Pensions (Extension of Automatic Enrolment) (No. 2) Bill

Baroness Drake Excerpts

2nd reading
Friday 14th July 2023 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I congratulate the noble Baroness, Lady Altmann, on sponsoring this Bill. It is in very capable hands. We have heard from her a powerful assembly of the arguments in support of the Bill, which I think people would struggle to second-guess in any way, so I congratulate her.

I welcome the powers that the Bill gives to the Secretary of State to extend the coverage of auto-enrolment to younger people and to remove the lower-earnings limit from the qualifying earnings band. The Secretary of State retains the discretion as to when and to what extent to reduce the lower age limit and the extent to which and over what time period it will reduce or repeal the lower earnings level threshold.

The Government have indicated that they are supportive of this Bill. Can I therefore push the Minister a little to give an indication of when they will implement changes? Presumably it is not intended that the powers given to the Secretary of State will sit and gather dust. It is, after all, six years since the review of automatic enrolment and we are only 18 months away from the mid-2020s—the date by which the Government committed to introducing changes, including the changes provided for in this Bill.

The Bill provides for the Secretary of State to carry out a consultation. I therefore take the opportunity to highlight a few issues relating to younger people and extending auto-enrolment to people below the age of 22. The regulator has been very active and effective in identifying and addressing negligent employers who seek to avoid their employer duties. However, in lowering the age for auto-enrolment, the regulator will have to monitor that the change is working to the benefit of most young people. Many young workers aged 18 to 21 may, because of training, higher or further education commitments, or the types of work available to them, be working irregular hours, part-time or earning more flexible incomes. There is a significant rise in students working out of economic necessity, and younger people from lower socioeconomic groups may be in less secure employment; we saw their vulnerability in this regard during the pandemic

Employers have up to three months from commencement of employment to enrol a qualifying worker. Even then, for those who work irregular hours or earn flexible incomes they need not be auto-enrolled until the first time that they earn over the earnings trigger, which is currently £192 a week or £833 per month. It will be important to monitor for any emerging labour market behaviours that could undermine the intent of this Bill to benefit young people, such as restricting the earnings or hours of younger workers so they do not qualify for auto-enrolment; not paying younger workers through payroll; or pressuring them to opt out.

There is also a need to be sensitive to how the national minimum wage aligns with the £10,000 earnings trigger. Currently, an 18 to 20 year-old on the national minimum wage of £10.18 an hour and working 18 hours net would not qualify for auto-enrolment. That may therefore exclude a very significant number of young workers being targeted by this Bill. A 20 year-old young mum on the national minimum wage and working 18 hours a week would not qualify for auto-enrolment if it were operating today. With the removal of the lower earnings limit from the band of earnings and access to tax relief, it means that she would lose £900 going into her pension scheme in that year. So there is therefore a sensitivity around that link between hours on national minimum wage and the auto-enrolment of younger people.

The Chancellor’s estimates for improved returns over the working life of pension savers, from greater investment in illiquids and private equity, were predicated on the assumption of saving from 18. That is four years more of saving than is currently provided for under auto-enrolment. There need to be reforms made by this Government before the Chancellor can rely on estimates based on such an early age as 18.

Eligible workers, contrary to everybody’s expectations, have a lower opt-out rate than older workers, so it will be important to monitor the opt-out rates for 18 to 21 year-olds to ensure that that positive trend we are currently seeing is not undermined—that trend being the high number of 22 year-olds remaining in when they are auto-enrolled.

Finally, ONS recent figures reveal that just over 15% of young workers change jobs, compared with 5.1% of employees aged between 35 and 49, so the Government need to push ahead with their small pots solution, because for young people that solution will be very important to the efficiency of managing their savings and for it to benefit them over their working lifetime. I hope the Government will push ahead with the better deal for young people that the Bill—again, I congratulate the noble Baroness, Lady Altmann—will provide.

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[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Viscount Younger of Leckie) (Con)]

My Lords, I am pleased to add my support to my noble friend Lady Altmann’s Bill. This legislation would bring into workplace pensions more younger people, women and those in part-time work, including workers not already benefiting from an employer pension contribution. My noble friend eloquently set out further detail of the Bill, its benefits and its beneficiaries.

The Government are committed to building on the success of automatic enrolment to date with a stronger, more inclusive savings culture for younger people. The noble Baroness, Lady Sherlock, was right to remind us of some of the historical context. My noble friend’s Bill would expand the automatic enrolment framework, which was one of the most radical reforms to the pensions landscape since Lloyd George enacted the first state pension nearly 120 years ago. This Bill builds on the undoubted success of workplace pensions and sits firmly within the political consensus established by the independent Turner commission, on which the noble Baroness, Lady Drake, served, as has been mentioned, and which set out the road map for these reforms in 2005. I add my name to those who have paid tribute to the noble Baroness in this respect.

I want to move straight on to the subject of small pots, which was raised by the noble Lord, Lord Davies. I hope that I can help in providing some answers because I agree—he is right to raise this issue—that the growth of deferred small pots is a huge challenge for the workplace pension market. We know that it acts as a burden on providers, reducing the value for money that pension schemes can provide and negatively impacting retirement outcomes for their members.

I assure the noble Lord and the House that the Government are taking decisive action to address this issue. We are consulting now on our ambition to deliver a framework for a default consolidator approach, which will enable a small number of authorised schemes to act as consolidators for deferred small pots in order to provide greater value for money for their members. In this way, we are working to address the current and future stock of deferred small pots. I note the comments made by the noble Lord today in this respect; we would very much welcome his contribution to the consultation if he has not already given his views, as I suspect he may well have done.

I turn to some of the points made by my noble friend Lady Altmann and the noble Baroness, Lady Sherlock. We had an interesting, brief debate on the lowering of the age limit, which we reckon is about right at 18. The Bill provides for regulation-making powers to reduce the age for AE, rather than setting a specific number. This has been done to avoid pre-empting the statutory consultation. We do not wish to close off our ability to respond openly and thoughtfully to stakeholder proposals.

The 2017 review found 18 to be the appropriate minimum age for automatic enrolment. The current minimum of 22 has failed to keep pace with changes elsewhere, such as to the national minimum wage. The lower age also aligns with the entitlement to social security benefits, such as universal credit. Moving to 18 is seen as an effective way to embed the habit of workplace pension saving for young people as they start work for the first time. Indeed, the Government’s commitment for young people below the age of 18 in England and Wales to remain in education or receive training and employment through apprenticeships has resulted in a decrease in 16 and 17 year-olds in the labour market. Workers aged 16 and over will still be entitled to opt in to AE and receive an employer contribution if they choose to save into a workplace pension.

I also want to touch on pension tax relief. The Government recognise the different impacts of the two systems of paying pension tax relief on pension contributions for workers earning below the income tax personal allowance. This picks up on some points raised by my noble friend Lady Altmann. We have announced a new system that will make top-up payments to low earners in net pay schemes, many of whom are women—I think that she made this point—to address the net pay relief at source anomaly. The Treasury has confirmed that this will be introduced for contributions from 2024-25 onwards. In 2025-26, we estimate that up to 1.2 million individuals, 75% of whom are women, could benefit from top-ups worth on average around £50 each year. The Office for Budget Responsibility assesses that the cost to the Exchequer could be between £10 million and £15 million per year.

My noble friend Lady Altmann also raised the issue of low earners, as did one or two other Peers. The AE framework has an earnings trigger that is set at a level that aims to bring those individuals for whom it pays to save into pension saving automatically. The Secretary of State must review this trigger each year to help to make sure that it remains appropriate. As my noble friend mentioned, currently the trigger is set at £10,000. However, if an eligible worker earns below this amount, they can still choose to opt in to a workplace pension if they want to save, as mentioned earlier. The Bill is the essential first step to allow the expansion of AE. The Government are clear that these measures are the best route to enabling low and medium earners to save more, with more workers benefiting from the employer contribution to help them to build their retirement savings.

I will now move on to a few general comments about pensions and, indeed, the state pension, which was alluded to by the noble Lord, Lord Davies. I hope that I am not going too far in terms of his remarks, but hopefully this will set the scene a bit. I reassure the House that we believe that the state pension remains the foundation of the UK pension system. In April 2023, the state pension saw its biggest ever cash increase, rising by 10.1%, so that the full yearly amount of the basic state pension will be over £3,050 higher in cash terms than in 2010.

Workplace pensions sit on top of that foundation, helping to maximise individual retirement saving. This is an approach guided by the work of the independent Pensions Commission, which made clear the importance of reinvigorated private saving to help individuals to achieve their retirement aspirations. The Government continue to support the success of automatic enrolment, which has seen 10.9 million workers enrolled into a workplace pension since 2012, with an additional £33 billion saved in real terms in 2021 compared to 2012.

I move on to a more substantive point raised by the noble Lord, Lord Davies—I think that he mentioned it twice—which is what we are doing to reduce the gender pensions gap. As he will know, the pensions gap is a complex issue tied to the labour market, the pensions system and demographic differences, but one that the Government take seriously. We remain committed to implementing the 2017 review measures, which will disproportionately benefit lower earners, including people working in multiple jobs, who are predominantly women.

Going back to the basic concept of automatic enrolment, AE came along at a time when the UK was towards the very bottom of the OECD league tables on retirement saving. A radical reversal has taken place in the past decade putting us close to the top, with the UK now having the largest pension market in Europe. I pay tribute to those, some of whom are in the House today, for their efforts to make this happen.

In the private sector, workplace pension participation for eligible employees has increased from 42% in 2012 to 86% in 2021, representing a 44 percentage point increase. As my noble friend Lady Altmann said, it has been especially transformative for women, low-earners and young people. Her Bill would enable the Government to build on that success and deliver the expansion of AE.

There are a couple of other questions I want to answer—actually, about three—particularly from the noble Baroness, Lady Drake, from the noble Lord, Lord Davies, and from the noble Baroness, Lady Sherlock, on timing, which is a very fair question. The Government are committed to making progress in implementing the 2017 review measures, including lowering the age for being automatically enrolled and reducing the lower earnings limit so that pensions contributions are payable from the first pound of earnings, in the mid-2020s. We have always been clear that implementation of these measures and the timing must be done in a way and at a time which is affordable, balancing the needs of savers, employers and taxpayers, with a suitable lead-in time for implementation. I am afraid that that is as far as I can go on that, but as soon as I have any further detail I will certainly let the House know.

The noble Baronesses, Lady Drake and Lady Sherlock, are right that we need to look at any opt-out rate with great care in monitoring, and I reassure the House in that respect. The noble Baroness, Lady Drake, raised a very important point about AE enforcement. The regulator has a statutory duty to enforce compliance with employer AE duties. Employers must provide information about AE to each eligible employee, including their right to an employer contribution. If a worker has concerns about whether their employer is complying with the law, they can report their concerns to the regulator in confidence—as I suspect noble Lords will be aware.

[Baroness Drake (Lab)]

My point was that the regulator is doing a good job on enforcement, but very young people are quite vulnerable, and I was just saying that it needs a new lens brought to enforcement activity.

[Viscount Younger of Leckie (Con)]

Absolutely. Again, I provide reassurance that we are very much alert to the issue and we shall be sure that we monitor it and keep the House updated.

The noble Lord, Lord Davies, raised the important subject of carers, and I have a couple of brief answers for him. The Government recognise the valuable role of carers and that they are disproportionately women. Where carers are working, if eligible, they will be automatically enrolled into a workplace pension, or they can opt in. The expansion of AE will see all those participating get an employer contribution from their first pound of earnings, and that will help to improve the incentive to save for those who are in lower-paid or part-time work, including carers.

Finally, to touch on consultation, which was raised by the noble Lord, Lord Davies, and others, the use of the Bill’s powers would be subject to a statutory consultation requirement and the affirmative procedure in both Houses to gain consensus on the implementation approach and timetable, so that the measures can be introduced in a way that is affordable for all parties, as mentioned earlier. This is a crucial point. While we are all rightly keen to build on the success of AE—and many Peers call for more and faster change, hence the questions on timing—the approach needs fully to take account of the impact of these measures on employers, workers and the Exchequer in a way that makes the changes both beneficial and affordable for all. To clarify, we intend to consult in the autumn with employers, payroll and delivery partners throughout the supply chain to get the implementation approach and timetable right before changes are introduced.

I again thank my noble friend Lady Altmann for taking the Bill through and for helping more people gain the benefits of retirement saving. I judge from the mood in the House that it shares my view of the importance of the Bill and the positive and sensible way in which it would allow for the future expansion of automatic enrolment, which I believe is an ambition we all share.