National Employment Savings Trust (Amendment) Order 2018
Considered in Grand Committee
That the Grand Committee do consider the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2018 and the National Employment Savings Trust (Amendment) Order 2018.
My Lords, I am pleased to introduce these instruments, which were laid before the House on 29 January and 31 January 2018. Subject to approval, the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2018 reflects the conclusions of this year’s annual review of the automatic enrolment earnings thresholds required by the Pension Act 2008. It has considered both the automatic enrolment earnings trigger, which determines the point when someone becomes eligible to be automatically enrolled into a qualifying workplace pension, and the qualifying earnings band, which determines those earnings which the enrolled employee and their employer have to pay a proportion of into a workplace pension. This order sets a new lower and upper limit for the qualifying earnings band and will be effective from 6 April 2018. The earnings trigger is not changed with the order and remains at the level set in the automatic enrolment threshold review order 2014-15, so no further provision is required.
Subject to approval, the National Employment Savings Trust (Amendment) Order 2018 will facilitate the effective operation and development of the NEST pension scheme and improve the way the scheme operates for participating employers and scheme members. From 6 April 2018, the proposals will allow the NEST trustee to accept people who are contractually enrolled by their employer, give the trustee the discretion to remove members with empty accounts, allow bulk transfers in with consent, and require NEST Corporation to carry out research. I am satisfied that the orders are compatible with the European Convention on Human Rights.
Automatic enrolment has been hugely successful in achieving its aim of getting millions more people saving into their pensions. Since its launch in 2012, more than 1 million employers have complied with their automatic enrolment duties and more than 9 million people have been successfully enrolled into a workplace pension. The vast majority of people who have been automatically enrolled are choosing to continue saving, with opt-out rates remaining consistently low at around 9%. Such progress and success, supported by all sides of the Committee, is truly to be commended and celebrated.
This is a big year for automatic enrolment and one which marks several key milestones for the policy and programme. First, the final and most challenging phase of rollout concludes this month when the last month group of the smallest employers take on their duty to automatically enrol all staff. These employers will have to declare their compliance by the end of July 2018. This means that all established employers are now subject to automatic enrolment. From last October, the duties also began to apply to all new employers as a matter of course.
Secondly, in April this year, the first of the two planned increases in minimum contribution levels for automatic enrolment will occur with contributions rising to 2% and 3% of band earnings for employers and jobholders respectively. Automatic enrolment continues to be a programme that works. It is re-establishing a culture of saving and making workplace pension saving the norm for a new generation. However, the Government recognise that there is still more to do as they continue to work towards their commitment of improving retirement outcomes for millions of savers.
This time last year we were embarking on the early stages of the 2017 review of automatic enrolment. Last December, the report from this work, Maintaining the Momentum, was published—I think we should change the name—setting out a clear path for the future of workplace pension saving. The comprehensive and balanced package of proposals that it detailed are intended to build on the remarkable success of automatic enrolment to date, increasing the number of people saving and the amount that they will save. We are now embarking on the process of building consensus around these proposals. It is my Government’s ambition to implement these changes in the mid-2020s, subject to discussions with stakeholders around their detailed design, learning from the contributions increases in 2018-19 and finding ways to make the changes affordable. I am sure noble Lords will join me in welcoming and supporting our continued progress with this crucial agenda.
Turning now to the orders of the day, I will first describe impacts of the automatic enrolment thresholds order. As signalled by the Minister for Pensions and Financial Inclusion in his Written Statement in another place on 18 December 2017, the order will, as previously, align the both the lower and upper limits of the qualifying earnings band with the national insurance lower and upper earnings limits of £6,032 and £46,350 respectively, ensuring stability and consistency in the light of the key milestones already highlighted. By continuing to align the limits to the national insurance thresholds, the changes relating to payroll systems are kept to a minimum. Simplicity is maintained and this approach helps employers to manage costs while they adjust to the overall increases in contributions from April. Setting the thresholds at these levels will also ensure that contribution levels continue to be meaningful for savers.
It is important to be clear that the proposal outlined in the 2017 review of automatic enrolment to remove the lower earnings limit is setting the direction for the future of the policy and is not reflected in a current-day change; neither does the proposal to remove the lower earnings limit in future pre-empt or prejudice any future annual statutory review of the automatic enrolment earnings thresholds.
The order does not change the earnings trigger, which remains at £10,000, striking a balance between bringing in those most likely to benefit from pension saving and maintaining affordability for employers. By continuing to bring in lower-paid workers, we continue to address the savings needs of those traditionally underrepresented in workplace pension saving. We have gained the greatest ground on participation among younger workers and low earners, and seen gender parity in participation achieved among eligible men and women in the private sector. By 2019-20 an extra £20 billion a year is estimated to go into workplace pensions as a result of automatic enrolment.
Maintaining a stable trigger is hugely important with the upcoming rollout of phased increasing contribution rates. As these contribution rates increase, consistency and stability are key for both employers and jobholders. Due to anticipated wage growth and with the maintenance of the existing trigger, the effect is a real-term lowering of the trigger. We expect that an additional 100,000 individuals, the majority of whom are women, will now meet the earnings criteria and be brought into the automatic enrolment population. Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still have the option to opt in to a workplace pension and benefit from their employer contributions, should they wish.
To conclude on this point, the decision to maintain the earnings trigger at £10,000 will increase the number of low earners who meet the earnings criteria and who are therefore automatically enrolled into a workplace pension, and will therefore increase the total numbers saving into a pension, and 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 burdens on employers. Taken together, these changes will mean that total pension saving is expected to increase by £48 million.
On the second instrument we are debating, the National Employment Savings Trust—commonly known as NEST—was established to support automatic enrolment by ensuring that all employers have access to a low-cost workplace pension scheme with which to meet their duties. NEST was specifically designed for, and targeted at, low to moderate earners and smaller employers that the wider pensions market had historically failed to serve adequately. It has a public service obligation to admit any employer that wishes to use the scheme to meet its automatic enrolment duties. NEST has also been a tremendous success. So far, it has more than 6 million members, in excess of 554,000 participating employers and over £2.4 billion of funds under management.
All the measures in this amendment order will improve the way in which the scheme works for participating employers and members. There are four minor and technical changes, which I will briefly outline. The first is contractual enrolment, which describes a process whereby a worker is enrolled into a scheme by their employer through contractual agreement—usually via their employment contract. The order will make it possible for participating employers to enrol their workers into NEST whether or not the automatic enrolment duties apply to the employer. Currently, an employer may enrol their workers into NEST only before these duties apply. This extension of contractual enrolment into NEST will enable employers to enrol all their workers into NEST and thus consolidate provision through the use of a single scheme.
The second change is to the research duty. The order will require NEST Corporation to carry out research with scheme members and participating employers or their representatives in connection with the operation, development or amendment of the NEST pension scheme. Research is an integral feature of the administration and management of any pension scheme, including NEST. All the major pension schemes have insight or research teams that reach out to employers and savers to improve their service and inform management and administrative decisions on product development, investment et cetera. NEST’s research will focus on underresearched groups, such as NEST members on low to moderate incomes. The introduction of a duty is designed to align NEST’s operation to changes in data protection law as a result of implementing the General Data Protection Regulation—GDPR—and provide it with a clear basis on which lawfully to process data going forward.
The third component in this instrument will give NEST Corporation the ability to remove a member with an empty account from the scheme where certain conditions are met, including that the account has been empty for at least 12 months. These accounts are of no value to the member and incur administrative costs for other members. In April 2017, NEST had around 60,000 members with no funds in their accounts. Making the change will reduce administrative burdens on the scheme and will not impact on individuals whose accounts are closed, as they can still be automatically enrolled again in future.
Fourthly, the final part of this instrument will clarify that individuals may join NEST in the event of a bulk transfer with consent. Previous wider restrictions on transfers into and out of NEST were removed on 1 April 2017, and this measure complements NEST’s ability to accept bulk transfers without consent. In doing so, it will facilitate the scope for NEST members to consolidate their pension savings into NEST.
I finally turn to what the evidence shows. All the changes are deregulatory and positive for employers, but minimal, are not expected to have a material impact and will also mitigate NEST scheme inefficiencies. The changes should give NEST the freedom to continue to serve its employers and members in a straightforward and efficient manner and also bring NEST into line with the rest of the pensions industry. I commend these instruments to the Committee and beg to move.
My Lords, it is getting later in the afternoon and there are some important debates following this, so I will be very brief on these two orders. The Minister is quite right to declare that the auto-enrolment provisions have been successful. She is also right to say that this year there are two, if not more, big changes and reforms in the existing system as it relates to small employers and to 3% contributions for employees and employers. We wish these changes well. These orders are perfectly sensible in promoting the agenda. She is also right to say that Maintaining the Momentum is a less than appropriate name for any kind of government report at the moment, but it was a good solid document and it gave confidence that there is a real prospect of delivering this scheme and building on the progress that has been made. Speaking for myself, I wish it well. I agree that the new opportunities for women in future are a signal and ambitious plan that we hope works in the way that the Minister set out, so I am very happy with the automatic enrolment order.
I have one or two pedantic questions about the NEST order. I spend a lot of time looking at secondary legislation. Paragraph 8(1) of the Explanatory Memorandum states:
“The Department for Work and Pensions consulted on the National Employment Saving Trust (Amendment) Order from 7 November 2017 to 27 November 2017”.
According to my arithmetic, that is a 20-day consultation. The next sentence is shorter: “It received five responses”. It occurs to me that one may be a consequence of the other. I understood that government consultations had to be slightly longer than that. Of course, it is a technical matter, I understand that, and the stakeholders involved might not be that numerous, but if it received five responses it is a bit rich to claim that, “the majority of the respondents were in favour” of the consultation as set out. Is that 3:2 or 4:1? I am being slightly facetious, but it is an important issue and consultation is an important part of getting these statutory instruments correct.
Coming to the substance, I think that the noble Baroness’s four recommended changes are entirely sensible. I am particularly interested in the revisions for research, because I have been involved as a trustee of schemes in the past and it is a struggle to keep the data up to date. Will the research function assist the trustee in being able to ensure that the data is as clean as it can be? Sometimes with some of these schemes, particularly involving bulk transfers, the data gets out of date—the members change their addresses, their occupations and their other personal details.
I did not know that there was no ability to carry out research as a trustee, but I think that making it explicit is a very good idea. Contractual enrolment is absolutely sensible, and removing empty schemes and accounts makes perfect sense as well. I think that NEST is also a success, as far as it has gone, so more power to its hand. I hope that both these orders work, and I will be watching developments, as I am sure everyone will be, in this important area of auto-enrolment over the rest of 2018 as these significant events come to pass.
My Lords, I thank the noble Baroness for her introduction of these two orders. I shall start with that relating to auto-enrolment. As the noble Baroness and the noble Lord, Lord Kirkwood, said, auto-enrolment has, by any measure, been an important policy success. It was founded on the independent work of the Pensions Commission, legislated for by a Labour Government, first implemented by the coalition Government and sustained by the current Conservative Administration. The broad consensus and robust analytical underpinning has been key to its success thus far, along with a design and implementation approach that encompassed government, regulators, employers, payroll firms, intermediaries and the pensions industry. This does not mean that there has always been an identity of view across parties or that the job is complete. It is not.
The noble Baroness referred to the big year 2018, which indeed has some important matters to consider but, as the earnings triggers and qualifying bands analysis for 2018-19 sets out, as at the end of November last year more than 9 million people have been successfully auto-enrolled and more than 900,000 employers—possibly now a million—have met their auto-enrolment duties. By the time the staging process is complete, the government analysis estimates that around 10 million people will be newly saving or saving more.
However, we know that just as the staging process is being completed, we are entering the year when the first phased increase in minimum contributions is to take place, leading eventually to 8% minimum contributions. Notwithstanding this, the Automatic Enrolment Review 2017 refers us to the Pensions Commission work that estimated that 8% of relevant earnings, together with the state pension, would deliver about half the level of income needed for an adequate retirement income. That is, around 12 million individuals will still be under-saving for retirement and, of these, 87%—10.4 million—earn more than £25,000 a year, so 13% earn less. While the 2017 review sets out a package of reforms to address this, it does not propose to see these completed until the mid-2020s. This package will include lowering the age threshold from 22 to 18 for young people, removing the lower earnings limit to help those with lower earnings and multiple jobs, as well as seeking to improve the retirement outcomes of the self-employed. These are worthy ambitions, but why do we have to wait for so long? Why is the current review concluding that the lower limit of the qualified earnings band should be raised, while arguing for it to be removed? Are the Government to find time for a full debate on this 2017 review in fairly short order? The review came out in December and it is very important. We ought to have the opportunity to debate it in Parliament.
As for the 2018-19 review, we note the retention of the earnings trigger at £10,000, which is a minor real reduction. While we support the Secretary of State in resisting the alignment of this with the income tax threshold, it leaves too many of the lower paid having to opt in to take the benefits of pension savings. However, we see the need for a smooth transition from the post-staging period as contribution increases are the order of the day. Maintaining affordability is a key function of the earnings trigger in the qualifying earnings band, but we agree that the overriding factor should be to enable individuals to build up greater security in retirement.
We would raise again the disparity of income tax arrangements under the net pay arrangements and relief at source. In brief, those earning below the personal tax threshold and contributing to a pension receive more tax relief under a relief at source system than under an NPA. Higher-rate taxpayers receive less tax relief under an RAS system.
Keeping the earnings trigger frozen at £10,000 while the personal allowance increases will increase the number of individuals who would not benefit from tax relief on their contributions if a net pay arrangement is used. The numbers involved mean an increase from 50,000 to 340,000 people who would be missing out. The Government say that this is difficult, but what options have they looked at to date?
As has been said, NEST was established in 2010 to support automatic enrolment and address a market failure for low to moderate earners and smaller employers. We accept that all the measures in the order seek to improve the way the scheme can operate for employers and members. We will of course support the order, but we have a few questions.
On contractual enrolment, can the Minister say something about the emerging scale of the push for contractual enrolment emerging from employers? As far as research is concerned, it is noted that the change is primarily about compliance with the GDPR. Can the Minister say how far adrift NEST’s current arrangements are in the new requirements? It seems to be the case that a member can be removed if 12 months have elapsed, starting from the date on which the members are admitted to the scheme, but when the member’s account has been zero over that period. We accept that empty accounts are inefficient and understand that there were about 60,000 that had been empty for 12 months, presumably from first admittance. Can the Minister say what it is about the enrolment process that may have given rise to the scale of the build-up of those accounts? It is noted that the Government have set their face against formalising the requirement that employers should be notified when NEST pension accounts are closed. Can we take it from the consultation response that this will nevertheless be part of the implementation design?
As for bulk transfers, it is understood that there is a clarification of the changes made a year ago facilitating the opportunity for NEST members to consolidate their pension savings into NEST. We support that and we support both these orders.
I thank the noble Lords, Lord Kirkwood and Lord McKenzie, for their contributions to this debate and for their incisive questions. I also thank the noble Lord, Lord Kirkwood, for saying that the whole concept of automatic enrolment and the process through to its delivery and implementation has been successful. As the noble Lord, Lord McKenzie, said, this came about through a considerable amount of consensus. We hope that the changes—albeit fairly minor—that we have made to NEST will work well. Certainly for us, the whole process has been a huge success, and we hope that it will also work well into the future.
One reason why we have brought forward this order on NEST is that it is important to keep tidying up the legislation to ensure that certain requirements make sense—for example, in relation to research, as the noble Lord, Lord Kirkwood, said. He asked a question which I asked of officials while I was learning about this issue in recent weeks. Why were there only five responses to a small consultation? The truth is that of the five responses, four said, “Thank you so much for asking us but we really have no comment”. The fifth was a little bit negative, and that was it.
Not a bad score.
I am glad that the noble Lord has said so. I take that as a very good sign that we are doing the right thing. Let us hope that it continues. We will ensure that we keep tidying up where necessary to keep this whole process—the implementation, the work of NEST and the work of developing auto-enrolment—as simple as possible while retaining an important balance between what is fair for the employer and what makes sense for us in communicating changes and developments in the whole programme.
The noble Lord, Lord McKenzie, asked some questions about automatic enrolment and the review proposal, including why we are not doing anything until the 2020s. Our review proposal is a comprehensive and balanced package, recognising that costs will be shared between individuals, families and businesses, who need time to plan for change. Over the coming year, we will work to build a renewed consensus to deliver the detailed design and implementation of our proposals. We need to learn from the implementation of the contribution increases, starting from this April. The support of employers and their advisers has been key to the success of automatic enrolment. We recognise the importance of giving them and savers sufficient time to plan for further changes. Our ambition is to implement changes to the automatic enrolment framework in the mid-2020s, subject to discussions with stakeholders around the detail of the design, learning from the contributions increases in 2018 and 2019, and finding ways to make the changes affordable, followed by formal consultation with a view to introducing legislation in due course.
The noble Lord, Lord McKenzie, asked about the timing of the implementation. It is important to put on the record that through the 2017 review we have set a clear direction to build a more robust and inclusive savings culture, specifically supporting younger generations with the opportunity to save for a more secure retirement.
The noble Lord, Lord Kirkwood, raised the issue of women. Increased gender parity is something that we are very pleased about, and it is making such a difference. Automatic enrolment was designed specifically to help groups who historically have been less likely to save, such as women and lower earners. The decision to freeze the trigger again for 2018-19 is estimated to bring an additional 100,000 individuals into workplace pension saving, of whom 72% are expected to be women. The gender gap in private sector pension participation has now been closed. In 2012, 65% of women employed full-time in the private sector did not have a workplace pension. As of 2016 this had fallen to 31%. I hope noble Lords will agree that that is real progress.
The noble Lord, Lord McKenzie, asked about net pay arrangements versus relief at source. Pensions taxation policy is a matter for Her Majesty’s Treasury—that sounds as if I am proposing a get-out clause. We continue to work with the Treasury and officials on this matter but a straightforward or proportionate fix has not yet been identified. However, alongside further work on the automatic enrolment changes outlined in the recent automatic enrolment review, the Government will examine the processes for payment of pensions tax relief for individuals to explore the current difference in treatment and ensure that we can make the most of any new opportunities that emerge, balancing simplicity, fairness and practicality, while engaging with stakeholders to seek their views.
I was asked why NEST needs to offer contractual enrolment. Contractual enrolment was raised in a response to the DWP call for evidence on the policy framework underpinning NEST, NEST: Evolving for the Future. Contractual enrolment is where workers are enrolled with their consent into a pension scheme under a contract and by reference to the rules of the scheme. By contrast, automatic enrolment is where workers are enrolled automatically into a qualifying scheme in accordance with the Pensions Act 2008. Contractual enrolment often covers groups of workers who do not qualify for automatic enrolment, such as those earning less than £10,000 per year or those aged under 22.
The majority of respondents who mentioned it in the call for evidence thought that any qualifying scheme should be open to all of a participating employer’s workers, including those who are contractually enrolled into it, as is normal in the industry. The Government expect that this change could ease administrative burdens on some employers who are already using NEST, and could result in small increases in the number of workers benefiting from workplace saving and an employer contribution. This change is minor and technical in nature and supports the delivery of the service of general economic interest defined in the approval granted to NEST.
The noble Lord also asked about empty accounts. Very briefly, it is just an issue of churn. Some people fall out of the system; more come in. We wanted to make sure that we tidied up the process. In fact, we are reducing the number of schemes, which will make it easier to administer. It is not anything that we feel we should be particularly concerned about, it is just a general issue of churn.
I hope that I have been able to answer all noble Lords’ questions. If I have failed in any way, I would be very happy to write. The long downward trend in pension saving has reversed. The number of workers saving into a workplace pension scheme has increased to almost 9.3 million. In practice, the changes will be delivered largely by the payroll and advisory communities, which have worked hard to support the introduction of automatic enrolment, providing a range of products to help employers comply with their automatic enrolment duties. NEST is playing its vital part in this success story and we need it to continue to do so.