Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2018
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Baroness Buscombe
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.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Buscombe) (Con)
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.
Baroness Buscombe
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.
Baroness Buscombe
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.