Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012

Lord McKenzie of Luton Excerpts

Tuesday 22nd May 2012 Grand Committee

With those questions to my noble friend, I am pleased to support the order. We will need to return to this matter with a review and further thinking as time progresses—and certainly within the next year or two.

[Lord McKenzie of Luton]

My Lords, I begin by thanking the Minister for the manner in which he introduced the order—and I think I spotted a few kind words as well.

My noble friend Lady Drake set out our position with her usual precision and focus, so I will be brief. Auto-enrolment goes live in a few months and we should take this opportunity to reflect on the tremendous efforts that have been brought to bear, not least by my noble friend, to make it a reality. Although we do not have an identity of view with the Government on all aspects of its implementation, we acknowledge their role in taking this forward in challenging times. The introduction of auto-enrolment may not be preceded by a torch relay but its effect and indeed its legacy have the potential to outshine the other exciting event that we expect to experience later in the year.

Appendix A to the Explanatory Note sets out the impact of changing the earnings trigger and the upper and lower limits of the qualifying earnings band. My noble friend Lady Drake focused on our major concern: the impact of the raised earnings trigger. As she explained, far and away the biggest number of losers are women. There seems to be an implicit assumption—which was in a sense reiterated by the noble Lord, Lord German—that these would be persistent low earners. I would be interested to know what evidence there is for that. If we wanted to align it with something that had a PAYE component, what about the primary threshold, for example?

I looked at the Government’s response to the consultation. The reason given for excluding the primary threshold was that there was no tax relief at the lower end. How much work have the Government done on this? I went to the HMRC website to remind myself of the rules on tax relief for pensions. It states:

“Usually, your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic, higher or additional rate you get the full relief straightaway. However, some employers use the same method of paying pension contributions that personal pension scheme payers use—read more in the section on 'Personal pensions'”.

That section states:

“You pay Income Tax on your earnings before any pension contribution, but the pension provider”—

this is for personal pensions—

“claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return”.

What happens if you do not pay tax?

“If you don't pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief … on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount”.

So the assertion that there is no tax component available simply because you are below the tax threshold is not true. I recall that the proposition was that NEST would adopt that alternative means of generating tax relief for people who went into the NEST scheme. Will the Minister outline in some detail the extent to which that issue was factored into the considerations; and confirm what the position of NEST is intended to be in relation to the routes by which people may get tax relief when it is introduced?

It is a great pity that the issue of the trigger has left us apart. The noble Lord, Lord German, instanced the fact that the tax threshold may rise to £10,000—part of a wider deal, I understand. We will see whether and when that comes to fruition, but it will simply exacerbate the problem that my noble friend Lady Drake outlined in such detail. I hope the Minister can deal with that point.

[Lord Freud]

My Lords, I said I was expecting a robust debate. It has been short but typically robust. What has clearly come through is that the figures around the earnings band seemed to get general acceptance in this Committee, and the real issue we are discussing is the trigger level. It is common ground that it would be pretty hard to find an earnings trigger that would target auto-enrolment perfectly. Our aim is to maximise pension saving for those for whom it is valuable, and minimise the number captured of those for whom it is not. Clearly this is not a perfect science.

The rise in the value of the trigger takes us to the impact on the low paid. As noble Lords pointed out, on balance many more women are in this category—in particular years, though it may not be a continuous position. I should put on the record that the rise from the £7,475 threshold to £8,105 excludes does not exclude 75,000 women; the figure I have is 100,000. We might as well get that on the record. Of those affected, my information is that 82% are women. We recognise that women are more likely to work part time or work less than men, and that they will be disproportionately represented in the group excluded from automatic enrolment by the increase in the trigger.

With the trigger, and automatic enrolment generally, we are talking about soft compulsion. We have developed a system that aims to capitalise on inertia—the default is saving, but we have left people who are new to pension saving to opt out if they consider that they really cannot afford it. Automatic enrolment with an employer contribution is an incentive to save. For the first year, certainly, we do not want to encourage people who do not earn enough to pay tax to divert wages into a pension pot unless their circumstances mean that it makes financial sense.

A question was asked based on reading three pages of the HMRC site, which was very assiduous. Tax relief was one of the factors considered, but not the only one. Maintaining an adequate gap between the trigger and the bottom of the earnings band was also relevant. We also needed to make sure that the right people—those who could afford to save—were enrolled.

There are two ways for a pension scheme to access tax relief for individuals. As the noble Lord, Lord McKenzie, said, schemes using relief at source can get tax relief at the basic rate even if the individual is not a taxpayer. However, where a scheme uses a net-pay arrangement, individuals can get tax relief only if they have taxable earnings. To answer the specific question, NEST will use the former, so that all members can get that tax relief.

[Lord McKenzie of Luton]

Does that mean that the tabulation in the Government’s response—which says that if the trigger is set at the primary threshold, it is not tax relievable at the lower end—would only run in some circumstances and would not run for many scheme members, particularly if they were members of NEST?

[Lord Freud]

Yes, on the basis of what I have just said, that is quite clear. For those saving in NEST, the figures would not work, while those saving in some other way, as the legislation currently stands, would not get the relief. NEST: yes; others: no. I think the silence behind me suggests a good spot there and I suspect we may look at that particular issue or anomaly —we may.

With the gently-gently approach of phased contributions starting at a modest level, we hope that we will not trigger a rush to the exit, but we do not know. We know what people tell researchers when they are asked. We can look at the opt-out rates in those countries that have similar systems. However, in the end, the evidence shows that if people feel they cannot afford it they are more likely to walk away, and the whole issue of pensions stays in the “too difficult to think about” pile. We are feeling our way here and there will be chances to make adjustments.