Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014

Baroness Sherlock Excerpts

Monday 10th February 2014 Grand Committee

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for his explanation of this order, and I apologise for missing the first few seconds of it. Like my noble friend, I was caught out by the omission of this order from today’s lists, and I apologise to the Committee. I also thank my noble friend Lady Drake for her very detailed and extraordinarily learned analysis of the impact of this order and the ones that have preceded it. I hope very much that the Minister will be able to give it the answer it deserves, and I look forward to hearing that.

A helpful note on this subject from the House of Commons Library dated 17 December 2013 reminds us that the original idea proposed by the Pensions Commission chaired by the noble Lord, Lord Turner, of which my noble friend Lady Drake was such a distinguished member, was that the qualifying earnings band should start at the primary threshold for national insurance purposes and should finish at the NI upper earnings limit. The previous Government said in their 2006 pensions White Paper that they would adopt broadly this approach, so the lower and upper limits of the qualifying earnings band were set at £5,035 and £33,540 respectively, and provision was made for both limits to be increased in line with earnings.

The real jump came with the Government’s Pensions Act 2011, which introduced an earnings trigger for auto-enrolment set at a level higher than the lower limit of the qualifying earnings band, on which contributions are paid. As we have heard, for 2011-12 the trigger was set at £7,475 rather than the planned threshold of £5,035 in 2006-07 terms, and the effect of that was to exclude 600,000 individuals, 75% of them women. My noble friend went through some of these figures but I think it is worth rehearsing them because the Minister will have to give us an answer about the effect of these changes.

Since then, the exclusions have mounted up. In 2012-13, the trigger rose to £8,105, excluding 100,000 people, 82% of them women. In 2013-14, it rose to £9,440, excluding some 420,000 people, of whom 300,000—72%—were women. Now, as we have heard, by going up again from £9,440 to £10,000, the Government will exclude another 170,000 people, of whom 120,000—69%—are women. I would be very interested to know if the Government agree with the figure offered by my noble friend Lady Drake about the cumulative number of people who have been excluded from auto-enrolment by these changes.

The DWP paper titled Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2014/15: Supporting Analysis—I commend the officials on its title—issued in December 2013, offers the defence that the reason that so many women are affected is that women are more likely to work part-time and to earn less than men, so they will be disproportionately represented in the group excluded from auto-enrolment. Well, yes, of course. That is not a defence, it is a reason, but that still leaves the problem. Now another 170,000 are to be excluded from the benefits of auto-enrolment into pension saving.

Of course, not only are women more likely to work part-time but there are those who work in more than one mini-job, neither of which takes them above the trigger point for being brought into this. Those women could, in fact, be earning significant sums of money on which contributions would be payable but because neither job takes them above the trigger they will not be auto-enrolled in either job. I would be interested if the Minister could comment on that.

As so much has been said already, I will ask just a small number of questions of the Minister. The DWP document I mentioned noted—and the Minister reinforced a version of this in his speech—that the Government used three principles in reviewing the automatic enrolment thresholds. The first of these is whether the right people are being brought into pension saving. Can the Minister tell the Committee how the Government reached the conclusion that excluding another 170,000 low-paid workers from the benefits of auto-enrolment met the condition that the right people are being brought into pension saving?

Secondly, with a trigger of £9,440, the target population for auto-enrolment is around 10 million individuals, of which only 37% are women; going up to £10,000, that falls slightly to 36%. When the Minister considers that figure, which came from the DWP’s excitingly named document, and the high proportion of those excluded who are women, is he satisfied that the Government’s approach to auto-enrolment is serving women workers well?

Finally, the paper argues that workers paid below the earnings trigger are likely to be able to achieve their target replacement rates through the single-tier pension if they remain low earners, and it may therefore not be beneficial to direct income from working life into workplace pension savings. If an individual earning £9,999 a year has an option to contribute to a DC scheme, should she take it?

[Lord Bates]

My Lords, first, both the noble Baronesses referred to the speed with which we have gone through the Order Paper. In fact, that caught all sides on the hop, and apologies are due all round. The responsibility, of course, lies in the preceding orders going too speedily. However, I am grateful to both noble Baronesses, who, in the exchanges we have had over many sittings on the Pensions Bill, have demonstrated their incredible grasp and knowledge of these complex areas, and have spoken passionately about the impact upon women in particular. I will come to these points, and respond to them as best I can.

One of the key things I said in the concluding remarks of my speech was that we recognise that setting these thresholds is a balancing act and that there is no right or wrong answer. It is therefore right that there should be a debate and that it has become an annual debate. It is an affirmative instrument and therefore any changes that are made annually have to come before your Lordships’ House for consideration. That is the right way to do it.

The other point of context we need to acknowledge, which the noble Baroness, Lady Drake, was good enough to make, is that the figures for auto-enrolment, which I accept came out of the Turner commission, which in turn came out of the Pensions Act 2008 under the previous Government, have been impressive. Significant progress has been made in encouraging the right people to save for their retirement. In pursuing that, we are absolutely on common ground.

It might be helpful if I went through some of the figures that we have for the number of people affected. Raising the 2014-15 value of the automatic enrolment trigger from £9,440 to £10,000 will exclude around 170,000 individuals, of whom around 120,000—69%—are women. Raising the 2013-14 value of the automatic enrolment trigger from £8,105 to £9,440 excluded around 420,000 individuals, of whom 300,000—72%—are women. I am going back through these numbers because it is a rough way of getting back to the calculation made by the noble Baroness, Lady Drake, which the noble Baroness, Lady Sherlock, asked me whether I agreed with. Raising the 2013 value of the automatic enrolment trigger from £7,475 to £8,105 excluded around 100,000 people, 82% of whom were women. Finally, raising the 2011-12 value of the automatic enrolment trigger from £5,035—in 2006-07 terms—to £7,475 excluded 600,000 individuals, 78% of whom were women. If one calculates those figures, one begins to recognise the numbers that the noble Baroness, Lady Drake, presented to us.

However, it is not so simple as to say that 70,000 women would be in automatic enrolment if their part-time earnings were brought together. I realise that there is a big education job to be done here, because many women who are underneath the threshold need to realise that if they are above £5,772 in terms of the lower earnings limit, they can opt in and therefore get the benefits that would accrue from that.

--- Later in debate ---

[Baroness Drake]

I do not want to be too difficult. However, the Secretary of State has stated clearly that this is driven by his view that people should not be auto-enrolled into pensions until they start paying tax. That is not doing a balancing act; that has been the Government’s consistent position since 2010. The Hansard record shows that I keep asking the question, “Are you going to keep tracking the tax threshold, because if you keep doing that you will exclude more and more women?”. That is not a balancing act. If you did a balancing act, you would say, “What is the balance between that approach and the number of women excluded?”.

The Government have locked themselves in, both by the Secretary of State’s statement and by their behaviour since 2010, when they said that people who do not pay tax should not have the advantage of auto-enrolment. The benefit of releasing them from a certain level of tax is reduced by the fact that they lose the employer’s contribution, and we are now getting to a point where the gain from the increase in the tax threshold is less than the loss of the 3% of the employer’s contribution. So over their lifetime, the low-paid person is actually worse off.

[Baroness Sherlock]

My Lords, before the Minister answers that, I asked him whether he felt that the way in which the Government have designed the service served women well. His defence appeared to be that there has to be a line somewhere. The point I was trying to put to him is that the Government have designed this scheme in such a way that only a third of its target population are women; in other words, they have designed a scheme that will benefit two men for every woman. Does he feel that the way the Government have chosen to design the scheme benefits women?

[Lord Bates]

No more or less than raising the personal tax allowance thresholds is a policy that is designed to disproportionately benefit women compared to men. When the tax threshold goes up from £7,475 to £10,000, that is a massive benefit to women, particularly in lower income positions. That is money coming into their households, so they can decide what to do with it. Anyone with earnings over £5,772 will retain the right to opt in, as I have already said, with employer contributions.

The Pensions Act requires the Secretary of State to review the thresholds each tax year. That is a discussion which takes place. There is a strong argument that says there is synergy there between personal tax allowances at the £10,000 level, helping employers and employees to understand where that mark falls, but in no way does that guarantee what the policy will be going forward. It will be for the policy to be announced and the review to take place and the instruments to come forward next year.

I am trying to work my way through the many questions that the noble Baronesses have put to me. I am not sure whether I have answered all the points.

[Baroness Sherlock]

I will let the Minister off the first two, if only on the grounds that I am unlikely to elicit an answer that I will find helpful. But my last question was very specific: if an individual earning just less than £10,000 a year had an opportunity to contribute to a DC scheme, does the Minister think that she should take it?

[Lord Bates]

The view is that this will be a personal choice for the individual faced with that challenge. It is a specific point. I know that the noble Baroness feels very strongly about this.

[Baroness Sherlock]

I am not asking this question because I feel strongly about it; I am trying to test the Government’s argument that the reason low earners should not be auto-enrolled is that it is not worth saving small sums of money. Do the Government assume that same stricture should apply to private pensions as well as to auto-enrolment?

[Lord Bates]

Each individual’s situation will be different. In some cases, they will have partners who will be earning more and therefore they will take a household decision to take advantage of the same scheme. For some people, that will not be the case and therefore they will not. We are saying that we want there to be a scheme. We want it to be as simple and straightforward as possible so that as many employers and employees as possible can get full benefit from it, and so that people can get into the habit of saving. It will be up for annual review. There needs to be much more education to ensure that all people who earn below that threshold realise that they can opt in should they wish to and should their personal circumstances make that the right choice for them.

I have tried to address as many as possible of the questions that have been put forward by the noble Baronesses, for which I thank them.