,000. While it represents a modest lowering of the threshold in real terms, it does not go far enough, as my noble friend asserted. Bringing within scope a further 70,000 individuals, 75% of whom are women, is to be welcomed. But if the trigger rate were just set at the national insurance primary threshold, as the papers before us show, a further 750,000 would be in scope and 70% or more of those would be women.
My noble friend has highlighted research, some of which came from Scottish Widows. Although it shows improvement in the number of women saving for retirement, there is still a gender gap. That reflects the fact that women are more likely to be in part-time work and lower-paid jobs—it is they who bear the brunt of having an earnings trigger that is too high.
In making the judgment as to the appropriate level of the earnings trigger for 2017-18, the Government assert that the overriding factor should be ensuring that people have sufficient retirement income savings. We agree with this. However, they then use the broader upcoming 2017 review to settle for the status quo on the basis of stability and affordability, without, I suggest, any detailed analysis, at least on the latter. Perhaps the Minister will take the opportunity to expand on this justification for the record.
So far as the qualifying earnings band is concerned, we note the continued alignment of the starting point with the LEL and the retention of an overall cap on employer contributions. The Government acknowledge that using a trigger below income tax personal allowance level does not preclude the benefit of effective tax relief if net pay schemes are used. Reliance on those below the income threshold opting in ignores the key principle of inertia on which auto-enrolment is built. Can the Minister give us any data on the numbers who opt in to schemes voluntarily and obtain the benefit of the employer contribution? Nevertheless, as my noble friend said, we look forward to the upcoming review and trust that it will include a focus on such matters as mini-jobs—mentioned by the noble Baroness, Lady Bakewell—and the self-employed.
The self-employed have of course caught the attention of the Chancellor this week. So, too, have those who operate through their own companies. When the legislation was introduced, excluded from its scope were sole-director companies, generally on the basis that such individuals were officeholders rather than workers. Given the growth of such arrangements, are there any plans to review this situation?
The order represents a modest advance in expanding the reach of auto-enrolment and we will obviously not oppose it. The 2017 review is an opportunity to take stock of matters more widely to ensure that the full benefits of this policy are obtained and that there are better outcomes, in particular for women and the low-paid.
I am very grateful to the noble Lord for his offer not to oppose the order. I am even more grateful for the generally constructive approach that all noble Lords have taken to it. As we know, it is very simple and deals merely with automatic enrolment and raising the lower qualifying limit and higher qualifying limit in line with the lower earnings limit and the upper earnings limit of NICs, at the same time leaving the £10,000 figure where it was.
As I made clear in my opening remarks, we are conducting the 2017 review, so I have to be fairly circumspect in what I say in response to noble Lords because I do not want to prejudge that. However, many of the speeches, in particular that of the noble Baroness, Lady Drake, will be taken into account in that review, and we will consider in due course any further comments that she wishes to put forward. I will answer one or two of the more detailed questions put to me in the course of this short debate.
Perhaps I may deal first with the question of multiple jobholders, which was raised by the noble Baroness, Lady Bakewell, by making it clear that for some multiple jobholders, one of their jobs will earn in excess of £10,000. They will therefore be automatically enrolled on that job. But it is the case that they can choose to opt into schemes if they earn under £10,000 but more than the lower earnings limit so if they have a number of jobs, one of which is paying at least £5,876 a year, they can obviously do that. We think that around 500,000 multiple jobholders meet the age criteria for automatic enrolment and that of these, some 330,000 earn more than £10,000 in at least one job, so they would be automatically enrolled in it.
This may deal with the point raised by the noble Lord, Lord McKenzie, when he asked about the numbers of those seeking to voluntarily opt in who are below the £10,000 trigger and above the upper earnings limit. I understand that the survey we conducted in 2015 suggested that some 5% of those ineligible workers had chosen to opt in, which probably shows the benefit of the whole idea behind automatic enrolment—that you are automatically opted in and have to opt out. If we compare a 9% dropout rate there with a 5% enrolment rate for those who can, we see that leaving these things to a voluntary process would have led to a very different take-up from what we have seen so far with the automatic enrolment introduced by the 2008 Act. As I think I made clear in my opening remarks, we have seen a dropout rate among those who were automatically enrolled of only 9%. That rate might go up as the contributions go up but, at the moment, it is way below what was originally estimated by the then Government who introduced this measure and in other measures by us.
The noble Baroness, Lady Drake, expressed some concern about the £10,000 limit. She would like to reduce it still further. She certainly agreed that it was preferable to keep it at £10,000, though, rather than linking it to the personal income tax threshold. I think she would also agree that the arguments are finely balanced on both sides as to whether to increase or decrease the limit. I can see the case for a degree of simplicity by aligning it with the personal income tax threshold, but that would obviously exclude many more people. There is also the argument on the other side: if one lowers it—below £10,000—yet more people who are not paying income tax will be eligible for automatic enrolment. Having listened to the noble Baroness and said that the arguments are finely balanced, these matters can be looked at in the 2017 review, which I stress will look at the overall operation of the policy in the round, including the balance between catching the lower earners and other factors that determine the overall numbers who will be subject to automatic enrolment. Again, the concerns that she has put forward will be taken into account.
The noble Lord, Lord McKenzie, also asked about the Pension Schemes Bill, which is close to my heart. It was just disappearing from this House with all its detail as I arrived back in DWP and is awaiting its Report and Third Reading in another place.
I can tell the noble Lord that the department expects to consult later this year on regulations that will set out all the detail of the new authorisation regime. Obviously, that will be introduced once the Bill is on the statute book. He also asked for a number of other detailed figures, which I would prefer to deal with in writing, to the extent that we have them or estimates of them.
I repeat my gratitude for the generally positive contributions to today’s discussion and stress that all comments will be taken into account in the review.
Before the Minister sits down, may I comment on his comment on the opt-in rate, which is 5%? That means that 95% of people who could take advantage of an employer contribution, for example, are missing out. A 5% opt-in rate is not great, and reflects the fundamental architecture of the scheme. Causing people to do something generally does not work with pay and pensions: you need to do something. Inertia keeps them in. On the issue of mini-jobs and whether any of them reaches a £10,000 threshold, even if one of them did, it would not give relief or benefit on the full aggregate of a number of mini-jobs that people may have, so it is not equivalent. It is difficult: we have debated and agonised over the issue of how effectively to aggregate these disparate jobs and get the same result as if it were one job. If that came out of the review, it would be a real success.
What it reflects—to use a fashionable modern word—is the power of nudge. By means of automatic enrolment, we are achieving those high rates, whereas if one asks individuals whether they wish to join, one gets the relatively low rate of 5%. That 5% compares very interestingly with what I think is a rather low rate of opt-outs: 9%, which is far lower than we originally expected.
Having said which, I would still say that one has to get the right balance between administrative simplicity and ensuring that people will ultimately benefit. It is important to remember administrative simplicity for the employer, particularly the very small and micro-employer. That said, all those factors can be taken into account in the annual review. We all have the same desire: to increase enrolment in pensions as far as possible, but in the best way. This has been working very well since the 2008 Act. There are just questions such as whether to bring the trigger lower. They are best looked at in the review, where they will be taken into account.
I think I have dealt with most matters, other than those on which I promised to write to the noble Lord, Lord McKenzie. I commend the Motion.