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

Baroness Altmann Excerpts

2nd reading
Friday 14th July 2023 Lords Chamber

Moved by

[Baroness Altmann]

That the Bill be now read a second time.

[Baroness Altmann (Con)]

My Lords, I am delighted to sponsor the Bill before the House today. It brings to fruition the hard work of dedicated colleagues across the Chamber, who have advocated tirelessly for the improvement of workplace pension coverage and adequacy, especially for younger workers and low earners.

I thank and pay tribute to my honourable friend Jonathan Gullis MP, who championed the Bill in the other place and saw it through its stages there earlier this year. His hard work paved the way for the Bill to come to us today and has been praised fulsomely, with cross-party support welcoming these improvements to retirement provision for millions of our fellow citizens. I also pay tribute to my noble friend the Minister, who I am very pleased to see today, and to my honourable friend the Pensions Minister in the other place, Laura Trott MP, and the department officials who have done so much work and are supporting the Bill.

The Bill has two main objectives: first, to pave the way for extending auto-enrolment to workers under the age of 22, the current minimum age for automatic enrolment to a workplace pension; and, secondly, to allow the Government to abolish the lower earnings limit of the qualifying earnings band, which will increase the overall amounts being saved, as pension contributions under auto-enrolment will be calculated from the very first pound of earnings rather than from £6,240, which is the case now.

Auto-enrolment into workplace pensions has been a celebrated success, bringing 10.9 million more people into pensions since the programme started in 2012, with 2.2 million employers complying with their duties and an extra £33 billion being invested in pensions in 2021, relative to 2012. I pay tribute to the noble Baroness, Lady Drake, for the seminal work she contributed in the Pensions Commission in 2008, which led to auto-enrolment in the first place.

It is now time to move on to the next stage of this successful programme. In 2017 there was a year-long major review of the policy, which recommended, among other things, the two measures put forward in the Bill today. The aim is to allow the Government to help improve people’s private pensions. There are several benefits of extending auto-enrolment to workers under the age of 22: it will improve inclusivity and will give younger generations longer to benefit from the power of compounding long-term investment returns, giving them a chance to build bigger pension funds. It can also simplify the administration of workplace pension schemes, which will save money and reduce the risk of errors if a minimum age is no longer in place—although that will be determined in due course by regulations.

The Bill should also help lower the likelihood of 22 year-olds opting out of an employer pension scheme, which is the risk at the moment, as their take-home pay suddenly falls due to pension contributions starting to be deducted as they pass their 22nd birthday. It is expected that 600,000 private sector workers aged 18 to 21—and, as I said, there could be more if the age is somewhat lower—could benefit from these measures. I hope that the consultation for regulations will include not a minimum age of 18 but a removal of the limit altogether, so that every worker, even those who leave school at 16 and start work at that age, can start a pension.

There are also significant benefits from removing the lower earnings limit, the other important strand of the Bill. Employer contributions for lower earners who want pensions will be significantly higher as a result. Currently, those who are under 22 also have to request to join their employer pension and do not benefit from the powerful behavioural nudge that sees those over 22 automatically enrolled into the pension scheme. While younger workers can ask their employer to join, the estimates suggest that only 32% of those eligible workers are actually paying into a pension at work—far less than the nearly 90% of eligible workers over 22, who are building a pension at work after being auto-enrolled.

There will also be the opportunity to help people to start the pension habit earlier, establishing even more clearly the principle that workers in this country can expect their employer to cover tax, national insurance and pension for them. This Bill will therefore particularly pave the way to help underpensioned groups, including lower earners, women, people from ethnic minorities, the disabled, multiple job holders, young workers and those in the gig economy.

Helping to narrow the gender pensions gap is an issue that many of us across this House have been exercised with for some time and is another reason to support these measures. Of course, this alone will not close it entirely. The ABI estimates that, at the moment, the average woman aged 65 has a pension pot worth just one-fifth of the value of that of a man of the same age. Due to lower-paid work, lower lifetime earnings, interrupted careers and more part-time jobs, women have always lost out on this earnings-related private pension system. By ensuring that all their earnings are used to calculate contributions in future, even lower-earning women will build much bigger pensions. Instead of someone on, say, £10,000 receiving contributions on just £3,760 of her earnings, she will—once this Bill and subsequent affirmative resolutions are hopefully passed—be able to receive nearly twice as much again, as the full £10,000 will be used to calculate her and her employer’s contribution. This means that, instead of receiving £300 a year into her pension, it will be £800 a year.

The Bill provides regulation-making powers to amend the automatic enrolment framework set out in the Pensions Act 2008. The Secretary of State for Work and Pensions will be required to carry out a public consultation on the proposed use of these powers to lower the minimum age and abolish the lower earnings limit, with the findings having to be reported to Parliament before regulations are made. It is promised, I believe, that the consultation will be later this year, so I do not think that we will have to wait too long. All noble Lords will therefore be able to consider and vote on the detail of the proposals for secondary legislation before they become law. I hope that noble Lords will therefore be able to support these enabling measures in the Bill today.

Colleagues across the House may have concerns about bringing more people into pensions and increasing contributions for lower earners if they are going to be put into pension schemes that administer tax relief by the net pay system. However, the Treasury has announced a new system, which will make top-up payments to low earners in met pay schemes—many of whom are women, of course—to address the net pay and relief at source anomaly. This is planned to be introduced for contributions from the 2024-25 tax year onwards, so should time well with the start of measures provided for in this Bill, following the laying of regulations. I am therefore delighted that the Bill before us today will set us on the path to the next successful chapter—I am sure—in the story of automatic enrolment. It will bring undoubted benefits of pensions savings to younger people and to those hard-working, lower-paid workers, including women with caring responsibilities, who deserve the opportunity to build a more secure retirement for themselves and their families.

As the Government have promised, this measure will be in place—or the intention is that it will be in place—by the mid-2020s. Of course, there is more to do, including extending auto-enrolment to workers with earnings in any one job below £10,000 as well, but that can be covered elsewhere, and to the self-employed. However, these measures are an important start. I welcome the improvements, and I hope that noble Lords across the House will do so. I commend the Bill to noble Lords.

--- Later in debate ---

[Baroness Altmann (Con)]

My Lords, I am grateful to all noble Lords and to my noble friend for their contributions to this excellent debate. I have just a few brief words.

The noble Baroness, Lady Drake, expressed her concerns about younger workers perhaps being off-payroll. She is right in the warnings that she has put on record, and about the issue of the national minimum wage for a part-time female worker, for example, who might still be excluded because of the £10,000 trigger. Indeed, the issue of small pots will grow as a result of these measures. I know the Government will look at ways to solve that. I urge my noble friend to proceed with the measures currently under consideration and the consultation.

The noble Lord, Lord Davies, is absolutely right to raise the issue of the gender pensions gap, which I think all noble Lords who have spoken will have concerns about. He is right that more women being on low pay means that fewer women will have as good pensions as men, but I hope he might be persuaded that the fact that we will be taking earnings contributions from pound zero will make a difference. It might be a small one, but it will make a difference in the right direction to the gender pensions gap. As I said, someone on £10,000 per year, who is more likely to be a woman than a man, will suddenly have £800 going into their pension instead of £300. That will help to build a better amount over the long term, but he is clearly right that more can and should be done.

The noble Lord, Lord Palmer, is right that there is more to do on auto-enrolment, but I appreciate the welcome for these measures. I also welcome him to our merry band of pension Peers. As he pointed out, it is always the same individuals across the House.

The noble Baroness, Lady Sherlock, is right to celebrate the success of auto-enrolment. She asked about the opt-out rate. As far as I am aware, the DWP published some research in August 2022 which suggested that there was a slight uptick in the auto-enrolment opt-out rate for newly enrolled workers, rising to 10.4% from 7.6% in January 2020. In contrast, for the workers who stopped contributing once they were in, there was actually a reduction to 3.1% in August 2022, down from the figure of about 5% that she mentioned. As a previous Pensions Minister, Steve Webb, has written, the auto-enrolment programme so far seems to be remarkably robust, but we clearly had not had the worst of the cost of living crisis in 2022. This needs to be monitored, but I am pleased that the DWP is doing that.

My noble friend the Minister is right to say that the Secretary of State can review the trigger each year. Therefore, there is a potential for those earning below £10,000 a year to also be included at some point.

I thank all noble Lords who have spoken today.

Bill read a second time and committed to a Committee of the Whole House.