Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2017

Baroness Bakewell of Hardington Mandeville Excerpts

Thursday 9th March 2017 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Henley) (Con)]

My Lords, this order was laid before the House on 2 February 2017. I give the Committee the usual assurance that the draft statutory instrument is compatible with the European Convention on Human Rights.

The order reflects the conclusions of this year’s annual review of the automatic enrolment thresholds required by the Pensions Act 2008. The review considered both the automatic enrolment trigger, which determines the point at which someone becomes eligible to be automatically enrolled into a qualifying workplace pension, and the qualifying earnings band, which determines those earnings of which the enrolled employee and their employer must pay a proportion into a workplace pension.

The order sets a new lower and upper limit for the qualifying earnings band and is effective from 6 April 2017. The earnings trigger is not changed and so no further provision is required in this order. The earnings trigger remains at the level set in the automatic enrolment threshold review order of 2014-15. Automatic enrolment continues to be a programme that works; nearly 7.3 million people have been enrolled, more than 400,000 employers have met their duties and the opt-out rate remains low at around 9%. We are now in the final year of rollout and the most challenging phase of automatic enrolment, with small and micro employers staging in peak volumes throughout 2017. Against this backdrop, it is more important than ever to maintain simplicity and consistency for employers. This year’s order will provide this through to the end of rollout in February 2018.

I am sure the Committee will share my enthusiasm about the very exciting juncture of automatic enrolment at which we find ourselves, with the review of the policy and its operation being undertaken by my department this year. With that review, it is time to reflect on the successes we have achieved so far, take stock of the current position and consider how to build on this so that automatic enrolment continues its success in helping to rebuild a culture of saving. As such, it is important that this year’s thresholds decision avoids pre-empting the outcome of the 2017 review but still delivers on the established principles of increasing the opportunity for people to make meaningful savings into a workplace pension while balancing costs for employers.

To describe the impact of the order, I turn first to the qualifying earnings band. As signalled by my honourable friend the Minister for Pensions on 12 December 2016, the order will, as previously, align both the lower and the upper limits of the qualifying earnings band with the national insurance lower and upper earnings limits of £5,876 and £45,000 respectively. By maintaining the alignment with the national insurance thresholds, both at the point where contributions start for low earners and are capped for higher earners, the overall changes to existing payroll systems are kept to a minimum. This decision therefore both ensures simplicity and minimises the administrative burden of compliance for employers in 2017-18, while maintaining consistency for hundreds of thousands of small and micro employers implementing automatic enrolment over the coming year. As I said, the order does not change the earnings trigger, which remains at £10,000, as set in the 2014-15 order.

Automatic enrolment continues to bring into its eligible target group those least likely to save for retirement. Low-paid workers and women, who are often likely to be low earners, have traditionally been underrepresented in workplace pension savings. Between 2012 and 2015 the private sector saw a 30 percentage point increase in eligible female participation in workplace pensions, and in 2014 there was no gender gap at all in participation. In fact, 2015 has seen more eligible women in the private sector participating in a workplace pension, exceeding the participation of men with 70% to 69% respectively.

Due to anticipated wage growth and with the maintenance of the existing trigger, we expect that an additional 70,000 individuals will meet the earnings criteria and be brought into the automatic enrolment population, of whom around 75% are women. Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still be able to opt into a workplace pension and benefit from their employer contributions, should they so wish.

In conclusion, the decision to maintain the earnings trigger at £10,000 will increase the number of low earners who meet the earnings criteria and are therefore automatically enrolled in a workplace pension. The decision will increase the total number of people saving into a pension and the total savings. In addition, the decision to maintain the alignment of the lower and upper earnings qualifying bands with those for national insurance contributions maintains simplicity and consistency and minimises the burdens on employers at a crucial stage of the programme’s wider rollout. Taken together, that means that the total pensions saving is expected to increase by some £71 million. The order therefore ensures that automatic enrolment will continue to provide greater access and opportunity for individuals to save into a workplace pension and build up meaningful pension savings. I commend the order to the Committee.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I thank the noble Lord the Minister for his instructive introduction to the order and for the fact that the number of women who are now enrolling has increased considerably. That is very good news.

I welcome the fact that the earnings trigger above which people will be automatically enrolled will remain at £10,000, which seems very reasonable. A lower threshold would bring more people into pensions, but, as the Minister indicated, with a state pension currently providing over £8,000 in retirement, there is obviously a limit to how far the Government want to be enrolling people who earn approximately £9,000, taking into account the cost to employers of setting up schemes, making payroll changes and so on. As has been indicated, the earnings trigger will undergo a fundamental review as part of the automatic enrolment review later this year. It would perhaps be better to wait for that and to look then at altering the trigger threshold.

The lower and upper limits for the band of qualifying earnings, on which contributions are due, are currently linked to the lower and upper limits for national insurance contributions. The order maintains that connection. However, I note that the Chancellor of the Exchequer raised the upper limit for national insurance contributions from £43,000 to £45,000. The order does the same and means that higher earners will be putting pension contributions in over a slightly wider band. That is welcome, but they can of course opt out if they wish to.

Although I welcome the regulations, I flag up my concern about people who have multiple jobs whose individual incomes will be below the threshold but cumulatively above it. They might earn £6,000 in one job and £5,000 in another. Such people are excluded from automatic enrolment; perhaps that can be considered on another occasion.

The Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2017/18: Supporting Analysis report, which was published in December 2016, refers to an important point about the 280,000 people who earn between £10,000, the automatic enrolment trigger, and £11,500, the current tax threshold, who get tax relief. However, they get their tax relief only if it is administered according to the relief-at-source tax system, but not if their tax relief is administered according to another system, the net pay arrangement. That arrangement is somewhat obscure and the Government have failed to address the issue in the order. Those are minor points, however, and I generally welcome the order.

[Baroness Drake (Lab)]

My Lords, I remain concerned that the earnings trigger of £10,000 for auto-enrolment still excludes too many people, particularly women, from the benefit of a pot of savings supported by an employer contribution. I am also a little disappointed that the Secretary of State has not taken the opportunity of the annual review to reduce the trigger. Although it has been held at £10,000 for three years, it is still too high, although this approach is preferable to aligning it with the personal income tax threshold, as happened between 2011 and 2015, which excluded ever more women every year.

Of the 11 million workers in the eligible target population for automatic enrolment, only 36% are female, and 3.5 million workers are ineligible because they earn less than £10,000 in any one job. The impact assessment confirms the disproportionate impact on women, because it shows that simply freezing the trigger at £10,000 will bring an additional 70,000 workers into auto-enrolment, over 52,000 of whom will be women.

The impact assessment reasons that auto-enrolment is in a challenging phase with the rollout to small and micro employers, so the earnings trigger should be held at £10,000. That is an understandable argument but not one that can fairly hold over time as a reason for not lowering the trigger. DWP figures reveal that of those working for smaller employers with 10 or fewer employees, 61% meet the eligibility criteria for auto-enrolment, compared to 90% of workers for large employers with 500 or more employees, and 55% of people employed in the service sector—where there is a concentration of women workers—meet the criteria, compared to between 70% and 90% of workers in other sectors.

The DWP analysis suggests that these discrepancies between small and large employers are largely driven by workers not meeting the earnings threshold. That is a pretty predictable observation. There are nearly 15 million women in work, 42% of whom work part-time. The ONS figures show that the smaller the company, the lower the level of earnings for part-time workers. Sweepingly, anyone working 25 hours or less on the national minimum wage of £7.50 is ineligible for auto-enrolment. The DWP’s analysis also shows that reducing the trigger to the national insurance primary threshold of £8,164 would bring more than 500,000 women—and nearly 750,000 workers overall—into auto-enrolment.

An argument deployed by the Secretary of State in 2011 for excluding lower earners was that the state system itself delivered an adequate replacement rate of income. Indeed, that argument is deployed again in the current impact assessment, which states that the earnings trigger,

“should be set at a level that ensures as many people as possible are eligible for AE without disproportionately capturing those lowest earners for whom it makes little sense to save for retirement”.

Lowering the £10,000 trigger, however, would not disproportionately capture lower earners. Very often, low earners are not low-paid throughout their working lifetime. Earnings are dynamic, but persistency of savings throughout working life is very important. Many women who earn less than £10,000 will, during their lives, have periods of full-time employment on higher earnings and periods of part-time employment on lower earnings, when they are caring. Persistency of saving throughout both periods and retaining the employer contribution improves their financial outcomes in retirement. Many, or most, very low earners are women who live in households with others with higher earnings and/or receiving working tax credits. They may well be workers who should be automatically enrolled.

As to excluding lower earners because the state system delivers an adequate replacement rate of income, “freedom and choice” means that individuals are no longer required to secure even a minimum income stream, and are free to spend all their money as they wish from the age of 55. Securing a replacement income is no longer a requirement of private pensions policy. Excluding so many lower earners from a pot of long-term savings supported by an employer contribution and the tax credits system is not fair because it simply denies them the opportunity to accrue a savings pot and build financial resilience in later life.