Automatic Workplace Pension Enrolment

Lord McKenzie of Luton Excerpts

Monday 25th June 2018 Lords Chamber

Asked by

[Lord McKenzie of Luton]

To ask Her Majesty’s Government what steps they intend to take to address the issues arising from the 2017 review of automatic workplace pension enrolment; and what is the proposed timetable.

[Lord McKenzie of Luton (Lab)]

My Lords, I welcome the opportunity to open this short debate about the progress of auto-enrolment and its future development, particularly in light of the 2017 review, sub-titled Maintaining the Momentum. Our starting point must be to acknowledge the undoubted success of this policy, which has enabled some 9 million individuals to have been automatically enrolled into a workplace scheme by their employer. In topical parlance, perhaps, it has been a game-changer.

As we have debated before, this success has been built on a political consensus, thorough research of the data, stakeholder engagement and a robust analysis of the state of pension provision in the UK. This was underpinned, of course, by the intellectual rigour of the Pensions Commission. The commission’s work focused on the consequences of rising life expectancy, a highly unequal distribution of pensioner incomes and the dispersion of private pension provision, along with a state system with gaps in provision for those with interrupted working lives and caring responsibilities, especially of course women. That was no basis for a sustainable pension system in which people could have confidence to save. The settlement proposed that the foundation of our pension system should be reform of the state pension to make it easier to understand and less means tested, and an earnings-related private pension which moves on from voluntary provision but stops short of full compulsion. It acknowledged the challenges of funding such a system and the logic of raising the state pension age—as it put it, the “unavoidable long-term trade-off” between public expenditure and state pension age—notwithstanding the need for fair notice of changes.

Hence we have come to a national pension saving scheme for those not otherwise covered by adequate pension arrangements. The participation is not mandatory but the obligation of employers to enrol employees and use the power of inertia was anticipated to be a significant nudge; so it has proved. There are of course mandatory minimum contribution levels for employers and employees. Sitting alongside this is a low-cost defined contribution scheme with a universal service obligation, NEST. Other providers have also engaged; specifically, we have seen the growth of master trusts and the consequent need for regulation.

With total contributions of 8% of earnings above the LEL threshold, including tax relief, the commission estimated that a median earner would eventually secure a pension at retirement of about 15% of median earnings, on top of an estimated 30% from the state system. For lower earners, the replacement rate would be higher because of the proportionally higher amount coming from the state pension. There was an assumption that further private saving would bridge the gap to support higher individual aspirations but this has not happened.

The Government’s review can rightly claim that auto-enrolment is transforming saving habits. This year, the rollout of automatic enrolment to employers will be completed. Minimum contribution rates increased to 5% from April this year and will increase to 8% in 2019. It remains to be seen what the effect of any of this is on opt-out rates and, perhaps more importantly, the rate of attrition where individuals subsequently withdraw from the scheme. However, workplace pension participation has increased from 55% to 78% in the four years to 2016. For the private sector, participation among eligible employees has risen to 73%. Annual contributions into workplace pensions amounted to £87 billion in 2016. So far, opt-out rates have apparently remained lower than anticipated, at approximately 9%, but rates of attrition have been twice this. Perhaps the Minister would confirm that.

We consider that automatic enrolment is becoming the foundation of workplace pensions in the UK: an important component of providing millions of workers with a reasonable standard of living in retirement. But as the review and other studies have identified, challenges remain. Most significantly there is the level of contributions, which, as the review itself identifies, currently presents a significant risk that the expectations of a substantial proportion of the working-age population will not be adequately supported in retirement.

There is also a great deal of evidence that the success of auto-enrolment is less prevalent for such groups as part-time workers, women and those from ethnic minorities. This is particularly a consequence of the earnings trigger. The TUC’s research found that 4.6 million employees earn less than the £10,000 trigger, three-quarters of whom are women. The trigger has a particularly unfair current impact on some 100,000-plus workers who hold multiple jobs, which when combined would take them over the £10,000 threshold. The TUC points out that in many sectors, particularly among employers new to pension provision, the minimum contribution rates have been established as the norm, but it is understood that there is little evidence of levelling down by existing pension providers. Again, perhaps the Minister would confirm that.

The Pensions Policy Institute estimates that two-thirds of those enrolled in pensions in 2030 will be on minimum contributions. The 2017 review states that using the savings adequacy measures introduced by the Pensions Commission, 12 million individuals are undersaving for their retirement—12 million individuals who comprise 38% of the working-age population. The review proposes a number of measures with which we agree and which should help to increase savings. Lowering the age from 22, which was originally based on the national minimum wage criteria, to 18 is one. NOW: Pensions data shows that younger ages are less likely to opt out so, by inference, are keener on pensions. Perhaps the Minister can say whether this is generally the position.

The proposal to abolish the lower contribution level for a band of earnings so that contributions become payable from the first £1 of earnings would simplify things, increase the amounts brought into pensions savings and improve incentives for those with multiple jobs to opt in. It would also enable the entitled workers definition to be scrapped.

The level of the earnings trigger is the most contentious issue. The review records no clear consensus. Keeping it where it is at £10,000 amounts to a real-terms decrease in its value, which for the current year would bring another 100,000 people, 72,000 of whom would be women, within the scope of automatic enrolment. It is the trigger that ultimately determines who will be auto-enrolled. The pays-to-save analysis is complicated, but is perhaps made less so by changes to the state pension. It is also to be regretted that the tax anomaly—the different tax outcomes of net pay and relief at source arrangements—has not been resolved.

Setting the earnings trigger clearly involves judgments about a range of issues—affordability, opt-outs, provision for pensions—and the review excuses itself from a longer-term view on the basis of not wanting to pre-empt further threshold reviews. However, the Government cannot look aside for ever from the fundamental point about the levels of undersaving and the risk of poverty in retirement at current contribution levels.

Another conundrum is the 4.8 million self-employed and how they can be brought into auto-enrolment. As the review sets out, this is a group for whom pension saving is declining, notwithstanding the range of products available, including access to NEST and lifetime ISAs. This is at a time when self-employment is increasing, fuelled by the gig economy. The review suggests that many of them should already be included in auto-enrolment via agency worker and other provisions. There are also those inappropriately classified as self-employed—the bogus self-employed. This is a matter for enforcement by the regulator and HMRC, but for others the review proposes the development of nudges and prompts including through Making Tax Digital. Can the Minister say something about progress on this, especially in the light of HMRC announcements about the slowing up of Making Tax Digital to cope with the consequences of Brexit?

The third strategic problem identified by the review is that although individuals are saving more than ever before, they are not looking to take greater responsibility to plan and save more for their retirement. Policy looks to inertia to capture savings while expecting positive and proactive engagement to save more and make decisions about savings, particularly the decumulation options. There is no longer just the obligation to annuitise.

The overall pensions landscape has changed considerably since auto-enrolment was conceived. Much of this has to do with pensioner protection: advice and guidance, some mandatory; a charge cap on default funds; the prospect of regulation of master trusts; the prohibition on cold calling; and a pension dashboard. This should be conducive to an environment of engagement, but we know there is some way to go to address the general low level of financial education in the UK, which undermines effective engagement.

Despite the success of auto-enrolment, there is still much to do to address undersaving. We have no doubt that automatic enrolment should remain the bedrock through which a workplace pension can be provided. We accept the need to maintain the consensus for the proposed changes and that this should involve employers, savers and the pensions industry. However, we question why the government timeline for making positive progress seems set at the mid-2020s. Those missing out now deserve a more expeditious approach. I look forward to the Minister’s comments.