Guaranteed Minimum Pensions Increase Order 2019
(Limited Text - Ministerial Extracts only)
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Baroness Buscombe
That the draft Order laid before the House on 16 January be approved.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Buscombe) (Con)
My Lords, in moving this order, I will speak also to the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2019. In my view, the provisions in both these orders are compatible with the European Convention on Human Rights.
I shall be brief. The Guaranteed Minimum Pensions Increase Order 2019 deals with an entirely technical matter that we attend to each year. This order provides for defined benefit occupational pension schemes which were contracted out to increase by 2.4% members’ guaranteed minimum pension that accrued between 1988 and 1997, in line with the increase in the consumer prices index the previous September.
The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2019 reflects the conclusions of this year’s annual review of the automatic enrolment earnings thresholds required by the Pensions Act 2008. In conducting the review, the Secretary of State 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 of which the enrolled employee and their employer have to pay a proportion into a workplace pension.
Automatic enrolment has been hugely successful in achieving its aim of getting millions of people saving into their pensions. Last year was a significant one for the policy, with a number of key milestones being reached. In February, the last group of smallest employers took on their duty to automatically enrol all staff, meaning that all established employers and new businesses are now subject to automatic enrolment. This was shortly followed by the first phased increase in minimum contributions from 3% to 5% in April 2018. We now have 1.4 million employers who have complied with their automatic enrolment duties, and have just reached the commendable milestone of 10 million people successfully enrolled into a workplace pension. It is also extremely encouraging that, despite the significant changes last year, rates of stopping saving—for example, through opt-outs and cessations—have remained consistently low since the increase. This year will bring another key milestone for the policy. In April, the second planned increase in minimum contribution levels, to 8%, will occur, with contributions rising to 3% and 5% of band earnings for employers and employees respectively.
This order sets a new lower and upper limit for the qualifying earnings band and will be effective from 6 April 2019. The earnings trigger is not changed within this order and remains at the level set in the automatic enrolment threshold review order for 2014-15, so no further provision is required. As signalled by the Minister for Pensions and Financial Inclusion in his Written Statement on 4 December 2018, 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 2019-20 tax year of £6,136 and £50,000 respectively. This will ensure continued stability during the next phased increase in minimum contributions this April, providing consistency for payroll systems and helping employers manage costs.
The order does not change the earnings trigger, which remains at £10,000—striking a balance between bringing in those most likely to benefit from pension saving and affordability for employers. Those earning below the £10,000 earning trigger who feel they can afford to save still have the option of opting in and benefiting from employee contributions if they earn above the lower earnings limit.
Automatic enrolment has enabled many people who previously would not have been saving towards their retirement to contribute towards a pension. We are seeing increasing numbers of young workers, with over 70% of 22 to 29 year-olds enrolled in a workplace pension, and pension participation rates for women in the private sector are now comparable to those for men. It is estimated that by 2019-20, an extra £17.7 billion a year will go into workplace pensions as a result of automatic enrolment. Due to anticipated wage growth and with maintenance of the existing trigger, the effect is a real-term lowering of the trigger. We expect that an additional 40,000 individuals will now meet the earnings criteria and be brought into the automatic enrolment population, the majority of whom will be women.
It is important to be clear that the proposal outlined in the 2017 review of automatic enrolment to remove the lower earnings limit is setting the direction for the future of the policy and is not reflected in a current-day change. The Government stand by the proposals in that report and continue to work towards our ambition of automatic enrolment reforms in the mid-2020s. Our ambitions for automatic enrolment will be delivered in a way and at a pace that maintains the stakeholder consensus, while finding ways to help individuals, employers and the Exchequer manage the higher costs associated with the proposed changes. We will in due course consult formally on the best approach to implementation, including when and how to introduce any new legislation.
The Government are also aware of concerns that have been raised by Members of your Lordships’ House and in the wider public around the differences in administering pension tax relief and its impact, particularly on low-income earners. I take this opportunity to assure noble Lords that the Minister for Pensions and Financial Inclusion is actively engaging with his counterparts in the Treasury to explore this issue.
I will conclude on this point. The proposed package of changes in these orders provide crucial stability and simplicity for employers during the second phased increase of minimum contributions, while continuing to increase overall pension savings nationally by £5.5 billion in 2019-20. I therefore commend the order to the House and I beg to move.
Baroness McIntosh of Pickering (Con)
My Lords, I welcome these orders for the reasons that my noble friend has given. However, I am concerned that a couple of categories are being left behind.
By definition, those on zero-hours contracts cannot benefit from schemes such as this, or from bonuses, paid holidays, sick leave, overtime and other such perks of work. In my last five years as an MP, for the first time I had a job centre in my constituency, whereas for the previous 13 years I did not, and so had to go outside my constituency for information on job vacancies and the number of unemployed. My experience was that there are specific categories, including women returning to work. I was delighted to hear my noble friend say how many younger new employees will benefit from this order. However, many women who have had children and wish to return to the workplace, or young people at the start of their career—I fell into this category when I first went into the workplace—are struggling to work and often have two, if not three, paid jobs. They could be working in a shop as a cleaner for part of the time and working in a bar the rest of the time, and obviously students will fall into that category as well.
Lord McKenzie of Luton (Lab)
My Lords, I thank the Minister for explaining the purpose of the orders. On the face of it, the GMP issue is straightforward. As we heard, GMPs are designed to provide a minimum weekly pension broadly equivalent to the amount of additional state provision accrued if not contracted out. Has any assessment been undertaken of the value for money of the GMP system? My noble friend Lady Drake raised an important issue around the Lloyds judgment and the decision to equalise pension benefits. I believe she wanted to know what would happen to the guidance and how soon it could be forthcoming. Is it a question not of the GMPs themselves generally having to be made more equal but, rather, of other components of the package?
On auto-enrolment, there was a brief but good debate in the Chamber—the contributors being women—the main thrust of which, not unreasonably, was the role of women. We praise auto-enrolment but all too often overlook the fact that it still has a job to do. I could recite the roll of honour of those who made auto-enrolment happen, but you know who you are.
Specifically, the legislation requires that the Government do two things: renew and, if necessary, amend the upper and lower thresholds of the qualifying earnings bands; and review the level of the earnings trigger, adjusting for roundings where appropriate. As the Minister explained, the order proposes to freeze the latter at £10,000 but align the former with the lower and upper earnings limits for national insurance purposes. This widens the earnings band by some £3,500.
The supporting analysis for this included a DWP review document of December 2018, which sets out the three principles adopted for the review. Subject to challenge from my noble friend Lady Drake, those principles are: will the right people be brought into pension saving; what is the appropriate minimum level of saving for people who are automatically enrolled; and are costs and benefits to individuals and employers appropriately balanced?
As for raising the qualifying earnings band to the UEL, this increases total pension savings by £179 million, employer contributions by £68 million and employee contributions by £85 million. Retaining £10,000 as the earnings trigger represents a real-terms decrease, which brings an additional 40,000 individuals within the target population. According to the DWP analysis, of that 40,000 some 75% of the additional savers are estimated to be women.
How have the Government made the judgment that costs and benefits to individuals and employers are appropriately balanced? What are the tests? The above apart, what specific additional factors have influenced the proposal before us today? Subject as always to the Minister’s reply, we have no difficulty in supporting the proposals in the order.
I was pleased to hear what the Minister said on tax relief and trying to address the thorny issues of relief at source and net pay arrangements. These issues have been long outstanding, certainly over more than one Government.
I am conscious that we are addressing these issues in the wake of the 2017 review, which involves a wider focus on auto-enrolment. It is also at a point where most of the transitional introductory phases have been accomplished. March 2018 saw staging completed for small and micro employers, while minimum contribution levels rose to 5% in April last year and are heading for 8% this April. Can the Minister say something about re-enrolment and opt-out levels?
As that review identified, despite its success, individuals are still not saving enough. An estimated 12 million are undersaving for their retirement and some 5.7 million are mild undersavers. The broader review, Maintaining the Momentum, charts a path for the future that will help to address some of the shortfall. Its recommendations include: reducing the lower age limit from 22 to 18; calculating pension contributions from the first pound earned; removing the lower earnings limit; and working to increase saving among the self-employed. These may be matters for another day but, like my noble friend, I do not see why they have to wait until the mid-2020s. Is the Minister satisfied with this framework?
Nevertheless, we continue to be enthusiasts for auto-enrolment in one of the most important public policy initiatives of recent times, bred of a consensus.
Baroness Buscombe
My Lords, this has been an important and helpful debate and I will do my best to respond to as many questions as possible. I thank all noble Lords who have spoken in support of automatic enrolment. It was a cross-party initiative. It seems only five minutes ago—but it was a year—that the noble Lord and I were debating this subject in very similar terms. There is support for auto-enrolment, which is a success story, but we are never complacent. There is always more to do to improve the system.
I shall start with questions on the guaranteed minimum pension. I thank the noble Baroness, Lady Drake, for giving me early notice of her question about the recent Lloyds Bank case. That case endorsed the Department for Work and Pensions’ long-held position that schemes must equalise for the effect of inequalities caused by guaranteed minimum pensions. The principle of equal pensions was established by the European Court of Justice in 1990. The requirement on schemes to equalise is not a new cost; they have been aware of it and should have been planning for it for many years. My department has put forward a method that schemes can use to equalise pensions which, because of its “once and done” nature, should limit costs resulting from additional administration requirements. The department will provide guidance in the near future for schemes wishing to use the method upon which the department consulted in November 2016. The Department for Work and Pensions intends to make further changes to the guaranteed minimum pension conversion legislation to facilitate the methodology on which we consulted. We are looking to make those changes as soon as a suitable opportunity presents itself. The representative beneficiaries in the Lloyds case sought leave to appeal on two points of the judge’s decision concerning the methodology favoured by them and the requirement to provide back-payments. Leave to appeal was refused, as I am sure the noble Baroness knows.
The noble Lord, Lord McKenzie of Luton, asked about the assessment of the guaranteed minimum pension system. I am unable to answer a couple of those questions and will write to him. Guaranteed minimum pensions were abolished in 1997, but those which accrued before that time must be honoured by schemes which had contracted out while GMPs were accruing.
On auto-enrolment uprating, the noble Lord, Lord McKenzie of Luton, asked why the Government do not tackle the inequality in the tax system which means that individuals automatically enrolled into a pension scheme use net payment arrangements or are losing out on tax relief. My noble friend Lady Altmann is not in her place but I know she is particularly concerned about this. The Government recognise the different impacts of the two systems of paying pension tax relief on pension contributions for workers earning below the personal allowance. The Government will look at the current differences and explore how to make the most of any new opportunities to balance simplicity, fairness and practicality. The Department for Work and Pensions has worked and is working with the Pensions Regulator to issue guidance to highlight to employers the differences between the NPA and RAS schemes and the potential disadvantage for low earners who are not eligible for tax relief if their employers opt out of NPA schemes.
The noble Lord also asked how many individuals have opted out. A total of 9% did so during the implementation of auto-enrolment. The 2018 evaluation report showed initial evidence of opt-out rates having fallen since the programme was fully implemented. Of course, the department will continue to monitor re-enrolment.
Baroness Buscombe
I thank the noble Lord. Unless it is somewhere among my notes, I do not appear to have the answer to that. If between now and the closing of my speech I cannot find it, I will write to him. I trust that he will bear with me on that.
My noble friend Lady McIntosh of Pickering and the noble Baronesses, Lady Janke and Lady Drake, asked a number of questions about auto-enrolment, with particular reference to women, people who are not in jobs, zero-hour contracts, the gig economy and so on. I want to respond to those questions and to the question of the state pension age, particularly in relation to women born in the 1950s.
I turn, first, to multiple jobholders and the earnings trigger. The proposal to remove the lower earnings limit and removing entitled worker status in legislation will ensure that multiple jobholders 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 jobholders the opportunity to build the same retirement savings as individuals who have only one job. It is the Government’s ambition to make these changes in the mid-2020s in the light of learning from the phased contribution increases and following full consultation with stakeholders in order to develop a consensus and find ways to make this affordable. I remember touching on this matter last year, and I again stress that we need to progress at a measured pace. As I said in my opening speech, we have to think about the cost to both the Exchequer and employers in supporting the scheme, but we will obviously continue to engage on this matter with stakeholders.
With regard to the gig economy in particular, in December 2018 the Government published a report entitled Enabling Retirement Savings for the Self-Employed: Pensions and Long-Term Savings Trials. This sets out our intention to test a number of approaches and interventions through trials with industry partners. It also invites organisations from a range of sectors, including invoicing software providers and accounting organisations, to work with the Department for Work and Pensions in co-designing and testing interventions.
On those working in the gig economy, the department will consider with BEIS and the Pensions Regulator the implications of recent rulings in this area. The Government’s December 2018 Good Work Plan set out the vision for the future of the labour market and ambitious plans to implement the recommendations arising from the Taylor review of modern working practices. The Government commit to legislate to improve the clarity of the employment status tests, reflecting the reality of modern working relationships. We will ensure that any changes are also considered in relation to auto-enrolment so that there is coherence and clarity for individuals and businesses on who is eligible for automatic enrolment.
I recall that my noble friend Lady McIntosh referenced people working in different situations and those returning to work. There is continuing progress in that regard. She also mentioned her nearest jobcentre. We are constantly improving the training of our work coaches to provide assistance in signposting support and helping those who want to go back into work or wish to build their confidence in order to do so. I think my noble friend will find that terrific progress is being made in that regard.
Only yesterday, the Secretary of State for International Development announced a new initiative to support particularly women and carers in returning to work. The Secretary of State for my department, the right honourable Amber Rudd MP, when Home Secretary, launched a similar project last year to help women and carers return to work. In fact, those two cross-government initiatives represent some £2 million. We are constantly working cross-government on this issue. Given the issues of multiple jobs, and the gig and zero-hours contracts economy, it is important that we keep a flexible eye on the changing world of work, as well as working across government with BEIS.
On zero-hours contracts, individuals can still opt in, but the removal of the lower earnings limit in the 2020s will help to address the issues for this group.
We stand by our mid-2020s timescale. As our AE review confirmed, automatic enrolment should continue to be available to all eligible workers, regardless of who their employer is. Making saving the norm for young people, by lowering the age for automatic enrolment so that an extra 900,000 people can benefit from a workplace pension, is certainly a goal. We want to support all those automatically enrolled—particularly those with low earnings in multiple jobs—to save more for retirement by removing the lower earnings limit, so that their contributions are calculated from the first pound of earnings. Also, we recognise the diversity of the 4.8 million classified as self-employed, for whom a single saving intervention might not be effective. We will work to implement our manifesto commitment by testing targeted interventions aimed at the self-employed—as set out in the review report—to identify the most effective options to increase pension saving among self-employed people.
Automatic enrolment has always been implemented methodically, backed up by comprehensive analysis to help us understand its affordability for employers and individuals. We will work to maintain the consensus that has underpinned automatic enrolment’s success, including by giving employers and savers time to plan. In that way, we can help avoid any risk of deterring individuals from continuing to save—so keeping the number of those opting out to a minimum—or any risk of undermining employer engagement with reforms. The latter point is hugely important: we have to keep employers on board.
I want to make further reference to women. Automatic enrolment was designed specifically to help groups such as women and low earners, who have historically been less likely to save. The decision to maintain the trigger for 2019-20 is estimated to bring an additional 40,000 individuals into workplace pension saving, as the noble Lord opposite has referenced; of these, three-quarters are expected to be women. In 2012, 60% of eligible women in the private sector did not have a workplace pension. As of 2017, this had fallen to 20%, and I trust the figure continues to fall.
The earnings trigger determines who is eligible to be automatically enrolled. I hope noble Lords will forgive me if I repeat myself. We believe that maintaining the figure at £10,000 continues to strike a balance so that those who can most afford to save are automatically enrolled in the workplace pension. Lowering the trigger could result in diverting income away from the day-to-day needs of the lowest earners, risking and impacting significantly on their living standards. For those low earners in a position to contribute, the option remains to opt in. If they earn above a lower earnings limit, they will also receive employer contributions.
I would like to make particular reference to carers, as mentioned by the noble Baroness, Lady Drake, whom I recall referring to this a year ago. The 2017 automatic enrolment review concluded that there should be no change to the way carers are currently treated through automatic enrolment. 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 automatic enrolment, which works through an employer-employee relationship. Carers in receipt of carer’s allowance are automatically credited with a class 1 national insurance credit, which helps to protect their future entitlement to a state pension. Individuals who provide informal care for 20 hours per week are eligible to apply for carer’s credit, which also helps to protect future entitlement to a state pension.
Of course, there is an issue with regard to women born in the 1950s—I include myself in that coterie. People are living longer and are healthier for longer. We welcome this, but it is right that arrangements for the state pension system reflect changes in average life expectancy. As we continue to build a country that works for everyone, we need an affordable and fair state pension-age arrangement for current and future generations of pensioners. The average woman reaching state pension age last year will get a higher state pension income over her lifetime than an average woman reaching state pension age at any point before. Women retiring today can still expect to receive the state pension for 23.5 years on average; that is almost three years longer than men, even after equalising women’s state pension age with men’s. Women will spend on average around two years more in receipt of their state pension, because of their longer life expectancy.
Transitional arrangements are in place. We committed £1.1 billion to lessen the impact of the 2011 changes for the most affected. This means that no one will see their state pension age change by more than 18 months, compared to the 1995 Act timetable. We have had to make tough choices, but we have calculated all of this with care. It is about maintaining a sustainable pensions system. We strongly believe that, with the new state pension, the change in life expectancy and the increase in the number of women working for longer and so on, we have struck the right balance on this.
The noble Baroness, Lady Janke, referenced black and minority ethnic individuals and asked what the impact of freezing the trigger is. I can tell the noble Baroness that the analysis underpinning the automatic enrolment earnings thresholds review suggests that freezing the trigger has had no adverse effect on the proportion of black and minority ethnic individuals in the group eligible for automatic enrolment.
I shall answer a question asked by the noble Lord, Lord McKenzie, about increasing the contribution rate as part of the 2017 review, with reference to the 8% and automatic enrolment. Millions of people are now saving, or saving more, as a result of automatic enrolment. As the noble Lord will be aware, the first planned increase in contribution rates took place on 6 April last year, with the second increase, to 8%, coming this April. It is certainly encouraging that since the increase to 5% in April 2018 there has been no increase in rates of stopping saving. However, as the review of automatic enrolment in 2017 revealed, there is no consensus about future contribution rates, and whether, when and to what level they might increase. As such, it is important that we understand the effects the second planned increase will have and carry out further work on the adequacy of retirement incomes. We will then take this forward to look again at the right overall level of saving and the balance between prompted and voluntary savings in due course. I shall allow my noble friend to ask a further question while I search for another answer on communications.
Baroness McIntosh of Pickering
I congratulate my noble friend on her generous and comprehensive response. I was delighted to hear her response to a question about opt-outs being down. However, I am slightly concerned that paragraph 12 says there has not been an impact assessment, but the Government have identified an estimated £79 million more in employer pension contributions. Do the Government share my concern that that might encourage more people to opt out? Also, I know that the burden on small businesses of the cost of administering the state enrolment scheme has been an issue. Is that something the Government are hearing less about, or does it continue to be a concern expressed to her department?
Baroness Buscombe
My Lords, the Secretary of State has considered the impact of the various options for each of the thresholds. A full analysis of volumes and costs was published on 18 December 2017. A separate impact assessment has not been prepared for this instrument. I hope that provides some assurance.
On the burden on business, particularly small businesses, we cannot have it every which way. We are trying to develop the whole process and opportunities for auto-enrolment in a very measured way, because it is hugely important that we do not put too much burden on SMEs, given the support of most of them for the national living wage and so on. We have to be careful that we do not increase rates without taking into account anything needed to help those in small businesses to cope with supporting their staff through automatic enrolment.
I will say something about communication, which was particularly referenced by the noble Baroness, Lady Janke. I absolutely understand where she is coming from. The reality is that we have got much better at communicating. We have advertising campaigns and a brilliant team at the Department for Work and Pensions focused very much on communications for every aspect of the work we do, including support for automatic enrolment, all the opportunities for support for women and so on.
The advertising campaign is not just done in the old-fashioned way; there is a lot of use of smartphones to make it really accessible. But we are not complacent: we continue to work on communications so that people understand what they can do and who they can go to for support and advice through signposting and a whole raft of communications to inform and encourage. We also work closely with outside organisations as our stakeholders in pensions. I hope that the single financial guidance Act, which is well-known to your Lordships’ House from its passage last year, will only make future support for people better by helping them understanding how they can work with their pensions. I look to the noble Baroness, Lady Drake, thinking of the pensions dashboard. That is something else we are developing our thinking on. There is a consultation out, so we are very excited about that.
I hope I have managed to answer most noble Lords’ questions. I will write to the noble Lord, Lord McKenzie, and share that letter with all noble Lords and place it in the Library. On that basis, I commend the order.