Pensions Auto-enrolment

Geraint Davies Excerpts

Wednesday 28th February 2018 Westminster Hall

[Several hon. Members rose—]

[Geraint Davies (in the Chair)]

Order. As four Members wish to speak, you each have about five minutes. I call Nigel Mills.

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[Jeremy Quin (Horsham) (Con)]

I am grateful for the opportunity to speak, Mr Davies. I am most grateful to my hon. Friend the Member for Chippenham (Michelle Donelan) for calling this debate. Too often, we come to the Chamber to have a good moan about things, but I sincerely hope that we have cross-party agreement today. Auto-enrolment should be warmly praised on both sides of the House, because it has been a great success. Some 19 million people are now enrolled in qualifying workplace pensions, 9 million of whom came through auto-enrolment. That means that we have increased by a quarter the percentage of the population who are in qualifying schemes. That is a success on any terms.

In addition to the policy being a success, its execution has been a success. My right hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb) was too modest to refer to his role in that, but a succession of Secretaries of State, both Conservative and Labour, oversaw the successful introduction of a good policy. For 1 million employers to be part of the scheme—including, I am proud to say, 1,860 in my constituency—and for opt-out rates to be as low as they are is a success.

I will dwell on that success for just a second longer while I talk about the long-term implications of what we have done. It is estimated that by 2019-20 an extra £20 billion a year will be being saved in pensions, which will ensure that people have a more comfortable retirement than would otherwise have been the case. There is more success in the small print: the biggest increase in participation has been among those on lower incomes and those working for smaller employers.

Unfortunately, as we are all aware, that is not the end of the story. We have had such positive buy-in from employers that, like other Members, I am nervous about the increase in the contribution rate to 3% in April 2019, but that is clearly a risk we have to take. If we cannot take that risk and push that envelope at a time when we have record rates of employment, there will never be a time for it. Even from there, as has been alluded to by my hon. Friend the Member for Chippenham and by my right hon. Friend the Member for Preseli Pembrokeshire, a savings rate of 8% will still leave 12 million individuals undersaving for their retirement.

We all know the huge power of inertia. There is a real risk that if people are told that is what they have got to save, they believe that is what they need to save, but we in this House know that that is not the case. The evidence from Australia and elsewhere is that higher rates will be required. I welcome the scheduled review of contribution rates. It may be difficult and painful, but it is necessary. I also welcome some of the other proposed reforms over the next few years that have been alluded to, such as lowering the relevant age from 22 to 18, bringing an extra 900,000 workers into the scheme, and removing the lower earnings limit, which will add nearly £3 billion a year to benefit in particular lower earnings workers, those with a part-time job and those with a number of part-time jobs.

My hon. Friend the Member for Chippenham eloquently described the issues faced by the self-employed. I agree that a participation rate in that growing sector of 19% is far too low. That is rightly a matter of concern. She produced some interesting ideas, and I look forward to the ministerial response. She and I would agree that there needs to be a structure in place for the self-employed. Again, it comes back to default and inertia: as long as there is no structure in place, they will not feel a need to go in, participate and make the provision for retirements that they require.

Many good things are coming out of the review. Of course, I have extra questions to ask my hon. Friend the Minister. Has the Department made an estimate of the number of individuals with earnings below the trigger rate of £10,000 per annum who are opting into the scheme? That would be good to know, to work through whether the scheme can be usefully extended below that rate. Opt-out rates are particularly low, but less so for small and micro-employers. Is that a matter of concern for the Department? What is it doing to address that?

My hon. Friend the Member for Amber Valley (Nigel Mills) referred to the need to understand the position and what can be done about it. I would love to hear more from the Minister about the pensions dashboard, which he referred to in his intervention, which I want to see extended to cover not just pensions but more assets. I also want to hear more about the mid-life review. My hon. Friend the Minister is a mere spring chicken, so he may not be under any personal time pressure to implement a mid-life review, but an MOT, as recommended by John Cridland, would be an excellent way to help people, as the Minister said, understand where they stand.

[Geraint Davies (in the Chair)]

I call Paul Masterton— I think you have got time for your pension.

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[Jack Dromey (Birmingham, Erdington) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Davies. I congratulate the hon. Member for Chippenham (Michelle Donelan) on initiating this debate and on a thoughtful and challenging contribution, with some ideas in it that I shall come to later.

Forgive me if I say that the right hon. Member for Preseli Pembrokeshire (Stephen Crabb) was right: auto-enrolment is a testament to what the last Labour Government did in initiating the Turner review and putting the wheels in motion for auto-enrolment to be implemented. As I have often said to the Minister, it is deeply welcome that there has been continuity of policy. He said only yesterday in his address to the TUC that, on issues such as pensions, continuity wherever possible is absolutely critical.

I was personally involved in some of the discussions with successive Secretaries of State and with Adair Turner, and the basis that was laid and the point we have reached now are both very welcome indeed. It has led to a better workplace pension landscape than before, with an additional 10 million workers estimated to be newly saving or saving more as a result of auto-enrolment. It has led to an additional £17 billion of pension savings being put away, mostly by low-income workers. We welcome the move by the Government to reduce the age of eligibility for auto-enrolment to 18, as that should lead to more people becoming aware of the importance of pensions at a younger age. The sooner that is introduced, the better.

However, for all the welcome progress that has been made, it is not a perfect system and there are issues that need to be addressed at the next stages to make the pension landscape better. First, the threshold over which workers are automatically enrolled is too high. According to the latest statistics from the Department for Work and Pensions, 37% of female workers, 33% of workers with a disability and 28% of black and minority ethnic workers are not eligible for master trust saving through auto-enrolment.

Secondly, auto-enrolment does not cover the self-employed or workers in the gig economy. The impact is felt in particular by female workers, workers with disabilities and black and minority ethnic workers, who are over-represented among low earners, the self-employed, those with multiple jobs and carers. That is why it is absolutely necessary, as the Taylor report recommended, to redefine workers in the gig economy as employees, meaning that they would be eligible for auto-enrolment. As Matthew Taylor said, if it looks like employment and smells like employment, it should be employment.

Having said that, the statistics outlined in various contributions today are stark. Self-employment, and in particular bogus self-employment, are becoming increasingly prominent in the modern economy. Figures released last year suggest that the number of self-employed workers in the UK rose by 23% between 2007 and 2017, from 3.8 million to 4.7 million. That represents a dramatic shift in the nature of the world of work and the way in which the British economy works.

Self-employed people now represent around 15% of the workforce, and 91% of businesses say that they hire contractors. The latest figures from the Office for National Statistics show that only 19% of the self-employed are saving into a personal pension. That is a worrying trend, and more needs to be done, not least because those concerned face decreased security in their current working practices and in their retirement. That is why the hon. Member for Chippenham was absolutely right—dare I say it?—to bang on about this and to call for a detailed review at the next stages. I would strongly support that. That issue needs to be tackled because of the changing nature of the workplace.

Thirdly, as stated earlier, the advent of auto-enrolment has increased the number of workers saving for retirement, with more active savers now in defined contribution pension schemes rather than defined benefit schemes. While the overall trend toward a greater number of savers is positive, we do not want to see a growing threat posed to DB schemes. It was never intended that auto-enrolment should become a bolthole for employers seeking to move away from historic DB schemes. Indeed, I thought what the Minister said yesterday to the TUC conference was absolutely right—he said that DB is working well notwithstanding a whole number of problems, and that where employers can, they should continue with their responsibilities. I strongly agree with him.

Fourthly, the rise in the number of pension savers is a step in the right direction, but DC plans must continue to evolve in order to provide savers with an adequate pension. A report by the Pensions Policy Institute in 2016 found that the median saving of DC scheme members could yield only £3,000 per year as an annuity, which is not a lot of money. That therefore demands action at the next stages and on a whole number of fronts: more work, for example, needs to be done to improve the adequacy of returns on DC savings, including looking in greater depth at costs and charges. On the 8% target, it is clear that, for the current proposed automatic contributions—I stress again that they are a welcome step in the right direction—8% should not be the summit of our ambition as we look ahead over the years to come. I take the point from the hon. Member for Chippenham that we should get the balance right so that we do not impose unreasonable burdens as we progressively move forward. However, I stress again that 8% should not be the summit of our ambitions.

On how one might have the best possible DC arrangements, there is an interesting debate going on around collective defined contribution pension schemes and what is being proposed by both Royal Mail and the Communication Workers Union. We have been engaged in constructive discussions with the Government on opening the door for such arrangements to be introduced at the next stages. However welcome it is, I stress again that 8% is not enough, and we therefore need to look at several things, including transparency, costs and all those things that would make a difference.

More workers having access to a pension pot is welcome, but I refer to what my hon. Friend the Member for Weaver Vale (Mike Amesbury) said earlier: it is vital that there is greater knowledge about pensions. To that end, the Government have the opportunity, through the Financial Guidance and Claims Bill, which is welcome, to increase the provision for financial education.

[Geraint Davies (in the Chair)]

I was hoping to allow the Minister about 10 minutes in which to speak.

[Jack Dromey]

In which case I will finish in about 90 seconds. Financial education is at the heart of that Bill, which is welcome. The role of the new single financial guidance body will also be important.

Auto-enrolment has been positive for the workplace pensions landscape in this country. It needs extending and improving—of that there is no doubt—to give workers greater security in retirement, but it is a strong and welcome step in the right direction, and it is deeply welcome that there is cross-party consensus.