Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013

Lord McKenzie of Luton Excerpts

Thursday 7th March 2013 Grand Committee

[Lord McKenzie of Luton]

My Lords, I start by thanking the noble Lord, Lord Newby, for introducing this order. I find myself on pretty much precisely the same page as the noble Lord, Lord German, concerning the points and questions that he raised. When we considered this matter in May last year, we looked forward to the introduction of auto-enrolment and acknowledged the contribution of the many people along the way who had made it happen. Indeed, we also acknowledged the role of this Government in taking it forward. Perhaps this would be an opportune moment to seek an early update on how it is all going.

As we set out last year, we see the merit of simplicity in the earnings band limits being aligned with the national insurance lower and upper earnings limits. This is notwithstanding that the raising of the former and the reduction of the latter means that the band is squeezed by some £1,100 for the upcoming year, with the Government estimating a reduction in pension savings of some £30 million. However, we welcome the fact that the broader definition of earnings, or its equivalent in other schemes, is being retained.

Our main concern, which I am sure will come as no surprise to the Minister, is the one touched upon by the noble Lord, Lord German, of raising the earnings trigger to the new personal allowance level. On the Government’s own figures, this will exclude around 420,000 individuals, 76% of whom are women. Of course, this is on top of those who have been excluded by aligning the trigger to the personal allowance threshold in the current year. We have heard some of the justification for that. It concerns simplicity and whether people are in a position to afford to save.

However, it seems that there is a breakdown in the Government’s logic. Let us say that the Government got the balance right in the current year. Looking at the current year, why should the increase in the personal allowance for other policy measures, which we may or may not agree with, by more than the rate of inflation and more than earnings cause the balance in adjustment as to what people can afford still to equate with the personal allowance threshold? I do not think there is a logical connection between the two. However, we are where we are on that.

The Government’s explanation was that persistent low earners tend to find that, through pensions and benefits, the state provides a level of income in retirement similar to that in working life. Of course, that assumes that today’s low earners will be tomorrow’s low earners. We would hope that as a matter of government policy that would not be the case. The noble Lord, Lord German, touched on the much heralded single-tier pension, which is supposed to negate the need for earnings-related support in the future. It takes us back to the big debates that we had around “pays to save”, when the whole concept of auto-enrolment was being considered and the structure was being put in place. If the single-tier pension is to be introduced and is successful, negating a whole raft of earnings-related means-tested support, that should make it easier to make the judgment about when it will pay to save.

I turn to the issue of tax relief and relief at source. If people are excluded from auto-enrolment due to the personal tax threshold, they are potentially missing out on this chunk of government support. The noble Lord, Lord German, raised absolutely the right point by asking what employers are required to do to make sure that people are aware of this potential benefit. I hope that the Minister can confirm that there is absolutely no intention of changing the structure of tax relief. I think it was confirmed last year that NEST will operate the relief-at-source system, so anyone who was going to be enrolled or who wished to opt into NEST would receive the benefit of that tax support.

I end on the same point as the noble Lord, Lord German, which is: if this is the way things are going to go and if there is to be this increasing raising of the threshold, which will really change the landscape over time if it continues, what publicity will be given to the right to opt in? That becomes ever more important if the threshold is to continue to be raised. What are the Government planning to do generally? What are the requirements on employers, so that those who miss out on auto-enrolment at least have the chance to consider the opt-in route? The key point of auto-enrolment was to deal with inertia, to get people into pension saving because they had to make a decision to opt out. Once you remove that requirement from them, inertia reverts and the onus is on individuals. I think that they have to be above the lower earnings limit to opt in. What support and encouragement will they be given? They should at least know that they have the choice. Given what is happening to the personal tax threshold, that is a key issue for us.

[Lord Newby]

My Lords, I thank both noble Lords who have contributed to the debate. The questions have been about not the people who will be automatically enrolled but those who might or might not.

Part of the context for this is that even with the uprating of the tax-free limit, in terms of income level we are talking about 29 hours at the minimum wage, so the vast bulk of people in the category we are discussing—people who could join if they wish but who are not automatically enrolled—are likely to be part-time workers. That comes to the final point of the noble Lord, Lord McKenzie, about what their career paths will be. I would expect quite a number of people in that category now would not necessarily be part-time workers for the rest of their lives. A lot of them will be women with children, who may go on to have a full-time job when their children are older, and we would hope that they would do so if that is appropriate. Of course if they do, they would then be automatically enrolled.

On how we make sure that people know of their rights, which is obviously important, employers must write to employees with information about rights setting out the full picture. The department has developed a language guide and template letters to help employers to communicate clearly with people new to pension saving. I must say that I have not seen that letter. I will now make it my business to read it. If it is a letter that communicates clearly on pensions, it will probably be the first one that I have seen. I am sure that the finest minds in the department have been worrying about that. It is a major problem. By and large, people are ignorant about their pension savings and pension options. It is a challenge in any scheme, but particularly here, where a lot of the people who may be in this category will never have had a pension before. I will enjoy reading that letter.

The noble Lord, Lord German, asked for a definition of “inappropriate”. It is easy to see why for a single-parent family with children, where the mother is working part-time, it is not so much inappropriate as impossible. There just is not the amount of money in the household to enable much saving to take place. Another example of where it might be inappropriate would be if a household had built up debts and had large outstanding payments due, as many people on low incomes do. It would probably be in their financial interest to try to get those debts down before undertaking any savings. I am not sure that is the complete answer but I can see circumstances where, if you were a debt adviser or financial adviser to people who had got into debt and were on low incomes, you would be advising them to pay off those debts first.

There was a question about relief-at-source schemes and how these will be made clear. I hope that the letter explaining to people what their requirements are also explains the relief-at-source mechanism, and I will be looking at that. If it is able to do that in very clear terms, that will be an even greater achievement. I have great confidence in officials at the Department for Work and Pensions being able to clarify what most people find opaque. We are still looking at how relief-at-source schemes are operating as the new system rolls forward. The evidence so far is that schemes aimed at this population are actually using relief-at-source, so at least in that respect the system is working well.

The noble Lord, Lord McKenzie, asked how many people have been auto-enrolled and how this process is going. We expect that by this April at least 1 million individuals will have been automatically enrolled. The early signs are very positive: some big employers who have gone in first are reporting very low opt-out rates. However, the department has a full evaluation programme and we will be able to produce our first reports on this in the summer.

The noble Lord, Lord McKenzie, also asked whether it was the intention to change the relief-at-source rules. This is a Treasury matter, and we are near the Budget, but I think it is fair to say—and if I am sacked for this I shall blame the noble Lord, Lord McKenzie—that I am not aware of any intention to change the relief-at-source rules. I hope I have answered the questions that noble Lords have asked me.

[Lord McKenzie of Luton]

If the noble Lord gets sacked for that statement, I shall campaign on his behalf. When he has got over the excitement of reading the letter that he is going to peruse, would he share it with us? That would be helpful.

[Lord Newby]

I will, because it deserves to have the widest possible readership. With those comments, I commend the order.