Pensions Auto-enrolment

Michelle Donelan Excerpts

Wednesday 28th February 2018 Westminster Hall

[Michelle Donelan (Chippenham) (Con)]

I beg to move,

That this House has considered pensions auto-enrolment.

It is a great pleasure to have secured this debate under your chairmanship, Mr Davies. Introducing auto-enrolment in the UK was a huge landmark, as is this debate—it is the first since the measure was introduced in legislation and since the Government review. Auto-enrolment was introduced as part of a package of policies designed to foster a saving culture and a new generation of savers whose long-term financial needs are prioritised as much as their short-term ones. It is an example of fiscally responsible policy, and paves the way to a better tomorrow by giving people greater financial security and independence in their retirement.

It is apt that we are having this debate. Just over a week ago we hit the milestone figure of 1 million employers engaged with the policy. The effect can be seen across the country including in my constituency, where 1,030 employers have introduced auto-enrolment schemes, which means that 9,000 people in Chippenham are benefiting.

To appreciate that success, it is important to consider the context. Saving for retirement has traditionally been seen as something we put off, and it was put off. In addition, it has always had connotations of being difficult, complicated and expensive to organise, especially given that a large proportion of employers did not offer a scheme. Traditionally, there have been low levels of engagement with pensions. People have relied on the state pension and, if need be, pension benefits. Given our ageing and expanding population, that is no longer tenable. Auto-enrolment helps to make the system more sustainable by, in effect, supplementing welfare payments with private provision.

Many have traditionally seen the state pension as a universal scheme that will be enough but, as I have seen in my constituency, the introduction of auto-enrolment has started to shift that mindset dramatically. The Association of British Insurers summed it up well:

“Engaging people to save adequately for their retirement is one of the biggest public challenges we face.”

The ABI believes that auto-enrolment is the best means to ensure people save adequately for their retirement. It is estimated that, by 2019-20, an extra £20 billion a year will be saved into workplace pensions as a direct result of auto-enrolment.

There are many reasons why the roll-out is proving successful. Perhaps most importantly, it is simple and is basically done for the employee. In addition, the employer contributions are a strong incentive. The rate of employer and employee contributions is going up in increments, which helps businesses to prepare and ensures that employees get into the mindset of saving for pensions. It will go up to 8% in 2019, but it is crucial that we do not leave it there. We need to ensure that pensions provide enough money for retirement and that they are fit for purpose.

The Pensions Policy Institute conducted an international comparison of auto-enrolment schemes and found that our employment contributions lag far behind those of our European partners. As higher statutory minimum contributions are phased in over 2018-19, employees will find themselves bearing more of the burden than their employers, which could drive opt-outs. The art is getting the balance right between employee and employer contributions and getting the rates right to ensure that saving does not damage business.

Being an opt-out scheme has helped auto-enrolment to be successful, and the opt-out rates have been lower than expected. The Department for Work and Pensions modelling assumed a 25% opt-out rate, but in 2017 it was just 9%. Some 23% more of the working population now participate in a pension than in 2012.

Traditionally, it has been hard to engage young people with pensions, as they tend to prioritise their disposable income over a pension in 50-plus years’ time. That means that they either never opt in or opt in later, which does not give them the time to accrue a decent pension. I am pleased to say that, since the introduction of automatic enrolment, the group that has had the largest increase in participation is young people—44% of those aged 22 to 29 now participate. We have also traditionally struggled to engage women, but since the introduction of automatic enrolment, participation rates have been catching up. Only 40% of eligible women participated in 2012, but by 2016 the number was 73%.

One concern about automatic enrolment was how the small business community would respond. However, it has not only coped with the policy, but embraced it. It is important that we thank it for its contribution. The Confederation of British Industry stated:

“Automatic enrolment is a successful policy built on sound principles—employer support is key to this”.

The main concern was about the perceived bureaucracy and the time it takes to administer the system, but 2017 Government-commissioned qualitative research found that most small and micro employers thought that the cost and time burden involved was lower than they anticipated.

On outcomes versus expectations, one of the key points in the Government’s review, published last December, was that the proposal would increase median earners’ private pension provision by more than 40% and lower earners’ provision by more than 80%. The review stated that reducing the auto-enrolment to 18 is essential to ensure that we foster a generation of savers, and will bring a further 900,00 people into pension saving. Scrapping the £5,876 lower earnings limit so that every pound of earnings is pensionable means that someone with a career-average salary of £27,000 will build up an extra £50,000 over 40 years of pension saving. The review also seeks to increase engagement to reach all, partly by building a sense of personal ownerships of pensions through initiatives such as the pension dashboard.

The review considered what to do about the self-employed pension problem. The self-employed are currently not eligible for auto-enrolment, yet the number of self-employed people in the UK is rising—in fact, it rose by 730,000 between 2008 and 2015 alone. That increase is combined with a decline in the number of self-employed people opting into pension schemes to only 19%. It is predicted that, within 20 years, a third of the employment market could be self-employed, meaning that nearly a third of the employment market could be without a pension, which is the opposite of the vision for auto-enrolment. I have developed a reputation for banging on about this over the years I have been in the House, and I have pitched an auto-enrolment scheme for the self-employed to the current and previous Chancellors. I was delighted that the 2017 manifesto contained a commitment to make auto-enrolment available to the self-employed, but I noted the valid concerns raised in the Government review, and will shortly set out my own ideas about how it can be implemented effectively.

The Government review outlined a number of pilot projects to address the problem, but today I want to focus on creating a new system. I am not alone in calling for that. In fact, the Pensions and Lifetime Savings Association has called for it to be considered, and the Taylor review stated that the Government should treat the self-employed like any other section of the labour market. That is hard to achieve without rolling out a self-employed scheme for auto-enrolment.

Creating auto-enrolment for the self-employed is not simple. The obvious problem is that there is no employer to pay the contributions, but there are no international examples and the self-employed market is diverse. However, the policy could be administered along the lines of auto-enrolment qualifications. A recent report by the Pension Policy Institute estimates that 38% of the self-employed would be eligible for auto-enrolment if they were employed. In addition, the income of the self-employed is often much more volatile, which discourages people from committing to standard pension provisions.

I want briefly to share my analysis of the four options reviewed by Aviva and Royal London. The first option was published in Royal London’s paper, “Britain’s ‘Forgotten Army’”. The option is to increase the rate of class 4 national insurance contributions by 3% for pension contributions, plus a matching pension contribution from profits. This would put all the outlay on the self-employed, offers little incentive and could appear to be a tax rise.

Under the second proposal, the Government acts as the employer by equally matching self-employed payments at 4%. Although that offers the incentive, it would be very costly and there would be no room to increase payment contributions from the self-employed unless the Government follows, which limits the long-term scope of the policy.

The third proposal is an opt-in tick box on tax returns for pension provisions, perhaps with a 1% Government contribution. It is an easy option and offers a 1% incentive, but relies on an opt-in. Many self-employed would just match the 1%, making it unfit for purpose. There was a proposal to extend lifetime individual savings accounts, but I do not believe that they could address the problem in full. The report prefers some form of default pension option as part of the annual tax return.

The Government review suggested the possibility of introducing a behavioural prompt in the accounting process. The concept has merits, which my plan builds on. I believe that linking a system to self-assessment is the best approach and would be simple—simplicity was one of the key reasons for the success of auto-enrolment. Auto-enrolment has shown us the power of the opt-out. There needs to be an incentive for the self-employed. All the research shows that their pension-saving mentality is very different, because incomes are more volatile. That was highlighted by the disparity before auto-enrolment was introduced. The self-employed need a compelling reason to commit to and prioritise pension contributions.

It is undeniable that the auto-enrolment opt-out rates are so low because the employer contribution acts as an incentive. However, I take on board the 1% drive to the bottom. We should offer a Government contribution of 1% for the self-employed who invest 3%, and 2% to those investing 5%. The rates at which the Government contributions kick in could be increased as we develop a pension saving psyche, but the Government and employee contributions would not be intrinsically linked. It would be cheaper than the 4% concept and would offer an incentive for higher savers.

A common argument used against the Government acting as the employer is that it would represent a substantial transfer of tax from the employed to the self-employed, which could be seen as unfair. To address this concern, first, I have benched this lower than the employee system will be in 2019. Secondly, our entire system is based on redistribution and acts as a giant insurance scheme, so that transfer exists in thousands of other ways. Thirdly, in the long run it will cost the state less, because otherwise a massive cohort of the population will be reliant on the state pension provision. Fourthly, we are currently in danger of the opposite. Martin Palmer of Zurich stated:

“We are creating a rapidly growing new divide between those who are employed, with access to auto-enrolment, and the self-employed. We need to ensure nobody is excluded from the chance to build up a nest egg simply because they don’t work…nine to five.”

I do not believe that a default nudge is the same thing as an auto-enrolment system, nor will it be as successful. I urge the Minister not to discount auto-enrolment for the self-employed, and to commission a detailed review into options that include the Government as the employer. In reference to the employer-employee relationship, the Taylor review stated:

“The Government could look to establish a similar principle for the self-employed”,

yet the 2017 Government review dismissed that option without even costing it.

In conclusion, automatic enrolment has reversed the decline in workplace pension saving. Total annual contributions are at their highest for a decade. Around 10 million people will be newly saving or saving more by 2018. The policy is proving successful, but the review has highlighted that there is room for improvement. I am pleased that the Government are making progress. To create a truly sustainable, long-term solution for pensions, we must ensure that we have a system that works for the self-employed, given that one in seven self-employed people in the UK are saving into a pension, versus three-quarters of employees, and the number of self-employed is rising at such a considerable rate.

[Several hon. Members rose—]