The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Buscombe) (Con)
My Lords, I thank the noble Lord, Lord McKenzie, for securing this debate, and thank all those who contributed to this evening’s discussion of this important issue.
The Government are proud of the progress of the automatic enrolment reforms, with over 9.7 million people enrolled into a workplace pension since the reforms began in 2012. In the last 12 months alone, hundreds of thousands of everyday employers have begun to offer a pension to their staff for the first time, helping their employees build up dedicated savings for a more secure retirement. I am especially pleased that all this good work has been achieved due to the commitment, support and collaboration between government, employers, the pensions industry and many other delivery partners. I should add that we welcome the cross-party support that has been evident throughout the delivery process. Given the scale of the technical challenges, the hundreds of hours of freely given time to help inform the most practical policy solutions and the sheer good will are a tribute to all those who have played their valuable part in successfully getting nearly 1.3 million employers to provide workplace pensions.
This year has seen the successful conclusion of the planned rollout of automatic enrolment duties to employers that existed prior to October 2017, known as the employer staging profile, which started with the largest employers in October 2012 and, following two extensions to help SMEs better prepare, saw the last cohort of existing micro-employers—those with only one or two staff—complete their declarations of compliance this spring. We are now delivering automatic enrolment as business as usual, with an estimated 180,000 to 210,000 new employers each year needing to comply with their automatic enrolment duties. We have also seen the first of two planned increases in contribution levels for automatic enrolment in April this year, with the latter increase following in April 2019.
I do not take lightly the challenge for employers in funding their share of these increases, and we are carefully monitoring the impact of this first upward shift in contributions for employers and their workers. I should stress, however, that these increases are essential to move savings rates up and will deliver more security in retirement. It is also important to note that many employers have chosen to pay contributions above the planned statutory increases, so faced no additional costs in April. It is important to add that, as automatic enrolment has been rolled out, the Pensions Regulator has been responsive to the need to help employers understand what they need to do. That included launching a simplified and much shorter step-by-step guide on its website, which has been adapted to the needs of small and micro-employers, which have less familiarity with pensions matters.
I turn now to the December 2017 review of automatic enrolment, Maintaining the Momentum, which sets out a clear direction for the future of workplace pension saving, and to which all noble Lords who have taken part in the debate have referred. Our ambition is bold and clearly builds on the success of automatic enrolment to date, with a comprehensive and balanced package of proposals which, crucially, recognises that costs will be shared between families and businesses and that they will need time to plan for change. Importantly, we are confirming that automatic enrolment should continue to be available to all eligible workers regardless of who their employer is. These reforms are focused on ensuring that retirement saving continues to be available to the widest possible number of workers in the UK.
We believe that the retirement saving habit needs to be established at the start of a working life. That is why we are going to make saving the norm for young people by lowering the age for automatic enrolment from 22 to 18, to bring an extra 900,000 people into workplace pensions. I can confirm for the noble Lord, Lord McKenzie, that research has shown that 18 year-olds are very keen for automatic enrolment to start—they care about their future and their retirement, which is very welcome.
We want to broaden and deepen the benefits of automatic enrolment, particularly for those with low earnings and multiple jobs, to which all noble Lords have referred. We want to help them to save more for retirement by removing the lower earnings limit so that their contributions are calculated from the first pound of earnings.
We intend to deliver on our manifesto commitment to use the principles and learning from automatic enrolment to improve retirement provision for the self-employed. We recognise the diversity of the 4.8 million people who classify themselves as self-employed, and the review highlighted—supported by the available evidence—that no single or straightforward saving intervention has been shown to bring self-employed people into pension saving. We are therefore moving quickly to find out what might actually work by testing targeted interventions aimed at the self-employed to identify the most effective options to increase pension saving among this group. In addition, as we set out in the 2017 review, many of those working in atypical or non-standard forms of employment potentially already come within the automatic enrolment framework and will be able to save into a workplace pension. We are working with the Pensions Regulator to ensure sufficient clarity for them and those who engage them, so that the automatic enrolment compliance regime continues to operate effectively.
In addition, the Government have responded to Matthew Taylor’s review of modern working practices and have been consulting on employment status with the aim of making it clearer and more certain for both individuals and business what their status is. The consultation has now closed. The Government are currently considering the submissions received and will respond in due course. We will ensure that any changes are also considered with care in relation to automatic enrolment so that there is sufficient coherence and certainty about the enforcement of automatic enrolment duties.
Noble Lords have raised several important points. I respect all their concerns and will do my best to address as many of those as possible this evening. The noble Lord, Lord McKenzie, raised the question of attrition. I can confirm that employers estimated that 16% of employees who had been automatically enrolled in the last financial year had ceased active membership. However, there is hope that a certain amount of those who ceased membership when they left one employer will start again with a new employer.
Other noble Lords, including the noble Lord, Lord McKenzie, asked about the earnings trigger. They suggested that too many of those on low incomes were still excluded from AE because of the earnings trigger, which determines who is eligible to be automatically enrolled by their employer into a pension. Freezing the trigger at £10,000 continues to strike a balance so that those who can most afford to save are automatically enrolled into a workplace pension. We fear that lowering the trigger could result in diverting income away from the day-to-day needs of the lowest earners, and that risks impacting significantly on their living standards. For those low earners who are in a position to contribute, the option remains to opt into automatic enrolment.
Considerable reference was made to women, particularly by the noble Baronesses, Lady Primarolo and Lady Drake. The question is, of course, whether automatic enrolment is helping women in work to save. There have been large increases in pension saving for women since the introduction of automatic enrolment. The private sector has seen the largest increases in participation in workplace pensions. In 2012, 65% of women employed full-time in the private sector did not have a workplace pension. By 2017 this had fallen to 24%.
The question also relates to multiple job holders—women who are juggling different jobs and caring duties—what are we doing about that and whether we should remove the lower earnings trigger. The proposal to remove the lower earnings limit and the entitled worker status in legislation will ensure that multiple job holders who are eligible for automatic enrolment, or who choose to opt in, will qualify for employer contributions in all jobs and will be able to pay their own contributions from the first pound of earnings. This will give multiple job holders the opportunity to build the same retirement savings as individuals who have only one job.
Over the coming year, we will work to build a renewed consensus to deliver the detail, design and implementation of our proposals. We recognise the importance of giving employers and savers sufficient time to plan for changes. There will be some people, particularly those on low incomes, for whom it makes little sense to divert income away from their working life, but for those low earners in a position to contribute, as I have said, the option remains to opt in. The earnings threshold is reviewed every year to ensure that it continues to strike the right balance between maximising the savings incentives for individuals and minimising costs for employers.
The Secretary of State has decided to freeze the earnings trigger this year at £10,000, which will bring an extra 100,000 people into automatic enrolment, of whom around 72% are women. It should also be noted that the IFS, in a 2016 report, found that automatic enrolment had also significantly increased workplace pension membership among those outside the eligible group, particularly those with incomes under the earnings threshold, whose membership has increased by 28 percentage points.
To answer a question asked by the noble Lord, Lord McKenzie, the analysis underpinning the automatic enrolment earnings threshold review suggests that freezing the trigger has no adverse effect on the proportion of black and minority ethnic individuals in the group eligible for automatic enrolment. Of the 100,000 people estimated to be newly saving as a result of freezing the trigger, 23,000 are black and minority ethnic individuals.
The noble Baroness, Lady Drake, asked about carers and how they are supported. The 2017 AE review concluded that there should be no change to the way that carers are currently treated through AE. Those who provide informal care are not subject to automatic enrolment as they have no employer to enrol them. However, bringing in individuals not subject to a contract of employment would be a fundamental change to the framework of AE, which works through an employee-employer relationship. Individuals who provide informal care for 20 hours per week are entitled to apply for carer’s credit, which helps to protect future entitlement to state pension. Alongside the wider work to address the challenges of social care for our ageing population, the Government are considering how to further support families and individuals who provide invaluable informal care.
I turn now to the net payment arrangements versus relief at source. Pensions tax relief is a matter for Her Majesty’s Treasury. The Government recognise the different impacts on pension contributions for workers earning below the personal allowance, but to date it has not been possible to identify any straightforward or proportionate means to align the effects of the net pay and relief at source mechanisms more closely for this population. However, alongside further work on the AE changes outlined in the review, the Government will examine the processes for payment of pensions tax relief for individuals to explore the current difference in treatment to 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. It is important that employers are free to choose a scheme that best suits the needs of their businesses and workers.
I was asked why we did not look at increasing the contribution rate as part of the 2017 review. As I have said, millions of people are now saving or saving more as the result of AE. As noble Lords may be aware, the first planned increase in contribution rates took place this year. As such, it is important that we understand the effects that the planned increases will have and to carry out further work on the adequacy of retirement incomes. We will look again in due course at the right overall level of saving and the balance between prompted and voluntary saving. It is important that this should be evidence-based. We are testing targeted interventions to identify the most effective options to increase pension saving among self-employed people during 2018. We are harnessing the ideas and enthusiasm that exist in addition, as I have just said, to developing the evidence base as our work goes forward.
The noble Lord, Lord Kirkwood, referred to the pensions dashboard among many other issues. The Department for Work and Pensions is leading the development of the pensions dashboard. We have carried out a feasibility study, the main conclusions of which we will share in due course. How we achieve increased engagement is not straightforward and it will not be solved by the use of a single tool such as a pensions dashboard. We need to make people feel confident about managing their finances and able to make informed decisions. The noble Lord also referred to the single financial guidance body, which we believe and trust will be a huge support in that direction.
Finally, all noble Lords have commented that progress is too slow. I shall start with the noble Lord, Lord McKenzie, who asked why nothing is being done until the 2020s. The review sets 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. Our review proposes a comprehensive and balanced package which recognises that the costs will be shared between individuals, families and businesses, and we will need time to plan for change. We are working to deliver detailed design and implementation. The support of employers and their advisers has been key to the success of AE and we want to make sure that we recognise their situation as well as that of savers. We want sufficient time to take those decisions with care.
Testing targeted interventions to identify the most effective options is critical. It is our ambition to implement changes to the AE enrolment framework in the mid-2020s, subject to learning from the contributions increases this year and in April 2019. There will be discussions with stakeholders around detailed design this year into next year, in order to find ways of making the changes affordable, and this will be followed by formal consultation with a view to introducing legislation in due course.
Noble Lords who know me know that I am always impatient for advancement in areas that will help everyone. I am looking in particular at one proposal made by the noble Lord, Lord Kirkwood. He knows that I am very keen on this, as is the Pensions Minister, my honourable friend in another place Guy Opperman. But we need to do this with care. We have to consult. We will work with stakeholders to build consensus on the shape and design, and that will help us to develop our detailed plans and an implementation timetable.
I hope that I have managed to answer most questions put by noble Lords, and again I thank the noble Lord, Lord McKenzie, for introducing this debate.