Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014
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Lord Bates
That the Grand Committee do consider the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014.
Relevant document: 19th Report from the Joint Committee on Statutory Instruments.
Lord Bates (Con)
My Lords, I am pleased to introduce this instrument, which was laid before the House on 15 January. I am satisfied that it is compatible with the European Convention on Human Rights.
Our task today is to consider the automatic enrolment figures that will set minimum savings levels from this April. The automatic enrolment earnings trigger sets the automatic entry point to determine who saves in a workplace pension. The qualifying earnings band then determines how much people save and sets employer minimum contribution levels.
This debate is now an annual fixture on our calendar—automatic enrolment is business as usual in so many respects. There is much on which we agree and we share common ground on the principles of automatic enrolment. The aim of automatic enrolment is to broaden access to workplace pensions and increase savings levels. In the end everybody should be able to say, “I’m in”, because saving is the norm. We can see from early opt-out figures that the trend is to stay in. That is enormously encouraging.
First and foremost, automatic enrolment needs to target those workers who are not saving but should be. To do this, it needs to exclude those very low earners for whom saving on top of the pension that they will get from the state may not make economic sense, especially while they have other priorities. It also needs to provide low earners with access to pension saving—with an employer contribution—if saving is the right decision for them.
This year there is a new element in the mix. This will be the significant year when automatic enrolment moves to the SME—small and medium-sized enterprise—sector. We will bring companies employing between 250 and 50 people on board. Some of these employers will be putting a pension scheme in place for the first time. Many of their workers will be new to pension saving. We need to be realistic about automatic enrolment costs. Although some workers will have personal pensions, many will not have had access to an employer’s scheme and will see a new deduction from their pay for the first time. Affordability is very important.
Parliament has already made some arrangements to address this issue. Minimum contribution levels are being phased in to get non-savers and employers who are new to pension schemes starting slowly. The absolute minimum is 1% from both workers and employers for the first five years. Some schemes will require more, but the 1% matched is the absolute minimum. This soft landing will help to mainstream automatic enrolment.
However, we still have a balancing act when it comes to the annual thresholds. Automatic enrolment is a tailored policy. It does not force pension saving on to everyone regardless of earnings. Our overall aim in setting the figures in this instrument is to maximise the number of people saving who can afford it, while excluding those who cannot. It also needs to cap minimum employer contributions for higher-paid staff and let existing arrangements cater for this market.
Baroness Sherlock (Lab)
My Lords, I thank the Minister for his explanation of this order, and I apologise for missing the first few seconds of it. Like my noble friend, I was caught out by the omission of this order from today’s lists, and I apologise to the Committee. I also thank my noble friend Lady Drake for her very detailed and extraordinarily learned analysis of the impact of this order and the ones that have preceded it. I hope very much that the Minister will be able to give it the answer it deserves, and I look forward to hearing that.
A helpful note on this subject from the House of Commons Library dated 17 December 2013 reminds us that the original idea proposed by the Pensions Commission chaired by the noble Lord, Lord Turner, of which my noble friend Lady Drake was such a distinguished member, was that the qualifying earnings band should start at the primary threshold for national insurance purposes and should finish at the NI upper earnings limit. The previous Government said in their 2006 pensions White Paper that they would adopt broadly this approach, so the lower and upper limits of the qualifying earnings band were set at £5,035 and £33,540 respectively, and provision was made for both limits to be increased in line with earnings.
The real jump came with the Government’s Pensions Act 2011, which introduced an earnings trigger for auto-enrolment set at a level higher than the lower limit of the qualifying earnings band, on which contributions are paid. As we have heard, for 2011-12 the trigger was set at £7,475 rather than the planned threshold of £5,035 in 2006-07 terms, and the effect of that was to exclude 600,000 individuals, 75% of them women. My noble friend went through some of these figures but I think it is worth rehearsing them because the Minister will have to give us an answer about the effect of these changes.
Since then, the exclusions have mounted up. In 2012-13, the trigger rose to £8,105, excluding 100,000 people, 82% of them women. In 2013-14, it rose to £9,440, excluding some 420,000 people, of whom 300,000—72%—were women. Now, as we have heard, by going up again from £9,440 to £10,000, the Government will exclude another 170,000 people, of whom 120,000—69%—are women. I would be very interested to know if the Government agree with the figure offered by my noble friend Lady Drake about the cumulative number of people who have been excluded from auto-enrolment by these changes.
The DWP paper titled Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2014/15: Supporting Analysis—I commend the officials on its title—issued in December 2013, offers the defence that the reason that so many women are affected is that women are more likely to work part-time and to earn less than men, so they will be disproportionately represented in the group excluded from auto-enrolment. Well, yes, of course. That is not a defence, it is a reason, but that still leaves the problem. Now another 170,000 are to be excluded from the benefits of auto-enrolment into pension saving.
Of course, not only are women more likely to work part-time but there are those who work in more than one mini-job, neither of which takes them above the trigger point for being brought into this. Those women could, in fact, be earning significant sums of money on which contributions would be payable but because neither job takes them above the trigger they will not be auto-enrolled in either job. I would be interested if the Minister could comment on that.
As so much has been said already, I will ask just a small number of questions of the Minister. The DWP document I mentioned noted—and the Minister reinforced a version of this in his speech—that the Government used three principles in reviewing the automatic enrolment thresholds. The first of these is whether the right people are being brought into pension saving. Can the Minister tell the Committee how the Government reached the conclusion that excluding another 170,000 low-paid workers from the benefits of auto-enrolment met the condition that the right people are being brought into pension saving?
Secondly, with a trigger of £9,440, the target population for auto-enrolment is around 10 million individuals, of which only 37% are women; going up to £10,000, that falls slightly to 36%. When the Minister considers that figure, which came from the DWP’s excitingly named document, and the high proportion of those excluded who are women, is he satisfied that the Government’s approach to auto-enrolment is serving women workers well?
Finally, the paper argues that workers paid below the earnings trigger are likely to be able to achieve their target replacement rates through the single-tier pension if they remain low earners, and it may therefore not be beneficial to direct income from working life into workplace pension savings. If an individual earning £9,999 a year has an option to contribute to a DC scheme, should she take it?
Lord Bates
My Lords, first, both the noble Baronesses referred to the speed with which we have gone through the Order Paper. In fact, that caught all sides on the hop, and apologies are due all round. The responsibility, of course, lies in the preceding orders going too speedily. However, I am grateful to both noble Baronesses, who, in the exchanges we have had over many sittings on the Pensions Bill, have demonstrated their incredible grasp and knowledge of these complex areas, and have spoken passionately about the impact upon women in particular. I will come to these points, and respond to them as best I can.
One of the key things I said in the concluding remarks of my speech was that we recognise that setting these thresholds is a balancing act and that there is no right or wrong answer. It is therefore right that there should be a debate and that it has become an annual debate. It is an affirmative instrument and therefore any changes that are made annually have to come before your Lordships’ House for consideration. That is the right way to do it.
The other point of context we need to acknowledge, which the noble Baroness, Lady Drake, was good enough to make, is that the figures for auto-enrolment, which I accept came out of the Turner commission, which in turn came out of the Pensions Act 2008 under the previous Government, have been impressive. Significant progress has been made in encouraging the right people to save for their retirement. In pursuing that, we are absolutely on common ground.
It might be helpful if I went through some of the figures that we have for the number of people affected. Raising the 2014-15 value of the automatic enrolment trigger from £9,440 to £10,000 will exclude around 170,000 individuals, of whom around 120,000—69%—are women. Raising the 2013-14 value of the automatic enrolment trigger from £8,105 to £9,440 excluded around 420,000 individuals, of whom 300,000—72%—are women. I am going back through these numbers because it is a rough way of getting back to the calculation made by the noble Baroness, Lady Drake, which the noble Baroness, Lady Sherlock, asked me whether I agreed with. Raising the 2013 value of the automatic enrolment trigger from £7,475 to £8,105 excluded around 100,000 people, 82% of whom were women. Finally, raising the 2011-12 value of the automatic enrolment trigger from £5,035—in 2006-07 terms—to £7,475 excluded 600,000 individuals, 78% of whom were women. If one calculates those figures, one begins to recognise the numbers that the noble Baroness, Lady Drake, presented to us.
However, it is not so simple as to say that 70,000 women would be in automatic enrolment if their part-time earnings were brought together. I realise that there is a big education job to be done here, because many women who are underneath the threshold need to realise that if they are above £5,772 in terms of the lower earnings limit, they can opt in and therefore get the benefits that would accrue from that.
Baroness Drake
Does the Minister agree that we do not ask the rest of the population to opt in to get the benefits of pension saving and an employer contribution? Why should we ask women to opt in to get the benefit, when all the evidence is that most people will not opt in? Why do we discriminate against lower earners in that way? We do not expect a £40,000-earning male to overcome his own inertia. Why do we expect a £9,000-earning woman to overcome her own inertia?
Lord Bates
I take the point, but the threshold needs to be drawn somewhere. That is the discussion that we are having. There has to be a threshold somewhere because, below a certain level, the benefits of saving will not be as acute for the retirement pension. The question that we are debating is where that threshold should be set. We are not saying that this is a gender issue; we are saying that it is a threshold and income issue.
The noble Baroness is perhaps being a little harsh on this Government’s record on auto-enrolment, but it is worth pointing out that we have also taken a very large number of people, mostly female, out of tax altogether. The rises in the personal allowance since 2010 have taken 2.7 million people out of paying tax. The majority of those people will be female. That is a very positive thing, but I accept that more needs to be done to encourage people to save for their retirement. The benefits of the 3% employer contribution, which the noble Baroness, Lady Drake, pointed to, will come when the scheme is fully implemented in 2018 and the thresholds and contribution levels increase. At the moment it is 1%, but it is very important that people engage at that 1% level so that their savings can rise as the employer contribution increases.
Of course, in addition to the employer contribution increasing, the employee contribution will rise, and many people who do not make pension savings point to the fact that affordability is the key issue that they are wrestling with.
Lord Bates
I do not think we disagree with that. I accept that you need to enrol in—to opt in to—the scheme. We are saying that you can opt in and get tax relief from the lower earnings limit of £5,772, and that your employer will have to do that from £10,000. Therefore, we agree on that. Persistent low earners tend to find that the state pension alone provides them with a retirement income similar to that which they would have had during their working life.
Baroness Drake
The noble Lord is arguing that if someone is poor all their life they can make do on the single tier and we are not obliged to give them the opportunity to build up a little capital—is that the policy of the coalition Government?
Lord Bates
The noble Baroness knows that is not our argument. We are encouraging people to save, as far as possible, but we recognise that savings, and how people spend their disposable income, is a choice. At what point does it become an automatic responsibility of the employer to enrol an employee in the scheme? That is what we are debating, not whether people are being encouraged to save. I hope that there is genuine cross-party agreement on this, coming out of the Turner commission, of which the noble Baroness was a distinguished member.
Of course, the whole objective is to increase savings across society. Thirteen million people are not saving enough for their retirement and we want that figure to improve. We want to ensure that as many people as possible are automatically enrolled. The Government believe that the decision on lower earnings is a decision for each person to take, and I hope they will take advantage of it.
Baroness Drake
The noble Lord is defending arguments that are untrue. Auto-enrolment does not work on the basis of it being a decision for individuals. They are put in, they have to come out. They have the choice to come out, but they are put in in the first place. These women are not getting the advantages of auto-enrolment. The point of inertia is that it is not based on informed choice; it is based on the assumption that the individual does this because it is in their best interest.
Lord Bates
We accept that. However, basically we are talking about the same issue: whether people have to opt out when they are put in an auto-enrolled scheme. They have the opportunity to decide to opt out. If they are above £5,772 they have the opportunity to opt in. I take the point that the threshold has to be set somewhere. Having looked at all the evidence, this is where the Government have come down—for this year. As the scheme gathers pace, more information will be available to us and we will be able to make that information available to your Lordships and have it influence decisions.
Baroness Drake
I do not want to be too difficult. However, the Secretary of State has stated clearly that this is driven by his view that people should not be auto-enrolled into pensions until they start paying tax. That is not doing a balancing act; that has been the Government’s consistent position since 2010. The Hansard record shows that I keep asking the question, “Are you going to keep tracking the tax threshold, because if you keep doing that you will exclude more and more women?”. That is not a balancing act. If you did a balancing act, you would say, “What is the balance between that approach and the number of women excluded?”.
The Government have locked themselves in, both by the Secretary of State’s statement and by their behaviour since 2010, when they said that people who do not pay tax should not have the advantage of auto-enrolment. The benefit of releasing them from a certain level of tax is reduced by the fact that they lose the employer’s contribution, and we are now getting to a point where the gain from the increase in the tax threshold is less than the loss of the 3% of the employer’s contribution. So over their lifetime, the low-paid person is actually worse off.
Baroness Sherlock
My Lords, before the Minister answers that, I asked him whether he felt that the way in which the Government have designed the service served women well. His defence appeared to be that there has to be a line somewhere. The point I was trying to put to him is that the Government have designed this scheme in such a way that only a third of its target population are women; in other words, they have designed a scheme that will benefit two men for every woman. Does he feel that the way the Government have chosen to design the scheme benefits women?
Lord Bates
No more or less than raising the personal tax allowance thresholds is a policy that is designed to disproportionately benefit women compared to men. When the tax threshold goes up from £7,475 to £10,000, that is a massive benefit to women, particularly in lower income positions. That is money coming into their households, so they can decide what to do with it. Anyone with earnings over £5,772 will retain the right to opt in, as I have already said, with employer contributions.
The Pensions Act requires the Secretary of State to review the thresholds each tax year. That is a discussion which takes place. There is a strong argument that says there is synergy there between personal tax allowances at the £10,000 level, helping employers and employees to understand where that mark falls, but in no way does that guarantee what the policy will be going forward. It will be for the policy to be announced and the review to take place and the instruments to come forward next year.
I am trying to work my way through the many questions that the noble Baronesses have put to me. I am not sure whether I have answered all the points.
Baroness Sherlock
I will let the Minister off the first two, if only on the grounds that I am unlikely to elicit an answer that I will find helpful. But my last question was very specific: if an individual earning just less than £10,000 a year had an opportunity to contribute to a DC scheme, does the Minister think that she should take it?
Lord Bates
The view is that this will be a personal choice for the individual faced with that challenge. It is a specific point. I know that the noble Baroness feels very strongly about this.
Baroness Sherlock
I am not asking this question because I feel strongly about it; I am trying to test the Government’s argument that the reason low earners should not be auto-enrolled is that it is not worth saving small sums of money. Do the Government assume that same stricture should apply to private pensions as well as to auto-enrolment?
Lord Bates
Each individual’s situation will be different. In some cases, they will have partners who will be earning more and therefore they will take a household decision to take advantage of the same scheme. For some people, that will not be the case and therefore they will not. We are saying that we want there to be a scheme. We want it to be as simple and straightforward as possible so that as many employers and employees as possible can get full benefit from it, and so that people can get into the habit of saving. It will be up for annual review. There needs to be much more education to ensure that all people who earn below that threshold realise that they can opt in should they wish to and should their personal circumstances make that the right choice for them.
I have tried to address as many as possible of the questions that have been put forward by the noble Baronesses, for which I thank them.