Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2021
(3 years, 9 months ago)
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Baroness Stedman-Scott
That the draft Order laid before the House on 12 January be approved.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, I am pleased to introduce this instrument, which, subject to approval, reflects the conclusions of this year’s annual review of the automatic enrolment earnings thresholds required by the Pension Act 2008. The review considered the earnings trigger and the qualifying earnings band for the tax year 2021-22.
The earnings trigger determines the point at which a qualifying worker becomes eligible for automatic enrolment in a qualifying workplace pension. The qualifying earnings band determines the earnings upon which workers and employers pay contributions into a workplace pension. This order sets a new upper limit for the qualifying earnings band and is effective from 6 April 2021. The lower earnings limit is not changed within the order and remains at the level set in the automatic enrolment threshold review order of 2020-21, so no further provision is required. Similarly, the earnings trigger is not changed within this order and remains at the level set in the automatic enrolment threshold review order of 2014-15, so no further provision is required. I am satisfied that the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2021 is compatible with the European Convention on Human Rights.
Automatic enrolment has been a hugely successful policy resulting in over 10 million workers being enrolled into workplace pension savings since 2012. Over 1.7 million employers have met their automatic enrolment duties. Automatic enrolment has become business as usual for employers and workers, and this success, supported by all sides of this House, is something that we all can celebrate. Automatic enrolment is re-establishing a culture of retirement saving and making workplace pension saving the norm for a new generation. However, that does not mean that it is mission accomplished. The Government recognise that there is still more to do as we continue to work towards our commitment of helping people to achieve greater financial security in retirement. We also understand that there is more to do for those who are not saving into a workplace pension, which is why we look at the automatic enrolment thresholds annually, ensuring that the coverage remains right.
As noble Lords will be aware, the Automatic Enrolment Review 2017: Maintaining the Momentum, set out our ambition to remove the lower earnings limit and lower the age threshold in the mid-2020s. While I recognise that there has been a reasonable degree of interest in when these measures will be implemented, we also must consider how they will be implemented and find ways to make them affordable for all parties.
It is important to recognise that the success of automatic enrolment has been achieved through a considered and systematic approach to implementation over a period of years which recognises the need to understand and manage the impact on employers and individuals as well as taxpayers. That is why the 2017 review report was clear that implementation will be subject to learning from changes in the automatic enrolment minimum contribution rates, discussions with employers and others on the right approach, and on finding ways to make these changes affordable. As with other areas of public policy, it is important that we pay close attention to the impact and costs of making changes and consider the optimal approach on implementation. This has been further highlighted by the impact of the pandemic and our overall support for the economic recovery. We will continue to support long-term saving, balancing the needs of savers, employers and taxpayers.
Helping people save for their futures remains a key priority for the Government, and the automatic enrolment duties continue to apply to all employers with eligible workers. We continue to monitor the impacts of Covid-19 on savers, employers and the pension industry. As part of supporting the UK’s economic recovery, our aim remains to help workers achieve greater financial resilience for the long term.
Turning specifically to this order, it determines key elements of the framework for the way in which automatic enrolment operates. It will continue to align the lower and upper limits of the qualifying earnings band with the national insurance lower and upper earnings limits for the 2021-22 tax year. The lower and upper limits are therefore £6,240 and £50,270 respectively. By continuing to align the qualifying earnings band limits to the national insurance thresholds, the changes relating to payroll systems are kept to a minimum.
The purpose of this framework is to balance the need to encourage individuals to take personal responsibility for pension saving with a sustainable compulsory minimum contribution level for all employers. Setting the thresholds at these levels will also ensure that contribution levels continue to be meaningful for savers. In doing so, we are mindful of the economic environment within which these changes are taking place. The order does not change the earnings trigger, which remains at £10,000 this year. The Government’s objective in confirming this threshold is, on the one hand, to strike a balance between bringing in those for whom it makes economic sense to be saving into a pension, and, on the other, affordability for employers and workers. Again, we must be mindful of the broader economic context.
Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still have the choice to opt in to a workplace pension and benefit from employer contributions, should they wish. Those earning below the lower earnings limit also have the option of being enrolled by their employers in a pension scheme. To conclude on this point, the decision to maintain the earnings trigger at £10,000 and maintain the alignment of the lower and upper limits of the qualifying earnings band with the national insurance lower and upper earnings limit for the 2021-22 tax year maintains simplicity and consistency, while minimising burdens on employers and continuing to increase the total pension savings this year by an estimated £14 million.
I commend this instrument to the House and beg to move.
Lord McKenzie of Luton (Lab) [V]
My Lords, I thank the Minister for her clear introduction to this order. As we have heard, it deals with the statutory requirement placed on the Secretary of State to review the earnings trigger and the qualifying earnings band, which are key components of the automatic enrolment process. We note that the Secretary of State returned to the three principles established in the first two reviews, in particular a judgment on whether the right people will be brought into pension saving.
This has led to determinations that the trigger should remain at £10,000, the lower limit of the qualifying earnings band and the national insurance contribution lower band. As far as these are concerned, there is no change. Perhaps the Minister will say why it is not considered appropriate to take forward the 2017 review proposal of removing the lower limit. She referred to it in her introduction, but we would appreciate more detail. Is it still the policy to remove this band in due course? The documentation we have advises that the methodology for the review has changed and that a new internal model of the DWP is in use. Perhaps the Minister will expand on the consequences of this and what it means for this review. Can she say who it considers are the right people to be brought into pension saving?
The overall impact of the proposed thresholds next year, so far as participants are concerned, is calculated to be of the order of a further 8,000 brought into pension savings and, in terms of contributions, a total of £14 million. This seems a considerable loss of momentum in the arrangements for auto-enrolment. Marking time on the review has implications for the gender balance of these arrangements. We are told that 43% of participants in the baseline are women and that it would require a downward shift on the earnings trigger to improve that position. What strategy can the Minister offer to address this and the other inequalities the analysis sets out?
I heard what the Minister said about the implications of the pandemic and support for companies. It would be good to hear quite who is meant to pick up the cost of the various components of this in due course.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I thank the Minister for introducing this statutory instrument. The content is in many ways predictable and, I fear, my comments may be too. Having established the precedent for the qualifying earnings band to align with national insurance contributions lower and upper earnings it is no surprise to see that alignment is retained, and I see the obvious benefit of the simplicity that creates in adjustments for PAYE. It is also no surprise that the automatic enrolment trigger remains at £10,000.
The effect of that over time, as pay and everything else rises, progressively brings more people into pension savings in real terms. Although it seems one reasonable way to do that, I am afeared for the reasons that were just outlined by the noble Lord, Lord McKenzie, with regard to how to get more women saving for pensions. Just relying on, if you like, the indexation effect to mean that £10,000 effectively becomes less does not give sufficient acceleration. I would be pleased to hear more about what might happen in the mid-2020s, because it seems that it will be difficult if it is done in a big jump. But if it is done in incremental stages, we might be here in the 2030s with many people still losing out.
It is a great pity that there is an enlarging gap between that £10,000 and the income tax threshold, and that more people are at risk of being put into the unsuitable and somewhat misnamed net pay enrolment scheme, where they are not getting tax relief. The Government are aware of that problem and the call for evidence on pensions tax relief administration closed on 13 October. Can the Minister enlighten us about whether there have been any conclusions on how to stop the lowest paid being diddled out of a significant chunk of their pension contribution and eventual pension because of the administrative choices of their employers? Are there going to be checks on employers when they choose their system, to see how many employees they might have who would fall into that trap, or are we even going to get a nice surprise in the Budget: that HMRC will make it right? It is not beyond its power to do so.
That probably concludes the things that I have to say, except for one thought. Is it possible to find more ways to encourage those who are near the £10,000 threshold and then fall below it—so that they get unenrolled, then re-enrolled when they go above it—just to stay in, given the benefits of doing so? That is a way in which we can make sure that more people stay in and get their pension. It is also a matter of some urgency to address the age limit at which we encourage people to start saving. I do not see much of a reason for delaying that.
I apologise for my ignorance here, but can the Minister enlighten me about what interaction there is between how benefit assessments are made and pension payments? Is there any account or effect there? I feel I ought to know, but I am afraid I do not.
Baroness Altmann (Con)
My Lords, I congratulate my noble friend on introducing this statutory instrument and on her clear explanation. I continue to welcome the success of auto-enrolment in making pension saving the norm across the British workplace. I also congratulate my Government and put on record the tremendous achievement that they have brought forward during the pandemic to insist on maintaining, through furlough, the automatic enrolment pension contributions. I am sure there was a temptation to relax that provision but it is most welcome that the Government have recognised the importance of continuing auto-enrolment uninterrupted, albeit at the furlough level. Will my noble friend comment on whether any measures are planned or in place to widen education and guidance in the workplace to run alongside auto-enrolment, so that people are helped to understand their pensions while they are paying money in?
I also support the aim of good value pensions. Indeed, master trust consolidation is aimed at helping in that regard by achieving economies of scale. However, what can we do about data reconciliation and accuracy for past records and future contributions? Is there an appetite within government to make sure that not only are employers required to pay contributions, and that the regulator checks that they are paying them, but that there are proper, regular, mandatory requirements for checking that the amounts being paid on behalf of each worker are correct? At the moment, there are no such checks and we are well aware that even recent auto-enrolment records are not correct. I have concerns that, under GDPR, the data for auto-enrolment may not be being kept for more than four or six years. If my noble friend could write to me on that, that would be fine.
I recognise that the cost of this SI, at £14 million, in the context of overall pension contributions, which are in the region of £38 billion, is not significant. Indeed, the employer/private sector addition of £5 million is not onerous—but the people who benefit from this SI are the higher earners, whose upper threshold has gone from £50,000 to £50,270.
I support the aim of aligning the national insurance lower and upper limits with the automatic enrolment contribution records, making it easier to administer, but, as the noble Baroness, Lady Bowles, pointed out, there remains a major problem for the lowest earners, most of whom are women. More than 1 million are caught up in this problem of net pay schemes, which are, indeed, misleadingly named. They force these lowest earners to pay 25% extra for their pensions. They do not receive less pension, but they have to live on less than they should, and their take-home pay is lower than it should be as a direct consequence of the scheme that their employer chose. These workers are often unaware of this, as, often, are the employers. Can my noble friend let us know when the Pensions Regulator and the Government will act to stop this and when we might find a resolution, as already proposed to the Treasury by the action group that I am a part of? That would at least remedy the injustice faced by these lower earners.
Baroness Drake (Lab) [V]
My Lords, I refer to my pension scheme interests as listed in the register.
I, too, thank the Minister for her presentation. Auto-enrolment has been stress tested during this pandemic and in large part has stood up well, reinforced by support from the Treasury through the various job protection measures. No doubt, the DWP has been a powerful influencer as to the strategic importance of protecting the private pension system. But, in making that acknowledgement, I want to refer to some—I cannot cover all—of the casualties that have occurred.
The key target group for public policy on auto-enrolment is low-to-moderate earners, including young people and women, but the pandemic has brought widening divisions. Young people are more likely to work in the most impacted sectors, to be made redundant or be furloughed, and to find it harder to enter a difficult labour market. In 2017, the Government commissioned a review of automatic enrolment and committed to changes by the mid-2020s to extend coverage. I am sure that if I ask the Minister for a timetable for those changes, she will repeat that it must be considered in the context of supporting businesses and getting people into work, but I want to push back on that argument, on a particular priority.
Young people will feel the consequences of the pandemic for their life chances for many years to come. The Government should give priority to automatically enrolling workers from age 18 and enrolling all young people registered as unemployed or earning below the earnings trigger into a private pension account, into which government makes a contribution. Other public service obligations are built into the design of auto-enrolment. This should be another—to increase the prospects of young people building up a decent pension pot, which has taken a kicking as a result of the pandemic. Will the Minister consider that proposal and give it priority?
The £10,000 earnings trigger has been frozen, but it still means that women will make up well under 40% of the eligible population for auto-enrolment. If more unemployed women re-enter the labour market on lower earnings, even the estimate of 8,000 more becoming eligible could well be overstated. There are other inhibitors to women building up their pension pot. Noble Lords have already raised the issue of tax relief. However, some master trusts offer both relief at source and net pay. It is not the case that all schemes offer only one option. But the main point is that we still have significant unresolved inequalities in respect of women, auto-enrolment and private pension schemes, which the Government do not seem to have the drive to address.
Another casualty is that rising unemployment will accelerate the small pension pot problem, particularly in sectors where the incidence of small pots is already high. As a DWP report suggests, it is employment ending and transitions to new jobs that drive growth of small pots, rather than active decisions to discontinue saving. There is a really pressing need to find a solution. The Government tilted at one in 2013, with pot follows member, but then kicked the can down the road. By when do the Government anticipate they will have a solution for small deferred pots that is fit for purpose?
Finally, it is now over five years since pension freedoms were introduced. There is increasing evidence that industry and policymakers are creating a retirement market based on assumptions about savers’ behaviours which are inconsistent with how they actually behave. Pension freedoms have also reframed the pension pot away from being the means, together with the state pension, to secure an income for life in retirement to being seen as an accessible pot of money to fund priorities in the near-term future. If that reframing persists, there will be a real public policy failure in 20 or 25 years’ time in terms of the money that people have as income in retirement. When will the Government commission a review of the impact of pension freedoms on desirable public policy outcomes?
Lord Bourne of Aberystwyth (Con) [V]
My Lords, it is a great pleasure to follow the noble Baroness, Lady Drake, who has such broad and deep knowledge in this area. I well remember the powerful contributions that she made to the Pension Schemes Bill, as it was, when it went through the House.
Along with others, I thank my noble friend for setting out the order with such clarity. I join others in noting the great success of auto-enrolment in pensions since 2012, particularly through this difficult period. I understand the thinking behind the decision not to change the qualifying trigger level. I appreciate that in the challenging environment of the last year there has been very little earnings growth. However, as has been acknowledged, freezing the threshold at £10,000 increases the number of people saving into a workplace pension by only 8,000, raising contributions by just a small amount.
Perhaps I may delve a little deeper into the current position on savings more generally. With spending by individuals lower than normal because of the constraints on spending in lockdown and during the pandemic, surely, despite the slowdown in earnings growth, there has been an upswing in savings. Should we not encourage those in employment to save into pensions? Perhaps we are doing that, but I worry about the fact that we are increasing the number of people auto-enrolling by just 8,000. What are the Government generally and the department specifically doing to encourage pension savings? What publicity and education are being provided, quite apart from the auto-enrolment scheme?
It is gratifying that, of the new savers, 72% will be women. This is welcome news, although of course it may well indicate the lower wages of women, as well as, admittedly, a reflection of more part-time working among women, but there remains a challenge to get more women into the auto-enrolment scheme. I wonder whether that statistic worries the Government or heartens them and what the thinking is here.
Perhaps I may also press my noble friend for some broader thoughts on the longer-term thinking of the department and the Government on pensions in general—in particular, on a point made by the noble Baroness, Lady Bowles of Berkhamsted, with regard to what we are going to do with people who, I fear, are in and out of employment in the current challenging circumstances, and how we are going to encourage pension savings in this difficult environment. Those points were also touched upon by the noble Baroness, Lady Drake. I assume that there is a desire to extend automatic enrolment in the future and to lower the trigger for automatic enrolment, but what is the current thinking and the longer-term outlook?
I join others—my noble friend Lady Altmann, for example—in noting the tax trap, or non-tax trap, for lower earners, and the need to incentivise savings for those people. The position at the moment is not satisfactory. I wonder whether my noble friend can give some indication of when the Government are going to get their teeth into this problem and come up with a solution.
Baroness Wheatcroft (CB) [V]
My Lords, as others have, I thank the Minister for introducing this SI in her characteristically clear, straightforward way. I declare my interest as set out in the register as the director of a financial services business.
We have to be grateful that auto-enrolment was introduced in 2012, that the scheme has prospered and that during this difficult period of Covid the Government have continued to support it. Getting people to save for their retirement is an imperative, and the sad thing is that so many will find themselves reaching retirement with only the tiniest of pension pots. Given the level at which auto-enrolment starts, it would be wrong to encourage people to believe that a happy retirement necessarily awaits.
It is absolutely the right thing to have kept the threshold where it is because something that has become apparent in the time of Covid is just how little of a cushion many people have, and therefore bringing the threshold down or altering it at all would have brought people closer to destitution. A report from the Joseph Rowntree Foundation at the end of last year found that, appallingly, the number of people in destitution during the previous year had risen by one-third. This meant that 2.4 million people, as the foundation says, were living in a position where they were unable to afford to meet their needs or those of their children. That is an appalling state for a country that is supposed to be a civilised leader in the western world.
People who were still in work found themselves having to go to food banks on an ever-increasing scale so it is crazy for us to believe that they could be saving for a pension. The problem is that so many people in our country work but do so on a very, very low wage. The problem is not with auto-enrolment—the scheme is good—but with the amount of money that people have to save.
Does the Minister have plans to do anything about the unfairness that is part of our capitalist system? I do not want to turn the capitalist system upside-down—far from it—but, as we come out of Covid, the fairness agenda will have to be addressed in a way that I do not see being done currently. I would be interested to hear the Minister’s views on that. I know she has a deep social conscience that will make her uncomfortable with the discrepancy in many businesses between those at the top and those at the bottom.
Setting the minimum wage where it is now means that many people who take dividends out of businesses are finding those dividends financed, in effect, by the taxpayer in the form of tax credits to those at the bottom of the company who simply cannot afford to live on what they are being paid. The working poor are a major problem in this country, and that problem will of course be exacerbated when they retire and have only their state pension to live on.
At the other end of the scale, I endorse what the noble Lord, Lord Bourne, said when he asked the Government what they were doing to make more people aware of the importance of saving for their retirement. Although of course I have every sympathy for those who are not in a position to save for their retirement, I also believe that those who can save should, and that they should save not only on their behalf but on behalf of their children. Can the Minister tell me in particular what steps the Government are taking to promote the junior SIPP scheme—the junior pension—to which people could contribute small amounts from the birth date of their children and which would multiply over time to provide a decent pension?
Lord Hain (Lab) [V]
My Lords, I thank the Minister for her clarity in introducing this instrument. It is a pleasure to follow the noble Baroness, Lady Wheatcroft, particularly because of her appeal for fairness in the context of the pandemic.
There have been many expert contributions to the debate so far on the auto-enrolment scheme, which I was privileged to introduce in 2007-08 as Secretary of State for Work and Pensions, making employee pension membership virtually compulsory and helping people save for their retirement. At that time many millions were staring at a pensions black hole but since then I am pleased to say that over 10 million people are in auto-enrolment.
However, huge challenges remain around the level of pension savings, not least as we see the impact of Covid-19 exposing deep inequalities and injustices. We need to go much further to help people save for retirement. One important way to do that is through collective defined contribution pensions or collective money purchase schemes, as they are known in the Pension Schemes Act 2021. As I have said before in your Lordships’ House, I welcome the introduction of CDC schemes. I believe they represent an attractive third way in workplace pension provision. They have the capacity to deliver significantly better outcomes for savers than individual direct contribution schemes, improving pensions outcomes for workers.
I have spoken to Royal Mail and its union, the Communication Workers Union, and understand that they are keen to launch Royal Mail’s collective pension plan for its 143,000 employees in the second half of the next financial year. I therefore ask the Minister to ensure the passage of the necessary secondary legislation, including tax changes, in a way that will allow such schemes to begin accepting contributions. I also understand that the scheme will require authorisation from the Pensions Regulator. Could she please address this matter in her reply? There is still quite some work to be done before the first CDC scheme in the UK is up and running but, as with auto-enrolment in 2008, there is a significant prize to be won with the introduction of CDC schemes in 2021.
I again appeal to the Minister to reconsider the issue of the 5 million self-employed, many of whom are low-paid and have no pensions at all. When will the Government find a solution to this serious gap?
With defined benefit schemes closing at an alarming rate, the current norm of completely inadequate defined contribution schemes means that the state will incur multibillion costs in future to save millions of people from abject poverty. The average pension pot is £50,000, which would give an annual income of just £2,500 a year—nothing like enough to live on, even with the full state retirement pension. Experts estimate that we should each save at least 13% of our income from the age of 25 but we are doing nothing like that. The Government are simply not addressing this situation. The blunt choice is between a future of poverty and misery in old age for millions or politicians today being honest about the need for workers’ and employers’ incentives to pay more into pensions and for the Government to raise extra taxation to help finance decent pensions and elderly care.
Baroness McIntosh of Pickering (Con) [V]
My Lords, I am delighted to follow the noble Lord, Lord Hain, and thank him for his part in introducing auto-enrolment. I join others in welcoming the order and congratulate the Minister on bringing this forward. With her, I also celebrate what we have achieved so far with the auto-enrolment scheme. I have a couple of questions.
My first concern relates to the impact on small businesses of the increase set out in paragraph 12.2 of the Explanatory Memorandum, which states:
“Due to the changes, private-sector employers will pay an estimated £5 million more in employer pension contributions in 2021/22 than they would have done had the thresholds been uprated in line with earnings.”
Can my noble friend say what the impact of the crisis will be on SMEs? How have the Government borne in mind the impact of Covid-19 on the performance of many companies, particularly small and medium-sized companies, during the ongoing pandemic?
I would also like to raise the plight of women workers, particularly exacerbated in the circumstances of Covid, and their ability to save for pensions. Women are now required to work until 66 years of age, yet the pandemic has removed many of these women from employment opportunities and placed them at greater risk of vulnerability, catching infection and being seriously ill from it due to age. Many may be shielding older or younger relatives and have caring responsibilities. That is one issue facing older women who are not yet of retirement age or who are unable to afford to retire and continue to work, but the job opportunities are not there.
Within this category of women I would like to look at women of all ages, and actually all workers, who may have more than one job. We are told that each job is treated separately for the purposes of auto-enrolment pensions. Some jobs will sign a person up to pay into a pension automatically; others will not. We are told an individual can pay into more than one pension, but charges will apply. It may be that you pay two sets of charges if you have contributions to two separate pensions. Have my noble friend and her department had the opportunity to look at this category of women who are caught out in this regard? It would be ideal if people were in full-time positions, but many do not have the opportunity and have to work part-time in more than one or two positions just to make ends meet. Many in this category, women and men, may be reliant on temporary and zero-hour contracts.
It is notable that the Office for National Statistics confirmed there has been an 11% increase in unemployment in women over the age of 65 who have not chosen to take a pension or perhaps do not have one. I would be delighted if, in response to my remarks and questions, my noble friend could write to me if she is unable to answer them today. I will be supporting the order, but I have these concerns.
Lord Foulkes of Cumnock (Lab Co-op) [V]
My Lords, I would like to thank the Minister too. I see so much of her over the screens these days I am tempted to call her my noble friend, even though she did not mention that auto-enrolment arises from the Pensions Act 2008 and that it is one of the many positive achievements of the Labour Governments of Tony Blair and Gordon Brown. If my recollection is correct, this Act was piloted through the House of Lords by my noble friend Lord McKenzie of Luton, although in his usual modesty he did not mention it in his speech.
I want to confine my remarks to a few brief questions. First, I am not clear on why Northern Ireland needs separate legislation. I sit on the Common Frameworks Scrutiny Committee and we have seen that Northern Ireland has the greatest amount of devolution of all the devolved Administrations—some think it is Scotland, but it turns out to be Northern Ireland. I am not quite clear why there has to be separate legislation in this case.
Secondly, a number of Members mentioned the number of people who will now be able to get auto-enrolment as about 8,000. Could we have a gender balance in relation to that? More importantly, how many working people are losing out and are not included in this when, as others have said, they really ought to be included?
Thirdly, it is not clear why there was no consultation. The Explanatory Memorandum tries to explain this, but it was not clear on why, and I think consultation is always useful on these issues.
Finally, I ask a question in relation to charities as employers. Clearly, they are going to have extra costs and they are suffering tremendously at the moment because of Covid—because of increased demand and the difficulty of raising money. This is going to be an additional burden. Can this be looked at and can the Minister have discussions with her colleagues in other departments to see what help can be given to charities?
I hope the Minister will be able to answer these questions, but meanwhile I will say that I strongly support this order. I hope my noble friend, as I now call her, will be pleased to hear that.
Baroness Ritchie of Downpatrick (Non-Afl) [V]
My Lords, I would also like to thank the Minister for introducing these regulations and it is a pleasure to follow my noble friend Lord Foulkes. Like him, I am also a member of the Common Frameworks Scrutiny Committee, and he raised two particular issues to do with Northern Ireland. As a former Minister with responsibility for benefits in Northern Ireland, I recall working with the Labour Government, and particularly the noble Lord, Lord McKenzie, in relation to the Pensions Act 2008. There is similar legislation in Northern Ireland, but Northern Ireland has always introduced its own social security legislation—that goes back to the date of partition, I think, in 1921.
I support this statutory instrument because I believe it provides an element of fairness and I support the principle of auto-enrolment. I suggest to the Minister that it could be built upon. It is worth noting that Age UK found that 1.9 million pensioners are still living in poverty in the UK. That means that over a quarter of pensioners, despite having worked all their lives, paid their taxes and contributed to our economy, are now living their later years facing more challenging decisions than they necessarily should; wondering whether they can afford to turn the heating on or pay their bills and watching how every penny is spent.
Returning to this statutory instrument and the general issue of auto-enrolment, I have several questions for the Minister. At this time of the pandemic, could she indicate what work has been undertaken about the impact of Covid-19 on workplace pensions? If so, could the Minister share those findings, any assessments and recommendations for the future with your Lordship’s House? Workplace pensions are important because almost 19 million are now involved in such schemes. What consideration have the Government given to putting money aside in a government savings scheme as a top-up to workplace pensions? I noted that the Minister in the other place, Guy Opperman, seemed to refer to the possibility of that in a debate on pensions on 10 December. Is that going to happen?
In many ways, furlough has probably meant that a lot of employees have retained their roles and pension contributions have had to continue as part of furlough. Is there a figure or an estimated figure for the UK in relation to this?
The fallout for pensions will become known only when we have a clearer picture of the impact on jobs. Some local pension experts in Northern Ireland have told me that there has not been a surge in people opting out during this period because of the government support schemes. A bigger worry would be those in the self-employed category—the noble Baroness, Lady McIntosh of Pickering, referred to this. I believe there has been a trend of owners of small to medium-sized businesses suspending or reducing their own contributions to protect cash flow within their business. What further protections and assurances can be provided for them to ensure that their pensions and entitlements do not collapse?
Baroness Gardner of Parkes (Con) [V]
My Lords, the Minister introduced this debate very clearly, and we have had some excellent contributions from Members. I support the order. I have always thought it important that we encourage people to save for their retirement with a pension. The younger you are when you start this pot, the more you have to support yourself as you get older. The introduction of automatic enrolment for pensions was a positive step in this direction, and the massive increase in uptake since it was introduced reflects this.
However, I worry that, in the current climate, this may be a strain too far for businesses, as they struggle under the financial pressure of closing their doors to trade, in part or in full. While the furlough scheme helps with salaries, it does nothing to assist with pensions and national insurance contributions. It is costing all these businesses money to stay closed—from the Richard Ward beauty salon chain racking up debts of £1,000 a day to the likes of the Leon takeaway restaurant losing up to £200,000 a week, rising to £800,000 if you take account of the profit it would usually make.
Pension costs are part of this equation, and even the changes made by this order will trigger an additional group now falling into automatic enrolment, the costs of which will add to employers’ financial worries. I ask the Minister to work with the Chancellor to look at ways of helping these businesses to survive by reducing these costs in the short term.
Lord Davies of Brixton (Lab) [V]
My Lords, I thank the Minister for her detailed introduction. It is a pleasure to follow the noble Baroness, Lady Gardner of Parkes, because, back in the day, we were both members of the Greater London Council—long lamented by me.
Everyone has pointed out that auto-enrolment has been a success, but it is important to understand that it is still a work in process. A series of well-recognised problems need to be addressed: the exclusions, low contribution rates—there is universal agreement that they should be higher; the only issue is when—and small pots, which is relevant here. Unfortunately, there is nothing in the supporting analysis to say what the impact of changing the earnings limits will be on the number of small pots. We know that there will be millions of them; what is the impact of changing the earnings limits on the future number of small pots? This is germane to the future of the scheme.
There are also some interesting figures in the supporting analysis. I found it a bit counterintuitive that the 8,000 people being brought in by freezing the trigger helps older people, more of whom are brought in by this change than younger people. This points out that we are running out of time: it is important to get the future of the scheme sorted out because these people do not have any time. We are not planning a scheme for people entering the workforce; this is a scheme for people approaching to retirement. The fact that freezing the limit helps older rather than younger people emphasises that point. Deferring it means that they have even less time to sort out their inadequate pensions.
Thirdly, I ask the Minister about the implications of the judgment in the Uber case, the key point in which was that these people are eligible workers and, hence, will be covered by the auto-enrolment requirement. Have the Government explored the implications of the judgment for pensions and, in particular, issues such as back claims for contributions that should have been paid and the fact that people in the area of employment covered by the Uber judgment have fluctuating earnings, almost by definition? Again, this has important implications for small pots and people moving in and out of the earnings limits. Have the Government considered the implications here?
The Deputy Speaker (Lord Faulkner of Worcester) (Lab)
My Lords, I am not able to call the noble Lord, Lord Bhatia, because he was not on the call when the Minister made her opening speech.
Baroness Janke (LD) [V]
My Lords, I thank the noble Baroness for her clear presentation. We will support the order today. I also thank all noble Lords for their contributions and feel that this debate has raised quite a few issues for her consideration.
Many noble Lords have commented on the fact that auto-enrolment has been highly successful. However, we know that, still, not enough people are saving for their retirement and that particular groups needs to save more. In the light of the success of auto-enrolment, could the Minister say what the timescale is for the Government to revisit the recommendations of the 2017 report, particularly in relation to the age threshold and earnings trigger? Several noble Lords raised the issue of the age threshold. Many of us would like to see young people eligible for auto-enrolment. They should be encouraged to make a start to their pensions, and there needs to be an incentive for them to start saving early in their working life.
However, as the noble Baroness, Lady Drake, explained, this age group is the hardest hit by the pandemic; can the noble Baroness comment on her proposal for special consideration for it, which I believe is definitely necessary? I also support her call and that of the noble Lord, Lord Bourne, for much more publicity and education about pensions and pension planning in the workplace.
By reducing the lower age limit to 18 and removing lower earnings limits, a further £2.6 billion could be saved, which would recognise the importance of starting this saving habit early. Although the pandemic has hit this age group hard, a government support initiative would definitely incentivise this group to think about its future.
The earnings threshold is also a barrier for many on low earnings to benefit from a pension. These are the working poor, for whom savings and pension provision will be crucial if they are not to move from being the working poor to pensioners in poverty. As the noble Baroness, Lady Ritchie, told us, 1.9 million pensioners are in poverty in the UK. In relation to the important points about fairness made by noble Baroness, Lady Wheatcroft, this group needs to be considered, and this will become increasingly pressing as we come out of the pandemic. I also cite her point about the small amounts of savings that many people have to help them survive and prevent them going into destitution.
The changes to automatic enrolment could also help to improve the pensions gender gap. The average pension pot for a woman aged 65 is one-fifth of a 65 year-old man’s, and women receive £29,000 less state pension than men over 20 years. This deficit is set to continue, all else being equal, only closing to 3% by 2060. Reducing the earnings threshold to a lower level would also bring hundreds of thousands of people, mostly women, into pensions saving.
I ask the Minister to comment on the latest ONS data, which show a stark contrast between the private pension wealth of white British savers and savers from ethnic minorities. What is the Government’s response to this data and what measures are they proposing to reduce the ethnicity pensions gap?
The noble Lord, Lord Davies, mentioned the judgment in the Supreme Court last week relating to employees in the gig economy. Like him, I ask what consideration has been given to the implications of that judgment, not just for Uber employees but for others in the gig economy. Have the Government made any assessment of how many other companies will be affected by the judgment and what action will be necessary?
I want lastly to highlight the self-employed, another group which is suffering particularly as a result of the pandemic. Recent research for the Institute for Fiscal Studies shows that only 16% of self-employed workers saved into a private pension in 2018, compared with 48% in 1998. The call made by the noble Baroness, Lady Ritchie, for a report on the impact of the pandemic on workplace pensions is therefore timely. What plans do the Government have to develop and implement policy for the self-employed to provide incentives to pay into a pension scheme to give them security in their old age? I look forward to the Minister’s response.
Baroness Sherlock (Lab) [V]
My Lords, I thank the Minister for her introduction and all noble Lords for a great debate. We do not oppose this order, of course; we all want auto-enrolment to flourish. It emerged from the work of the Pensions Commission, on which my noble friend Lady Drake served with such distinction. As my noble friend Lady Foulkes reminded us, that was legislated for by the last Labour Government—indeed, by my noble friend Lord McKenzie of Luton—and was then introduced by the coalition, so it is truly a cross-party baby. So far, it seems to have come through the threats posed by the pandemic reasonably well, as my noble friend Lady Drake said. People are still saving. Can the Minister confirm that there is no evidence of increasing opt-out rates?
I want to understand more about the effect of freezing the earnings trigger. The Government’s review says that a freeze reduces the value of the trigger as it assumes that there will still be wage growth, and its modelling estimates that the freeze will bring 8,000 more savers into scope. That last year’s review suggested a freeze would bring into scope another 80,000 savers shows what has happened to earnings growth. Can the Minister explain the projection a bit more? I have tried the methodology and failed. Does it mean only that, all other things being equal, freezing the trigger at £10,000 will draw another 8,000 people into auto-enrolment; that is, 8,000 more than would have come had it been uprated with earnings? In other words, is it just the pensions equivalent of fiscal drag? Crucially, were there any assumptions about employment levels? Is it possible that 8,000 extra people will be drawn in but that a million will lose their jobs and be kicked out, so we are 992,000 down? Was that factored into the decision by the Secretary of State?
As some people have lost hours rather than jobs, others have lost full-time jobs and will end up with one or more part-time jobs instead. If someone has one or more jobs, and none pays over the threshold, they are excluded from auto-enrolment altogether, so what assessment did the Secretary of State make of this in deciding about the earnings trigger? What are the Government doing to tackle our broken labour market and the rise in working poverty which it is driving— a point made strongly by the noble Baroness, Lady Wheatcroft?
I would be interested to hear the Government’s view on the age threshold—an issue raised by my noble friend Lady Drake, the noble Baroness, Lady Janke, and others—and what they intend to do about the gender imbalance, about the ethnic minority imbalance raised by my noble friend Lord McKenzie and the noble Baroness, Lady Janke, and about the self-employed, as mentioned by the noble Baroness, Lady Ritchie, and others. I am certainly interested to know, as are most noble Lords, what is happening to the 2017 review recommendations.
I also have some questions related to the impact of the pandemic. Are more people taking money out of their pensions early in response to short-term need in the pandemic? Are we seeing an increase in scams? With firms facing cashflow crises and then insolvency, are more employers failing to pass over auto-enrolment funds? If the furlough scheme is stopped and that leads to more insolvencies, which it probably will, what will be done to ensure that people get the money that the then-insolvent employer should have handed over? Is the DWP doing a full risk assessment for the pensions landscape in the light of the pandemic and, if so, will it publish it?
On the longer-term issues, my noble friend Lady Drake raised an important question about the shifting patterns of saving in the wake of the pension freedoms. Has the DWP looked at whether there is a shift to pension pots being viewed by people as simply another form of savings and not as a source specifically of long-term retirement income? If so, what does it intend to do about it?
A big challenge remains getting pensions saving up to the appropriate level to avoid, as my noble friend Lord Hain said, millions of people ending up in abject poverty in retirement. I would be interested to hear what the Minister has to say about that and about my noble friend’s question about when we will get the secondary legislation for the Pension Schemes Act. Noble Lords will remember quite how much pressure we were under to pass the Bill as quickly as possible, so I hope that we will not see implementation slowing down now the primary legislation is in place.
The Government are perhaps being cautious because of the pandemic, but, as my noble friend Lord Davies of Brixton said, auto-enrolment is a work in progress. Many noble Lords, including the noble Lord, Lord Bourne, the noble Baroness, Lady Bowles, and others, have pressed for the need for longer-term thinking. Can the Minister assure the House that the Government are developing a plan of action to ensure that, once the economic landscape stabilises and employers face less uncertainty, more people are automatically enrolled into pension schemes in the future? As many noble Lords have said, too many people simply are not saving enough money for retirement. We have seen during the pandemic more and more people falling into debt and potentially into poverty. People have lost so much already. We do not want those losses to be magnified further when they come to retire. I look forward to the Minister’s reply.
Baroness Stedman-Scott (Con)
My Lords, I thank all noble Lords for their contributions to this important debate and echo the words of the noble Baroness, Lady Sherlock, about how interesting and robust it has been. I have listened to the questions and sought to prepare my answers, but I am sure that I will not get them all in during the time that I have. If I do not answer all questions, I will undertake, as always, to write to noble Lords.
The noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, asked about implementation of the AE review measures and whether it was appropriate to take forward the 2017 review. Our ambition is to introduce the changes set out in the Automatic Enrolment Review 2017: Maintaining the Momentum to the lower earnings limit and the age threshold in the mid-2020s. We will do this in light of the impact of the pandemic and our overall support for economic recovery. We will continue to support long-term saving, balancing the needs of savers, employers and taxpayers.
The noble Lord, Lord McKenzie, spoke about explaining the modelling changes and calculating their impact. It is important that our estimates are as accurate as possible and that we review our analysis regularly to make best use of the data available. We have therefore moved to a new model that better reflects the latest data available since the full implementation of automatic enrolment. This has improved the accuracy of our estimates.
The noble Lord, Lord McKenzie, asked why the Government did not change the AE thresholds to enable more women to save; other noble Lords also made that point. Automatic enrolment has helped millions more women save into a pension, many for the first time. Participation among eligible women working in the private sector has risen from 40% in 2012 to 86% in 2019. Our ambition is to remove the lower earnings limit, which would ensure that all workers benefit from an employer contribution if they are enrolled or opt in.
The noble Lord, Lord Bourne, the noble Baroness, Lady Bowles, and my noble friend Lady Altmann raised net pay arrangements. I am not trying to avoid answering the question, but this is a matter for the Treasury and in the 2020 Budget the Government announced a call for evidence on pension tax relief, which also set out the Government’s views on the proposal already put forward. The call for evidence is now closed and the Treasury is analysing the responses received from stake- holders and will respond to the call for evidence in due course. I appreciate that this cannot come quickly enough for noble Lords.
My noble friend Lady Altmann raised the issue of data. I will need to write to her about that.
The noble Baroness, Lady Bowles, asked about the interaction between how benefit assessments are made and pension payments. I thank the noble Baroness for her question; it is a complex matter and I will write to her. The noble Baroness also asked about the conclusions on NPA/RAS rates and whether employers check how many employees are affected. It is for employers to choose the pension scheme that they use and the Pensions Regulator has guidance on its website about the implications of these two schemes. The Treasury is responsible for this; it has publicly carried out the consultation and will report on it in due course.
My noble friend Lady Altmann asked what we can do to ensure that the amounts paid in are correct. Where it suspects non-compliance, the Pensions Regulator carries out compliance investigations on all types of employers in all parts of the UK. In particular, the regulator conducts complex manual investigations into serious prolonged breaches and suspected offences related to automatic enrolment. In most instances, a compliance notice or unpaid contribution notice is sufficient to get the employer back on track.
The noble Baroness, Lady Drake, raised the issue of rising unemployment and asked whether it would increase small pots and when the Government would have a solution. The Government launched the small pots working group to help identify options to tackle the growth of deferred small pension pots. It is clear from the working group that more needs to be done by pension providers, working together with regulators and the Government. We welcome this work and, along- side this, the Government support the work by providers and others on developing proof of concept trials to help move towards solutions. We will study the working group’s recommendations in detail this year.
My noble friend Lord Bourne and the noble Lord, Lord Hain—who is to be congratulated on the work he did in introducing various pension changes when he was Secretary of State for Work and Pensions—asked why the Government did not change the AE thresholds to enable more women to save more. As I have said before, automatic enrolment has helped millions, particularly women, save into a pension scheme for the first time. Our ambition is to remove this limit to ensure that all workers can benefit from an employer contribution if they are enrolled or opt in.
My noble friend Lord Bourne and the noble Baroness, Lady Janke, asked whether we should be encouraging people to save more into pensions and what information about education is being provided. The Government have been active in raising awareness of the importance of pension savings and in driving tools, such as pensions dashboards and simpler pensions statements, to enable people to engage.
The noble Baronesses, Lady Wheatcroft, Lady Sherlock and Lady Janke, and the noble Lord, Lord Hain, all raised intergenerational fairness and the issues affecting young people. The Government’s approach to this is to ensure economic security for working people at every stage of their life. I note the points that all noble Lords have made, particularly the noble Baroness, Lady Drake, about the impact on young people of a very difficult economy and labour market. I confirm to the whole House that we are working flat out on our plan for jobs to get people back to work as quickly as we can. There is a huge focus on young people.
The noble Lord, Lord Hain, asked about the self-employed. The self-employed are a highly diverse population with different incomes and saving experiences. That is why we are committed to carrying out a trialling activity to identify the role of behaviour prompts.
I thank my noble friend Lady Gardner of Parkes for talking about the impact on women of freezing the trigger rates. The decision to freeze the trigger again between 2020 and 2021 has already been confirmed and an additional 8,000 individuals will enter the system.
I am touched by what the noble Lord, Lord Foulkes, said about me—I count him as a noble friend, too. The Government are very serious about the gender pensions gap. It is caused mainly by inequality in the labour market, including differences in working patterns and earnings. We need to ensure that women have the resources needed to make informed decisions. I take on board completely the point raised about charities, and I will write to the noble Lord on that.
The noble Baroness, Lady Ritchie, raised some issues regarding Covid-19 and its impact. We are gathering, monitoring and evaluating workplace pension participation and savings data in order to develop as complete and robust a picture as possible.
My noble friend Lady McIntosh asked about multiple job holders. I will write to her. The noble Lord, Lord Davies, raised the issue of Uber, which was also mentioned by the noble Baroness, Lady Janke. Again, I will need to write.
I am very sorry, but I have run out of time. I will write to noble Lords to answer their questions. To confirm, this order increases the automatic enrolment upper qualifying earnings limit to £50,270 and freezes the lower qualifying earnings limit at £6,240, thereby maintaining the alignment of the automatic enrolment qualifying earnings band with the earnings limits for national insurance contributions. The earnings trigger will also remain at its existing level of £10,000, all resulting in an estimated overall increase in total pension savings year on year. I commend this order to the House.