Automatic Pension Enrolment

Rob Roberts Excerpts

Wednesday 26th January 2022 Westminster Hall

[Jim Shannon]

I thank the hon. Gentleman for his comments. He is right that it is best to make contributions from an early age. I can speak to that and the benefits of it. Even though I may not have understood that at that time, my mother was insistent, so I enrolled. Today, we see the benefits of all the things we did in the past.

To be eligible for a compulsory pension scheme in Northern Ireland, a worker must be at least 22, under state pension age and earning more than the minimum earnings threshold. I know some young people who have been paying into pension pots from as young as 18, but that is down the employer and employee discretion. I do not see a reason why young people who are in consistent work should not be contributing to their future, as referred to by the hon. Member for Sedgefield (Paul Howell).

As this subject is not taught in schools, young people feel unaware of the importance of taxes and pensions. I urge the respective Ministers to think about that in relation to schools. There may be a way of suggesting to young people at an earlier stage that they need to be making contributions, perhaps through an introduction provided while they are at school.

[Rob Roberts (Delyn) (Ind)]

I find it difficult to believe that the hon. Gentleman started his pension contributions 45 years ago, as he cannot possibly be of that advanced age. He reminisced about how his parents drilled into him the importance of starting early. In his opinion, what has happened since those years? How did we go from the point of saying that it was a personal responsibility? How did we go from the point of our parents drilling into us the importance of saving for deposits for a house, as we heard earlier, and for retirement? Is the situation we have now on automatic enrolment satisfactory in terms of getting us back to where we were before?

[Jim Shannon]

I think the figure gain tells it as it is. We went from 2.1 million people to 21 million people; the increase was massive. People from my generation were very responsive to what our parents told us and we did what they suggested because they knew best. Today the companies are trying hard and encouraging people but, as the hon. Member for Grantham and Stamford said in his introduction, education might be another way of helping us get even beyond where we need to be.

In February 2021, a report from the National Employment Savings Trust looked at the impact of the covid-19 outbreak on its 9.5 million members. It found no significant changes in average contribution levels; the majority had continued to save, with around one fifth contributing more than the minimum contribution rate. That tells us that the scheme is successful for some—potentially, everyone—and helps people to save. I find those figures reassuring and proof that this legislation is beneficial, which may answer the question raised by the hon. Member for Delyn (Rob Roberts).

There is absolutely no doubt that this legislation has brought many benefits. Pensions help people maintain their standard of living in retirement, and savings provide important supplemental income for unforeseen expenses. Pensions are an economically efficient way to fund retirement, which means they are a prudent use of taxpayer money.

Others have expressed a few concerns about the lack of pension provision for the self-employed, and I have a question for the Minister. How and when should pension contribution rates increase above the 8% minimum? It is important that there is provision for the self-employed. There are 134,000 self-employed people in Northern Ireland. In Strangford, and perhaps in other constituencies as well, we have a tradition of many people being self-employed. I had a period of self-employment but continued to pay the pension contributions. That was probably when I increased the number of pension schemes I was in. Perhaps the Minister could indicate how we might encourage the self-employed to be involved. That is my question for the Minister, and I know I will get the response I wish for.

I want to conclude because I am conscious that others wish to speak. Automatic pension enrolment for workers makes sense and is a good deal. Pensions not only help the local economy but are a win-win situation for employers, employees and local business owners. The figures are astonishing: since 2012, more than 10.2 million workers have been automatically enrolled in pension schemes and that is on the increase.

The scheme is a success, and we thank the Government for their encouragement and promotion of it. I only suggest that it could be approached educationally at an earlier stage. I urge the Department for Work and Pensions to look at the issues others will raise on pension enrolment and to step in to solve them. None the less, I thank the Minister and Government for all they have done.

--- Later in debate ---

[Rob Roberts (Delyn) (Ind)]

It is a pleasure to serve under your chairmanship, Mr Dowd. I give credit to my hon. Friend the Member for Grantham and Stamford (Gareth Davies) for securing the debate and, indeed, to the Minister; it is always a pleasure to see him responding to a debate. He must get tired of hearing from everyone, every time we have a pensions debate, “Auto-enrolment has been wonderful and the things the Government are doing are outstanding, but we could always do more.” We are always asking for more. That is the way of things, and I think he has come to appreciate that over time.

As everybody else has done, I pay tribute to my hon. Friend the Member for North West Durham (Mr Holden) and his private Member’s Bill. When I read back through the Bill last night, I saw that it contained many of the things I wanted to cover, so I shall be very brief, which will please everybody no end. I will just mention three points that I hope the Minister can cover later.

My hon. Friend the Member for Sedgefield (Paul Howell) mentioned excluded people. Someone earning £9,000 in each of two different jobs would not be enrolled despite having £18,000-worth of income, which would otherwise clearly qualify. Like those of my hon. Friends the Members for North Norfolk (Duncan Baker) and for Clwyd South (Simon Baynes), my constituency is very rural, and we have lots of people in those circumstances. Something as simple as taking away the £10,000 qualifying point would be a real benefit to those people.

On the under-22s, I was a financial and pensions adviser for a decade and a half, and one of the key things that we always said—the hon. Member for Strangford (Jim Shannon) mentioned it earlier—was, “Start as early as you can.” An extra five years will add in the region of 26% to 30% to the end value of a pension pot. The hon. Member for Kilmarnock and Loudoun (Alan Brown) used the golden words “compound interest”. Those extra years at the start make such a huge difference at the end.

That is particularly relevant in my own situation. My daughter is 17 years old. She has decided that university is not for her and has gone into full-time work, but she is not being auto-enrolled. Of course, she can opt to be enrolled when she gets to 18, but, as my hon. Friend the Member for North Norfolk mentioned, it is easier when it is done for us; it is harder to opt out than to opt in to something. I completely appreciate that.

My second point is on qualifying earnings. People may well be under the illusion that if they are earning £30,000 a year, they are contributing 8% of £30,000. Sadly, that is not the case. The lower earnings limit, which is £6,240, is taken off before that 8% is calculated, so someone earning £30,000 grand is only paying 8% of £23,760. Getting rid of the lower earnings limit and making pension contributions start from zero would add another 26% to the final value of someone’s pension pot by the time they come to retirement. Just those two changes—making auto-enrolment available to under-22s and making it count for all earnings—would add 29% and 26% to the final value of a pot. That is a huge amount and would make a huge difference.

My final point, which is very simple, is about complacency risk. We hear that auto-enrolment has been transformative—my hon. Friend the Member for Grantham and Stamford used that word, and we have all heard the statistics—but has it? Eight per cent. is not enough. Even if it was 8% of all earnings, it would not be enough. My cousin is a financial adviser over in America. I talked to him over many years about how I did my processes and worked out how much people should save, with the calculations and the risk levels and all the interesting bits that go into forming a conclusion. He said, “I don’t do any of that. I just tell people, ‘Just do 20% and you’ll be fine.’” He advises people of relatively high net worth, and 20% is a relative amount to different people, but 8% just will not do it.

We have this complacency: because the Government have mandated 8%, people think, “Well, that must be okay, then; that must be what I need to do to get a good standard of living in retirement.” Somebody earning £30,000 per year, leaving out the earnings that do not qualify, will be contributing £1,900 per year over 35 years. Assuming 4% growth, they will have amassed a pot of about £140,000 after 35 years. That does not sound a terrible amount, but when we adjust it for inflation, in today’s prices, that is a pot of about £86,000. That will not buy a lot in retirement.

This is where the two things that I mentioned earlier will come in. If we added 29% and 26% to that pot, while it would still not be a massive amount, or enough to get people to where they need to be, it would certainly be something. As was mentioned earlier—I spoke about personal responsibility—people need to go and see a financial adviser and take the guidance that is available from the Money and Pensions Service.

What we are doing is not enough. People must wake up and open their eyes; what we are doing is great, but we could absolutely be doing more. There are a couple of ways we could do more. Back when we had defined-benefit pensions, the employer would pay about £3 for every £1 that the employee paid. That was unaffordable, and it was the main reason that most defined-benefit pensions were closed down. Under the defined-contribution schemes that existed before auto-enrolment, employers paid about £2 for every £1 that employees paid. Now, that figure is 60p or 70p. Although I talk about personal responsibility, there is a lot more scope for employers to do more, as they used to.

Another potential option would be to roll the principle of auto-enrolment forward into other savings options. Why can we not have an auto-enrolment individual savings account? Why can we not do what my hon. Friend the Member for Grantham and Stamford said about saving for a house deposit? Why can we not use the same principle in other arenas? Why can we not make pensions a bit more flexible, as they are in the United States, where the 401(k) product can be utilised in a lot more ways a lot sooner? That could provide the deposit for a house or be used at other crucial times in life. There are lots of things we could do.

I have offered a bit of a sandwich, with a nice opening and a nice ending, and bit of a demand in the middle. We are doing wonderful things and they have been successful—everybody says so. We can do more and we probably should, and I think the Minister knows that.

--- Later in debate ---

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Dowd. Like everybody else, I congratulate the hon. Member for Grantham and Stamford (Gareth Davies) on securing the debate. There have been a number of Tory Back-Bench contributions; I was worried that I would end up agreeing with all of them, but I have managed to find a couple of aspects to disagree with—I am pleased about that.

I agree completely that auto-enrolment has been a success. The hon. Member for Grantham and Stamford set out well its history and success. I agree, too, with the principle of creating larger pots for investment in infrastructure. That is an age-old argument, but we never seem to get there; I agree that that needs to change. I am slightly concerned about the talk about pension savings funding housing deposits. I know that people want access to the housing market. However, I worry that, depending on how deposits are funded, that will not take the heat out of the housing market, but will actually increase it, because more people will be chasing a smaller pot of houses. We need more affordable houses as much as new ways to get people deposits.

The hon. Member for Grantham and Stamford made the interesting point that only 12% of job adverts advertise pension contributions. If we are talking about advice and people understanding the benefits of pension contributions, we need to look at that. The hon. Member for Strangford (Jim Shannon), who would have been surprised to have been called so early, further set out the success of the scheme, and talked about his personal experience and, importantly, education—that is clearly important for everybody. It was brave of the Minister, in the current climate, to intervene on the hon. Member for Strangford to talk about cake—fair play.

We heard from the hon. Members for Darlington (Peter Gibson), and for North Norfolk (Duncan Baker). It was very good to hear the employer’s and the director’s points of view. Both Members admitted that they had concerns, but they were pleased to see how successful automatic enrolment is. It is good to have that buy-in.

The hon. Member for Clwyd South (Simon Baynes) spoke about access to advice; I will come back to that, because I agree with him on that point. The hon. Member for Delyn (Rob Roberts) made a good point about complacency. We need to make sure that people understand that they might need to increase their contributions and pay more. That is very important, and it links to the point about getting proper advice.

Finally, we heard from the hon. Member for North West Durham (Mr Holden). I, too, congratulate him on his efforts in bringing forward his private Member’s Bill. He set out his stall really well on that day, as he did, briefly, today. His key point—that for every 50p somebody contributes, they get £1 in their pension pot—sums it up perfectly; it is a great illustration.

As we have heard, auto-enrolment has clearly been a good thing, and a success in getting way more people to save for their retirement. In fact, it has been so successful that we have to ask why it took so long to bring in such a scheme. The Association of British Insurers states that automatic enrolment has brought a further 10 million people into pension saving. As we have heard, 88% of eligible employees participated in their workplace pension in 2020, which is up from 55% in 2012. That is a fantastic step forward.

However, there are concerns that an estimated 12 million people are still under-saving for retirement, and that needs to be addressed. Given what we have heard today about the success of auto-enrolment, and given that the Government think it is important that people save for retirement and believe that auto-enrolment is a success, the Government should logically ensure that as many people as possible are eligible. That means implementing the recommendations of the 2017 review as soon as possible. During the passage of the Pension Schemes Bill, Labour and the SNP worked together to introduce amendments that would do that, so it was disappointing that the Government voted those down. The Minister did commit to implementing the recommendations of the 2017 review by the mid-2020s, but rejecting the amendments does not give confidence.

We know how unstable UK Governments have been in recent years, and now the Leader of the House is threatening us with another general election, so it seems to me—without being too flippant—that there is a risk, if action is not taken sooner rather than later to get legislation through the House, that matters could slip further. As I said, the hon. Member for North West Durham has his private Member’s Bill, which we would support. I am still concerned, though, that we are looking at the mid-2020s. If we agree that this change is so good, we need to look at bringing it forward and getting things moving much quicker.

[Rob Roberts]

The hon. Gentleman makes an excellent point about bringing forward measures, but if we make these changes, is it not really important to give businesses enough lead-in time to plan properly and budget for them, rather than springing a significant change on businesses?

[Alan Brown]

There is a point there, but we have heard from an employer and a finance director that their concerns were allayed once the scheme came in, so I think that there will be fewer concerns as we go forward. Speaking of giving employers notice, we need only think about national insurance contributions. That rise was introduced in a short space of time, so we should not be too concerned about how we phase this in. If we do not do it, more people will lose out, which defeats the purpose.

Everybody here agrees that we should lower the age threshold for auto-enrolment to below the age of 22. I have said that I would rather have 16 than 18 as the threshold. I would be content with a two-stage process on that; we could review the situation with regard to 18 to 21-year-olds, just to see how successful it was, and to check that they were not opting out, but in the long term we definitely need to move to 16-year-olds, who could be in full-time employment. We also need to look at removing the lower limit of the qualifying earnings band, so that contributions are payable from the first pound earned. As we have heard, its removal would benefit the low-income workers who otherwise would have little prospect of a decent private pension.

To repeat what other hon. Members have said, the issue is particularly acute for women, who are more likely to be lower paid, in part-time work and doing multiple jobs. We have a massive gender pensions gap. In a recent report, the Pensions Policy Institute found the following:

“Men have substantially more private pension wealth than women, with disparities increasing across age groups. For those aged 65-69, median pension wealth for men is just over £212,000 compared to just £35,000 for women…Divorced women’s pensions are much lower than divorced men’s.”

The Association of British Insurers states that the average pension pot for a woman aged 65 is one fifth of that of a 65-year-old man. Women receive £29,000 less in state pension than men over 20 years. The deficit is set to continue unless further action is taken. We also need to look at expanding the contribution rates beyond the 8% statutory minimum, to allow people to maximise their pot. That builds on what the hon. Member for Delyn was saying.

As I have said, further delays are unacceptable. I hope that the Minister will say that the UK Government will set a clear timetable for their plans for expanding automatic enrolment. Morally, they should do that, given that they have made other decisions that are affecting pensioners both in the here and now and in the long term. We have a cost-of-living crisis, and I note that Tory Back Benchers are now using it as a defence for keeping the Prime Minister in his place, even though the cost-of-living crisis happened on his watch. They are arguing that there is a cost-of-living crisis that warrants our attention, but they still voted through the removal of the triple lock in the November Budget, costing pensioners more than £500 this year alone and a cumulative £2,600 over the next five years. That cut comes despite the fact that UK pensions are already the least generous in north-west Europe in comparison with the average wage.

We have just had the report on the shocking state pension underpayments, and there are comments that the system for state pensions is not fit for purpose. We have seen 118,000 people underpaid as regards benefits. We still have the injustice faced by the WASPI women—Women Against State Pension Inequality—and there are very low take-up rates for pension credit, which the UK Government acknowledge is an issue, but have not remedied.

The SNP continues to demand that the UK Government introduce a proper take-up strategy for pension credit, as the Scottish Government have done for devolved benefits. We continue to call on the UK Government to establish an independent savings and pension commission to ensure that pension policies are fit for purpose and reflect the demographic needs of different parts of the UK.

Another aspect of auto-enrolment that needs to be addressed relates to the self-employed. We have heard about the massive increase in employees in defined contribution schemes, but the trajectory for the self-employed has been the polar opposite—for them, the numbers have gone down: 48% of the self-employed contributed to a private pension in 1998, but the figure went down to only 16% in 2018.

Another key point is about professional advice. It makes no sense for people to save for retirement, or for support for when they are older, but to remain at risk when accessing their pension pots. That important matter was covered by the Work and Pensions Committee in its report “Protecting pension savers”, published last week. I support the calls for the Government to set a goal of ensuring that at least 60% of people use the Government’s Pension Wise guidance service or receive paid-for advice. That is a key consideration.

Pension Wise has proven to be a success. We need to make sure that more people access it. There should be a trial of automatic Pension Wise appointments, in order to encourage more people to access advice that will benefit them. The UK Government should initiate two trials: one in which people automatically get an appointment when they access their pension for the first time, and another in which they get an appointment at age 50, before they access their pensions—a mid-life MOT, as it has been called.

Auto-enrolment has been a good measure, but it needs further action to make it even better, so that it can benefit millions more people. Action to implement the 2017 recommendations should be a priority. I hope the Minister will agree, and will say that they will bring legislation forward at the soonest opportunity.