Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013
(Limited Text - Ministerial Extracts only)
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Lord Newby
That the Grand Committee do report to the House that it has considered the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
Lord Newby
My Lords, I am pleased to introduce this instrument which was laid before the House on 30 January. I am satisfied that it is compatible with the European Convention on Human Rights. The aim of automatic enrolment was to broaden access to workplace pensions and increase savings levels, often from a very low or zero start. Our job today is to consider the figures that will apply from April. This will be the second year of live running when companies employing between 10,000 and 250 people start to go live. The automatic enrolment earnings trigger determines who can save in a workplace pension. It sets the automatic entry point. The qualifying earnings band then determines how much people save and sets employer contribution levels.
This is a balancing act. Automatic enrolment is a tailored policy. It does not force pension saving on to everyone regardless of age, earnings or individual circumstances. In setting the figures in this instrument, our overall aim is to maximise the number of people saving who can afford it, while excluding those who cannot. To do this, we need to exclude those very low earners for whom saving on top of the pension they will get from the state may not make economic sense, especially while they have other family priorities.
We also need to provide low earners access to pension saving, with an employer contribution, if saving is the right decision for them. To meet all these aims, we need to bring in employers who have never provided a workers’ pension, or never paid into one, while being realistic about the costs that they will have to bear. We need to cap minimum employer contributions for higher- paid staff and let existing arrangements cater for this market. To deliver these several objectives, we need a system that makes sense for individual workers and their employers. The way that we set these figures can help to achieve this.
I think that we all accept the powerful arguments for income smoothing. We put money aside now while we have it and while we are earning so we have it in our retirement. But of course the very lowest earners may not have the cash now to sacrifice for retirement saving. That is why we believe that the automatic enrolment trigger should exclude those people who may not be well placed to make that sacrifice unless they themselves want to save.
Saving should be an individual decision for people whose earnings hover around the tax threshold. We believe the state’s role is to provide access to saving where automatic saving is not the right approach. That is why the right to opt in, with an employer contribution, is such an important feature of these reforms.
We fully recognise that any rise in the trigger disproportionately affects women. I want to be completely clear that we are not weighing equality against cost. Gender is not the issue. We think the outcome of this review is right for people on very low incomes, regardless of gender. In particular, we do not believe that it is right automatically to enrol people who do not earn enough to pay tax.
Nevertheless, as noble Lords will know, it is possible for non-taxpayers to get tax relief on pension saving depending on the scheme. This top-up may have an impact on pension savings. We are seeing evidence that schemes designed to cater for the under-pensioned market and those targeting low to moderate earners are using, or intend to use, the relief-at-source mechanism precisely because it helps low earners.
This illustrates the point that however carefully the policy targets the right groups, the enrolment process needs to work in practice. We know that people see their employer as the first port of call for anything connected with wages or their pay slip. Automatic enrolment will work best when it is simple for employers to understand, simple to administer and when pension contributions are simple to explain. We may not be quite there yet in all respects, despite some really clever and effective work from some of the lead companies to demystify pensions in the workplace. Aligning automatic enrolment thresholds with existing recognisable payroll figures can be of considerable assistance and this was strongly recognised in the response to the consultation. This will be the second year of live running and it is likely to be a challenging year, as activity starts to ramp up. The overall message we heard is that this is not the time to change course.
The automatic enrolment trigger does not exist in isolation. It is an entry point to saving that works hand in hand with the qualifying earnings band. The band sets a minimum definition of pensionable pay. In simple terms, if you earn £9,500-odd a year, you will pay pension contributions on anything over £5,500. This point about minimum savings is important. Some schemes will have their own definition of pensionable pay, perhaps more generous than the savings band we set today. We are setting a universal minimum quality standard for pension saving, rather than an aspirational target.
We have been debating how best to set the parameters for pensionable pay for automatic enrolment since the pensions commission reported in 2004. The commission originally recommended aligning private pension saving to the national insurance threshold for the state pension—at around £5,000. That was a starting point. It established a core principle: that private pension saving should build on the foundation of the state pension. The commissioners envisaged year-on-year rises, in line with average earnings.
Perhaps I may take your Lordships back to our target market of low-to-moderate earners. This is a group whose wages are less likely to increase by average earnings, so a qualifying earnings band that rises by average earnings will have a disproportionate impact on these people. We considered a variety of other approaches but perhaps I might deal here with the two distinct ones that came out of the consultation we undertook last autumn: abolishing the lower limit or freezing the band.
Abolition would mean putting contributions on earnings from pound one. This would add around £130 million to employer costs next year. It would also hit low earners very hard indeed, to the extent that pension saving could start to look like something to be avoided rather than embraced. As to freezing this year’s figures, we come back to the practical aspects of automatic enrolment. It should work in practice and it should be easy to explain and to understand. Thresholds that bear no relation to anything else on payslips would fail all those three tests.
As noble Lords will be aware, the national insurance contributions upper limit is going down. If we continue to align with national insurance, the upper limit of the qualifying earnings band would go down too. The upper limit serves two purposes. It caps mandatory employer contributions; it also distinguishes the target group of standard-rate taxpayers from earners in a higher tax band. Higher-rate taxpayers tend to have greater access to a pension scheme offering more that the minimum. The issue is whether a reduction in the top limit of the qualifying earnings band would have a disproportionate impact on the target group. The evidence suggests that it will not. Average earnings in the UK are around £26,500 a year. Average earners would not be affected by a change in a contributions rule that bites on people earning nearly £15,000 more than they do. The evidence suggests that the practical advantages of alignment outweigh a reduction in the nominal value of contributions for a subset of higher-rate taxpayers.
I said earlier that setting these thresholds is a balancing act. There is no perfect answer, either in theory or in practice. Nevertheless, we believe that we have used the evidence to consider how we can best achieve the policy intentions and have made reasonable judgments about the various trade-offs. We believe that these proposals continue to provide broad access to pension saving and maintain contributions for the target group. I commend this instrument to the Committee.
Lord German
My Lords, I have a single question on determining the balancing act which the Minister has just talked about. However, my question is in multiple parts. No one is more enthusiastic than I about the raising of the income tax threshold. I have used it in many speeches in your Lordships’ House to illustrate how we have taken many lower earning people out of the tax bracket altogether. However, this is an area where the balancing act does not necessarily work because of the use of the income tax threshold, which has risen well beyond the level of earnings increases and well beyond that of price increases. Here there is a negative aspect to that balance. The number of people who will now be excluded from the automatic element—the “automatic” in the title of the order—is about 420,000 individuals, of whom 320,000, or 76%, are women. The question that primarily worries me and should concern the Committee is whether these are people who should be saving for the future and will be able to maintain over a lifespan the appropriate level of saving for a worthwhile pension. This is where my question splits into several parts.
Of course, people who are excluded as a result of the above earnings increase in the income tax threshold can opt into the system. But there are ways of opting in that may not be as obvious as you might think to many people. I understand that employers are required to make the offer and provide information to their employees if they are below that threshold and within that bracket. Therefore, can the Minister tell me what is the actual requirement on employers to provide information? If it is a piece of paper stuck in an envelope along with the payslip, that may not be the most appropriate information source. This is a tricky area for people to understand and the information may not be being provided in a meaningful way. It should certainly be in clear language. There is probably a whole pension industry that has developed a language of its own in explaining what are essentially straightforward implications in a way that is often impenetrable to many people.
My second question relates to when people are excluded from the automatic element, the declared intention being that it may be inappropriate for some people to save for a pension. Will the Minister explain what “inappropriate” means to lower earners? In the Explanatory Memorandum it is quite clear that people may not need to save if the state will provide. But as noble Lords will know, the pension schemes that the state provides are not static. There is progress towards a single state pension, which may make a difference to the way in which people see their pensions over a longer period of time.
I understand that if people will be low earners for the whole of their working lives it may not be appropriate because they might find that they would get a better deal from just relying on the state. But you cannot determine what the state will provide in 30 or 40 years’ time when you are entering the jobs market at the beginning of your life span. I would be grateful for an explanation of what makes these pension contributions inappropriate for some people.
The third element to the same question is about the relief at source. The Minister has already spoken about that for people who are below the income tax threshold. They can still, using the RAS scheme, benefit from having the tax contribution taken off at source. Do the Government have any intention of promoting the relief at source in order to assist people when making a decision about whether they want to opt into the system? Do they have a view about whether that is something that should be promoted? It is another useful piece of information. If you were told that it would cost you less than if you were paying tax, you would naturally look differently on any contributions that you might have to make. With those few questions rounded into one major question with many parts, I am pleased to support the order.
Lord McKenzie of Luton
My Lords, I start by thanking the noble Lord, Lord Newby, for introducing this order. I find myself on pretty much precisely the same page as the noble Lord, Lord German, concerning the points and questions that he raised. When we considered this matter in May last year, we looked forward to the introduction of auto-enrolment and acknowledged the contribution of the many people along the way who had made it happen. Indeed, we also acknowledged the role of this Government in taking it forward. Perhaps this would be an opportune moment to seek an early update on how it is all going.
As we set out last year, we see the merit of simplicity in the earnings band limits being aligned with the national insurance lower and upper earnings limits. This is notwithstanding that the raising of the former and the reduction of the latter means that the band is squeezed by some £1,100 for the upcoming year, with the Government estimating a reduction in pension savings of some £30 million. However, we welcome the fact that the broader definition of earnings, or its equivalent in other schemes, is being retained.
Our main concern, which I am sure will come as no surprise to the Minister, is the one touched upon by the noble Lord, Lord German, of raising the earnings trigger to the new personal allowance level. On the Government’s own figures, this will exclude around 420,000 individuals, 76% of whom are women. Of course, this is on top of those who have been excluded by aligning the trigger to the personal allowance threshold in the current year. We have heard some of the justification for that. It concerns simplicity and whether people are in a position to afford to save.
However, it seems that there is a breakdown in the Government’s logic. Let us say that the Government got the balance right in the current year. Looking at the current year, why should the increase in the personal allowance for other policy measures, which we may or may not agree with, by more than the rate of inflation and more than earnings cause the balance in adjustment as to what people can afford still to equate with the personal allowance threshold? I do not think there is a logical connection between the two. However, we are where we are on that.
The Government’s explanation was that persistent low earners tend to find that, through pensions and benefits, the state provides a level of income in retirement similar to that in working life. Of course, that assumes that today’s low earners will be tomorrow’s low earners. We would hope that as a matter of government policy that would not be the case. The noble Lord, Lord German, touched on the much heralded single-tier pension, which is supposed to negate the need for earnings-related support in the future. It takes us back to the big debates that we had around “pays to save”, when the whole concept of auto-enrolment was being considered and the structure was being put in place. If the single-tier pension is to be introduced and is successful, negating a whole raft of earnings-related means-tested support, that should make it easier to make the judgment about when it will pay to save.
I turn to the issue of tax relief and relief at source. If people are excluded from auto-enrolment due to the personal tax threshold, they are potentially missing out on this chunk of government support. The noble Lord, Lord German, raised absolutely the right point by asking what employers are required to do to make sure that people are aware of this potential benefit. I hope that the Minister can confirm that there is absolutely no intention of changing the structure of tax relief. I think it was confirmed last year that NEST will operate the relief-at-source system, so anyone who was going to be enrolled or who wished to opt into NEST would receive the benefit of that tax support.
I end on the same point as the noble Lord, Lord German, which is: if this is the way things are going to go and if there is to be this increasing raising of the threshold, which will really change the landscape over time if it continues, what publicity will be given to the right to opt in? That becomes ever more important if the threshold is to continue to be raised. What are the Government planning to do generally? What are the requirements on employers, so that those who miss out on auto-enrolment at least have the chance to consider the opt-in route? The key point of auto-enrolment was to deal with inertia, to get people into pension saving because they had to make a decision to opt out. Once you remove that requirement from them, inertia reverts and the onus is on individuals. I think that they have to be above the lower earnings limit to opt in. What support and encouragement will they be given? They should at least know that they have the choice. Given what is happening to the personal tax threshold, that is a key issue for us.
Lord Newby
My Lords, I thank both noble Lords who have contributed to the debate. The questions have been about not the people who will be automatically enrolled but those who might or might not.
Part of the context for this is that even with the uprating of the tax-free limit, in terms of income level we are talking about 29 hours at the minimum wage, so the vast bulk of people in the category we are discussing—people who could join if they wish but who are not automatically enrolled—are likely to be part-time workers. That comes to the final point of the noble Lord, Lord McKenzie, about what their career paths will be. I would expect quite a number of people in that category now would not necessarily be part-time workers for the rest of their lives. A lot of them will be women with children, who may go on to have a full-time job when their children are older, and we would hope that they would do so if that is appropriate. Of course if they do, they would then be automatically enrolled.
On how we make sure that people know of their rights, which is obviously important, employers must write to employees with information about rights setting out the full picture. The department has developed a language guide and template letters to help employers to communicate clearly with people new to pension saving. I must say that I have not seen that letter. I will now make it my business to read it. If it is a letter that communicates clearly on pensions, it will probably be the first one that I have seen. I am sure that the finest minds in the department have been worrying about that. It is a major problem. By and large, people are ignorant about their pension savings and pension options. It is a challenge in any scheme, but particularly here, where a lot of the people who may be in this category will never have had a pension before. I will enjoy reading that letter.
The noble Lord, Lord German, asked for a definition of “inappropriate”. It is easy to see why for a single-parent family with children, where the mother is working part-time, it is not so much inappropriate as impossible. There just is not the amount of money in the household to enable much saving to take place. Another example of where it might be inappropriate would be if a household had built up debts and had large outstanding payments due, as many people on low incomes do. It would probably be in their financial interest to try to get those debts down before undertaking any savings. I am not sure that is the complete answer but I can see circumstances where, if you were a debt adviser or financial adviser to people who had got into debt and were on low incomes, you would be advising them to pay off those debts first.
There was a question about relief-at-source schemes and how these will be made clear. I hope that the letter explaining to people what their requirements are also explains the relief-at-source mechanism, and I will be looking at that. If it is able to do that in very clear terms, that will be an even greater achievement. I have great confidence in officials at the Department for Work and Pensions being able to clarify what most people find opaque. We are still looking at how relief-at-source schemes are operating as the new system rolls forward. The evidence so far is that schemes aimed at this population are actually using relief-at-source, so at least in that respect the system is working well.
The noble Lord, Lord McKenzie, asked how many people have been auto-enrolled and how this process is going. We expect that by this April at least 1 million individuals will have been automatically enrolled. The early signs are very positive: some big employers who have gone in first are reporting very low opt-out rates. However, the department has a full evaluation programme and we will be able to produce our first reports on this in the summer.
The noble Lord, Lord McKenzie, also asked whether it was the intention to change the relief-at-source rules. This is a Treasury matter, and we are near the Budget, but I think it is fair to say—and if I am sacked for this I shall blame the noble Lord, Lord McKenzie—that I am not aware of any intention to change the relief-at-source rules. I hope I have answered the questions that noble Lords have asked me.
Lord McKenzie of Luton
If the noble Lord gets sacked for that statement, I shall campaign on his behalf. When he has got over the excitement of reading the letter that he is going to peruse, would he share it with us? That would be helpful.
Lord Newby
I will, because it deserves to have the widest possible readership. With those comments, I commend the order.