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

Baroness Drake Excerpts

Monday 10th February 2014 Grand Committee

I said earlier that setting these thresholds is a balancing act. In that respect, we acknowledge that there is no right or wrong answer. We believe that these proposals continue to provide broad access to pension saving and maintain contribution levels for the target group. We aimed to set the trigger and the qualifying earnings band so that they work in harmony to deliver three objectives: to bring the right people into pension saving; for them to save at least a reasonable but affordable minimum starting amount; and to balance the costs and benefits to individuals and employers. With that assurance, I commend this instrument to the Committee.

[Baroness Drake (Lab)]

My Lords, I wish to speak on the earnings trigger in particular. I offer my apologies to the Committee: this item of business was not published and I have been sitting in a finance sub-committee taking evidence from Her Majesty’s Treasury and Her Majesty’s Revenue and Customs, which was quite compelling. I therefore ask your Lordships to accept my apologies for being a few minutes late.

I rise to speak on this statutory instrument because we see another year and another increase in the earnings trigger for automatic enrolment and another several thousand more women being disadvantaged and excluded from the UK pension system. I shall persist with this issue year after year because I fear that we are taking what started as a well designed private pension system, certainly in intent, and trying to make it an increasingly part-time-women-free area.

In 2011-12, 600,000 individuals, 78% of them women, were excluded from automatic enrolment. In 2012-13, the Government excluded another 100,000 people, 82% of them of women, by virtue of raising the earnings trigger. In 2013-14, another 420,000 people were excluded, 72% of them women, and now, for 2014-15, by increasing the trigger to £10,000, another 170,000 people will be excluded, 69% of them women. It reads as a rather depressing roll-call. The culling of women from the UK private pension system has almost become the Government’s annual sport.

I find it quite extraordinary that the coalition Government are so determined to carve out so many women from the UK private pension system. If women and men who earn below £10,000 are not automatically enrolled and do not, because of inertia, voluntarily opt in to their employer’s workplace scheme, many of them will experience several disadvantages. When automatic enrolment is phased in to their employer, they will not be in the pension scheme. Those excluded—mostly women—will suffer a loss in lifetime pay, albeit deferred pay, because they do not have access to the employer’s 3%—for some, where the employer contribution is above 3%, the loss is even greater. However, they will still lose out from any reduction in wage levels that flows from the cost to the employer of automatic enrolment.

When they move from a full-time job with one employer to a part-time job with another, they may not join the new employer’s scheme and are therefore at risk, first, of becoming an inactive member and subject to inactive member charge premiums on their existing pension pot unless the Government ban active member discounts—whether they will do that is a big question. Secondly, they are at risk of being defaulted into a personal pension by their previous employer, who does not allow ex-employees to stay in their workplace scheme. Therefore they leave an employer and are full-time, and then as a part-time employee they are not covered by auto-enrolment. Their accrued pot is vulnerable to higher charges and would not be protected by a pot-follows-member or any other aggregation mechanism.

As I said, they would not benefit from any aggregation mechanism, so they are not in their new employer’s scheme. They are not an active member, so their previous pension pot will flounder. When I raised this point in Committee the last time we discussed the increase in the earnings trigger for auto-enrolment, it was before we had the detail of pot follows member. The Minister, Lord Freud, commented:

“I will stand my ground a little bit on this, because these are some of the issues that really come into consideration when we look at the broader issue of pension pots”.—[Official Report, 22/5/12; col. GC 20.]

However, we now know that pot follows member will apply only where an individual is an active member of their employer’s scheme. Therefore, if these women are not automatically enrolled and inertia keeps them out of their scheme, they are unprotected; they are not protected by pot follows member. The noble Lord, Lord Freud, may have stood his ground then, but I am afraid that, now that we know the details of pot follows member, that ground has now moved from beneath him. Those women’s pots will just flounder without protection.

If part-time workers earning below £10,000 are not persistent low earners over their lifetime, which many will not be—a point confirmed in the Johnson review commissioned by the Government—and are not automatically enrolled into their employer’s pension scheme when they are on the lower earnings, the persistency of the savings habit that they built up will be broken and the accumulated value of their pension pot over their lifetime of pension saving will be reduced. Given the advent of the single-tier pension, which will be set at a level only slightly above pension credit but which will be based on national insurance record and crediting and not means-testing, the fact that low-paid workers are not automatically enrolled into their employer’s pension scheme means that they will simply be denied the opportunity to accrue even a modest amount of capital. That is yet another example of the awful attitude that says that public policy does not need to assist low-paid workers to accumulate capital or assets.

The reasons why the earnings trigger should not be raised any further are absolutely clear. Not all those earning below the earnings trigger of £10,000 are persistent low earners. Low earners should be able to accumulate savings over and above the single-tier pension, and the trivial commutation rules will allow most of them to take it in cash. This disproportionately affects women and breaches a basic principle that, in designing state and private pension systems, both systems should work for women, yet each time this earnings trigger is raised we carve out or cull thousands of women from the UK private pensions system.

Let us look in detail at some of the Government’s arguments—their preoccupation with the low earners. Almost half of those in the lowest-earning group are in couples where one works part-time and the other full-time. Most very low earners are women who live in households with others on higher earnings and they are receiving working tax credits. These are precisely the people who should be automatically enrolled in saving, yet we have seen persistently a rising earnings trigger that excludes them. Furthermore, the value of the loss of the employer’s contribution of 3% of qualifying earnings from raising the earnings trigger and not being auto-enrolled is greater than the tax reduction that they get from increasing the tax threshold. The combination of the two therefore means that the lowest earners could be worse off. They lose more from not being auto-enrolled than they gain from the increase in the tax thresholds.

Earnings are not static for many workers, either men or women. They can change significantly over a lifetime. Most low earners go on to earn more, so saving would still be beneficial because of the continuing contribution to their pensions over their working lives. Millions of women have a life pattern in which periods of full-time work are interspersed with significant periods of part-time work when caring responsibilities are at their greatest. Part-time working is part of the systemic solution to childcare in this country. When we look at the labour market statistics, we see that we respond by saying, “We are not going to auto-enrol you into your employer’s pension scheme when you are working part-time for periods of childcare or other forms of care”.

The Explanatory Memorandum states:

“The Secretary of State has concluded that it is appropriate to enrol people automatically into workplace pension saving once they earn enough to pay income tax”.

However, this disregards how working-age benefits can make it pay to save. The 100% disregard of individuals’ pension contributions from income brought to account when calculating entitlement to universal credit has been maintained thanks to the intervention of the Minister and the consequence is that it provides a positive incentive to save for many low-paid people. However, what are we doing? We are excluding them from the benefits of auto-enrolment by raising the earnings trigger.

As to persistent low earners, because within that population there will be some, the argument that they should not save because they get state pension and benefits means that yet again there will be no asset accumulation strategy for them. That position is even more indefensible with the advent of the single tier because it is not means-tested, so there is no means-tested track against the single tier that they can genuinely build up, even by only a modest amount of capital, by being auto-enrolled, that will not be lost on the means-tested basis against that single tier.

On my approximate estimates, increasing the earnings trigger to £10,000 from its original level has excluded 1,290,000 individuals per year from workplace pensions, 75% of whom would be women, at a loss to those individuals of approximately £40 million of employer pension contributions. But the cumulative total of those impacted, because different individuals are impacted year on year, will be much higher. This suggests that the group targeted to benefit from workplace pension reform will comprise approximately 65% men and only 35% women.

I come back to my basic point. We are increasingly designing, or “undesigning”, a private pension scheme to exclude ever greater numbers of women every time the earnings trigger is raised. It is simply not a credible argument to say that the impact of the earnings trigger can be mitigated by those earning below the £10,000 threshold being allowed to opt in voluntarily. Inertia prevents people from saving, and that is the whole point of auto-enrolment. You cannot say, “Because the rest of the population will not save we have to have auto-enrolment, but the very low earners can opt in”. It is an absolute nonsense. Low earners are not exempt from the maxim that inertia stops people saving, which is why you need auto-enrolment. As I said, a key principle of pension reform is to enable women to build up a pension in their own right. The higher the earnings threshold for auto-enrolment, the less the reforms will work for women. Each year since 2010, the Government have consistently excluded more and more women from the UK private pensions system.

The numbers remaining in employers’ pension schemes as a consequence of auto-enrolment have been a success for the Government. To date, roughly 90% of people have embraced auto-enrolment and stayed in. Perhaps that will drop a little when we get to the smaller companies, but it has been a success and the Government should be pleased with that. But when it comes to the reforms working for women, particularly women who work part-time, the Government are in danger of snatching failure from the jaws of success.

With the exclusion of 1.25 million women—and rising, because I am sure that the earnings trigger will go up again—we are designing a private pension system that does not work for women who work part-time. We know that in five or 10 years’ time the absolute failure of that decision will be exposed, as previously when women who work part-time were excluded from pensions. But by that time millions of women will have lost the advantage of being auto-enrolled into a private pension. The Government are simply wrong to say that simplicity for employers is worth the price of excluding 1.25 million women—and rising—from the benefits of auto-enrolment.

--- Later in debate ---

[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.

[Baroness Drake]

Does the Minister agree that we do not ask the rest of the population to opt in to get the benefits of pension saving and an employer contribution? Why should we ask women to opt in to get the benefit, when all the evidence is that most people will not opt in? Why do we discriminate against lower earners in that way? We do not expect a £40,000-earning male to overcome his own inertia. Why do we expect a £9,000-earning woman to overcome her own inertia?

[Lord Bates]

I take the point, but the threshold needs to be drawn somewhere. That is the discussion that we are having. There has to be a threshold somewhere because, below a certain level, the benefits of saving will not be as acute for the retirement pension. The question that we are debating is where that threshold should be set. We are not saying that this is a gender issue; we are saying that it is a threshold and income issue.

The noble Baroness is perhaps being a little harsh on this Government’s record on auto-enrolment, but it is worth pointing out that we have also taken a very large number of people, mostly female, out of tax altogether. The rises in the personal allowance since 2010 have taken 2.7 million people out of paying tax. The majority of those people will be female. That is a very positive thing, but I accept that more needs to be done to encourage people to save for their retirement. The benefits of the 3% employer contribution, which the noble Baroness, Lady Drake, pointed to, will come when the scheme is fully implemented in 2018 and the thresholds and contribution levels increase. At the moment it is 1%, but it is very important that people engage at that 1% level so that their savings can rise as the employer contribution increases.

Of course, in addition to the employer contribution increasing, the employee contribution will rise, and many people who do not make pension savings point to the fact that affordability is the key issue that they are wrestling with.

[Baroness Drake]

I am sorry for interrupting, but I feel really strongly about this point and I shall come back to it year after year. We are, admittedly, phasing in the contribution rate. However, you cannot get the benefit of the 3% contribution rate unless you are also enrolled at the 1% contribution rate.

[Lord Bates]

I do not think we disagree with that. I accept that you need to enrol in—to opt in to—the scheme. We are saying that you can opt in and get tax relief from the lower earnings limit of £5,772, and that your employer will have to do that from £10,000. Therefore, we agree on that. Persistent low earners tend to find that the state pension alone provides them with a retirement income similar to that which they would have had during their working life.

[Baroness Drake]

The noble Lord is arguing that if someone is poor all their life they can make do on the single tier and we are not obliged to give them the opportunity to build up a little capital—is that the policy of the coalition Government?

[Lord Bates]

The noble Baroness knows that is not our argument. We are encouraging people to save, as far as possible, but we recognise that savings, and how people spend their disposable income, is a choice. At what point does it become an automatic responsibility of the employer to enrol an employee in the scheme? That is what we are debating, not whether people are being encouraged to save. I hope that there is genuine cross-party agreement on this, coming out of the Turner commission, of which the noble Baroness was a distinguished member.

Of course, the whole objective is to increase savings across society. Thirteen million people are not saving enough for their retirement and we want that figure to improve. We want to ensure that as many people as possible are automatically enrolled. The Government believe that the decision on lower earnings is a decision for each person to take, and I hope they will take advantage of it.

[Baroness Drake]

The noble Lord is defending arguments that are untrue. Auto-enrolment does not work on the basis of it being a decision for individuals. They are put in, they have to come out. They have the choice to come out, but they are put in in the first place. These women are not getting the advantages of auto-enrolment. The point of inertia is that it is not based on informed choice; it is based on the assumption that the individual does this because it is in their best interest.

[Lord Bates]

We accept that. However, basically we are talking about the same issue: whether people have to opt out when they are put in an auto-enrolled scheme. They have the opportunity to decide to opt out. If they are above £5,772 they have the opportunity to opt in. I take the point that the threshold has to be set somewhere. Having looked at all the evidence, this is where the Government have come down—for this year. As the scheme gathers pace, more information will be available to us and we will be able to make that information available to your Lordships and have it influence decisions.

[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?