Considered in Grand Committee
My Lords, I am pleased to introduce this instrument, which was laid before the House on 2 March 2020. Subject to approval, the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2020 reflects the conclusions of this year’s annual review of the automatic enrolment earnings thresholds required by the Pensions Act 2008. The review considered the earnings trigger and the qualifying earnings band for the tax year 2020-2021.
The earnings trigger determines the point at which a qualifying worker becomes eligible to be automatically enrolled into a qualifying workplace pension. The qualifying earnings band determines the earnings upon which workers and employers pay contributions into a workplace pension. This order sets a new lower limit for the qualifying earnings band and is effective from 6 April 2020.
The earnings trigger is not changed within this order and remains at the level set in the automatic enrolment threshold review order of 2014-15, so no further provision is required. Similarly, the upper earnings limit is not changed within the order and remains at the level set in the automatic enrolment threshold review order of 2019-20, so no further provision is required. I am satisfied that the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2020 is compatible with the European Convention on Human Rights.
Today’s debate relates to a technical element of the automatic enrolment framework, which as a legal necessity we need to have in place for 6 April 2020. However, we are all too aware of the wider environment at this time impacting on automatic enrolment. There may be questions and concerns about the current and future position of automatic enrolment and pensions saving more generally, but noble Lords will understand that there is little I can tell them at this point on some of these matters.
As noble Lords will know, my right honourable friends the Prime Minister and the Chancellor have made it clear that the Government will do whatever it takes to support people affected by Covid-19. We have been clear in our intention that no one should be penalised for doing the right thing. These are rapidly developing circumstances; we continue to keep the situation under review and will keep Parliament updated accordingly.
In terms of the substance of this order, as signalled by the Minister’s Written Statement of 13 February 2020, this order will, as previously, align the lower and upper limits of the qualifying earnings band with the national insurance lower and upper earnings limits for the 2020-2021 tax year. The lower and upper limits are £6,240 and £50,000 respectively.
By continuing to align the qualifying earnings band limits with the national insurance thresholds, the changes relating to payroll systems are kept to a minimum. The purpose of this framework is to balance the need to encourage individuals to take personal responsibility for pensions saving with a sustainable compulsory minimum contribution level for all employers, mindful of the economic environment within which these changes are taking place. Setting the thresholds at these levels will also ensure that contribution levels continue to be meaningful for savers.
The order does not change the earnings trigger, which remains at £10,000 this year, in order to strike a balance between bringing in those for whom it makes economic sense to be saving into a pension with affordability for employers on the one hand and workers on the other. 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 employer contributions, should they wish. Those earning below the lower earnings limit also have the option of being enrolled by their employers in a pension scheme.
The decisions to maintain the earnings trigger at £10,000 and maintain the alignment of the qualifying earnings band with those for national insurance contributions maintain simplicity and consistency. I commend this instrument to the Committee and beg to move.
My Lords, I have always admired the versatility of the Deputy Chief Whip, and today is no exception. I thank him for his introduction. This is a rather important statutory instrument and there are a number of policy issues surrounding it. My heart sank when the Minister said that there is little he will be able tell us, I assume partly because he has no support from officials. I would be very happy for him to write in due course. The other thing he said that made my heart sink was that this is all about technical elements, which, as an understudy, I am not in a position to contest with him in any event.
The real essence of this is what the ABI has raised, because all of us support the scheme but want to see it go further. Both the ABI and the Women’s Budget Group said that we should look at the Wealth in Great Britain 2019 figures produced by the ONS, which show that among 65 to 70 year-olds, median private pension wealth is £164,700 for men and £17,300 for women. That is just over 10% of the private pension wealth of men. There is a considerable imbalance, to which I will return.
The success of auto-enrolment is clear, as the ABI points out, and the number of participating employees continues to increase. However, according to the ABI, if the lower age limit were reduced to 18 and the lower earnings limit removed, people could save another £2.6 billion annually. The change would demonstrate the importance of starting a savings habit early, given the powerful impact that early career contributions can have on the size of retirement savings. It points out that the Government committed to implementing these recommendations by the mid-2020s in the 2017 automatic enrolment review.
Furthermore, extending the coverage of auto-enrolment by reducing the earnings threshold to the NI primary would bring 480,000 people, mostly women, into pension saving, helping improve the gender pensions gap. As I have explained, the ONS figures on that gap are pretty dramatic. All else being equal, this deficit is set to continue, closing by only 3% by 2060. The suggestion of bringing forward that undertaking in the automatic enrolment review seems entirely apposite. I very much hope that the Minister will be able to give that commitment in the letter I know he will have to write after this debate.
My Lords, I thank the Minister for his introduction and echo the comments of the noble Lord, Lord Clement-Jones. Again, I will raise a number of issues so if the Minister would like to write a letter following this debate I would be more than happy to receive one.
The success of auto-enrolment is testament to the previous Labour Government, with tens of millions of workers saving for a pension under the scheme. In a recent report, the Pensions Regulator found that the overall proportion of eligible staff saving into a workplace pension was 87% in 2018. This has massively increased over recent years and decades. It also found that the largest increase in participation was from the youngest age groups. In the private sector, the largest increase was seen among 22 to 29 year-olds, increasing from 24% in 2012 to 84% in 2018.
We welcome the Government’s continued commitment to auto-enrolment but acknowledge that it is not perfect. Average contributions remain too low and, as the noble Lord, Lord Clement-Jones, said, the threshold too high. Department for Work and Pensions statistics show that, as a result of pensions inequality, 37% of female workers and 28% of black and minority ethnic workers are still not eligible for the scheme.
The exclusion of the self-employed from auto-enrolment also needs to be addressed. Some 15% of the workforce is now self-employed, but the numbers of such workers saving into a personal pension fell by a third between 2014 and 2018. With the current coronavirus crisis, the pressure on the self-employed will only increase, as we are seeing. I know that discussions are taking place around a number of possible changes to the Bill in the other place to try to protect the self-employed.
Today’s statutory instrument keeps the current earnings trigger of £10,000, and that is to remain into 2020-21. However, The People’s Pension found that, by reducing the trigger to £6,240, an additional 1.2 million people would be helped to save for their retirement. Why have the Government decided to keep the trigger at £10,000, given that it excludes some of the most vulnerable from saving into a pension scheme? The Explanatory Memorandum states:
“The Secretary of State decided not to consult on the amounts of the qualifying earnings band and earnings trigger for 2020/21”.
I understand that the Minister will need to write to me, but I ask: why not? Did the Secretary of State not want to take on board the concerns that the unions and others involved in this area were raising?
The Government have said that they will address issues with auto-enrolment, as the noble Lord, Lord Clement-Jones, said, by the mid-2020s, once it has bedded down. We would prefer that to be brought forward, especially given the many issues that will arise out of the current crisis. We see no reason for delay.
It is impossible to ignore the current national crisis of coronavirus. Are the Government looking into support for people who will be affected by a drop in their income over the coming months and years? That drop in income will have an effect on their pension. Are the Government also looking to develop long-term support for the defined benefit schemes, which will be massively affected by the market turmoil?
My Lords, I thank both noble Lords for their contributions. I will cover as many of the points raised as possible and will of course provide both with more detail in writing.
The noble Lords, Lord Clement-Jones and Lord McNicol, talked about the impact of automatic enrolment on young people. Automatic enrolment has been a quiet revolution, getting employees into the habit of pensions saving. It has reversed the previous decline in workplace pension participation that we saw in the decade before the reforms. As the noble Lord, Lord McNicol, said, since 2012, the workplace pension participation rates for eligible employees in the private sector aged 22 to 29 has increased from 24% to 84% in 2018.
Both noble Lords concentrated their remarks on the effect on women. Automatic enrolment has helped millions more women save into a pension, many for the first time. Workplace pension participation among eligible women working in the private sector rose from 40% in 2012 to 85% in 2018. Women are more likely to face financial instability later in life as a result of their experiences in the labour market. That is why this Government are committed to tackling the structural inequalities in the labour market that lead to the private pensions gap.
The noble Lord, Lord McNicol, asked why we have set the earnings trigger at £10,000. Our aim is that automatic enrolment should be of benefit to those who are put into pensions saving. The trigger is currently set at £10,000 to ensure consistency and stability for employers and individuals. For anything more on that issue, I will write to the noble Lord.
Both noble Lords rightly drew attention to the situation relating to automatic enrolment and Covid-19, asking about the impact on employers, individuals and the economy. As my right honourable friends the Prime Minister and the Chancellor have made clear, the Government will do whatever it takes to support people affected by Covid-19. We have been clear in our intention that no one should be penalised for doing the right thing. These are rapidly developing circumstances and we continue to keep the situation under review. We will keep Parliament updated accordingly. We welcome the statement released by the Pensions Regulator on Friday, explaining its approach to employers’ compliance with their pensions duty in the light of Covid-19. The regulator said that it would take a proportionate, risk-based approach towards enforcement decisions in the light of these challenging times and with the aim of helping to get employers back on track, supporting both employers and savers.
With the leave of the Committee, I will make a few more points that have been made available to me. On imbalance, a full analysis of the review was published on 27 February, covering the detail of impacts. I will write to noble Lords with further details on that. Our ambition remains the same in relation to the 2017 review, but there is a need to reflect economic circumstances. Auto-enrolment has been a huge success and it is important that we build on it. It is also important that we have consensus to do so, so we welcome the support of both noble Lords today. The noble Lord, Lord Clement-Jones, mentioned the thresholds. We keep the thresholds under review annually, including the impacts on women and minority groups. The details are in the published analysis, with which we can provide the noble Lord.
To confirm, this order increases the automatic enrolment lower qualifying earnings limit to £6,240 and freezes the upper qualifying earnings limit at £50,000, thereby ensuring that the automatic enrolment qualifying earnings band remains aligned with the earnings limits for national insurance contributions. As I said, the earnings trigger will also remain at the existing level of £10,000. That all results in an estimated overall increase in total pensions savings year on year. I commend the order to the Committee.