Saving for Later Life

Stephen Timms Excerpts

Tuesday 7th February 2023 Westminster Hall

[Sir Stephen Timms (East Ham) (Lab)]

I beg to move,

That this House has considered the matter of saving for later life.

It is a great pleasure to serve under your chairmanship, Mr Hosie. The debate arises from the recent report by the Work and Pensions Committee and the responses from the Government, the Financial Conduct Authority and the Money and Pensions Service. I am grateful to the Backbench Business Committee for allowing us to have this debate.

Auto-enrolment has been a big success, reversing the decline in workplace pension saving. By the end of last November, over 10.8 million workers had been automatically enrolled and over 2.1 million employers had met their obligations. Our report highlights two big challenges: first, people are not saving enough for an adequate income in retirement; and, secondly, there are people outside the scope of auto-enrolment, due to low pay or self-employment, who would nevertheless benefit from saving in a pension. I will set out those two problems.

The first is retirement income adequacy. Auto-enrolment requires employers to enrol eligible workers aged between 22 and state pension age and earning above £10,000 a year into a workplace pension, and, unless they opt out, to make minimum contributions on a band of qualifying earnings. Employees have to contribute at least 5% of qualifying earnings, including 1% in tax relief, and employers must contribute 3%, so the statutory minimum contribution is 8%. Thanks to auto-enrolment, 86% of eligible workers were saving in a pension in 2020—about twice as much as the proportion was in 2012. The problem is that some who used to have no pension savings now have inadequate pension savings, and they do not know that that is the case.

The Pensions Policy Institute claims that only 39% of households are on track for an adequate pension, according to the Pensions Commission definition. The Pensions and Lifetime Savings Association says that nearly 20% of households at the moment are heading for poverty in retirement. The problem is worse for people in their 40s or and above who have no defined benefit pensions and have not had time to build up an auto-enrolment pension either. The crisis of under-saving will crystallise when they retire, when it will be too late to do anything about it. One of the Minister’s predecessors, Sir Steve Webb, describes it as a “slow-motion car crash” that requires action now.

In our report we asked the Government to consult on a plan to deal with the issue and report back to us by March this year. In their response, the Government recognised the problem:

“Current statutory contributions of 8% on a band of earnings are unlikely to give all individuals the retirement to which they aspire”.

However, they said that now was not the “right time to consult” and that instead they would provide “further information and guidance”. Many witnesses, including the then Pensions Minister, the hon. Member for Hexham (Guy Opperman), told us that that would not work. He told us that

“the lessons of automatic enrolment are that default is the only way to get big interventions”,

and he was absolutely right.

The Government now need to make the case for higher contributions. As things stand, people do not know that they are not saving enough. We need a plan to raise minimum contributions, perhaps with mechanisms such as Save More Tomorrow, where people commit in advance to contributing more as their pay rises in future. The Association of British Insurers argues that contributions should go up from 8% today to 12% by the early 2030s, as in the successful Australian system.

[Mr Gregory Campbell (East Londonderry) (DUP)]

I commend the right hon. Member on this timely debate. He talked about timing. Does he agree that while successive Governments commendably maintained the triple lock on state pension contributions and entitlements, it will come under increasing pressure in the coming years? The timeliness of the debate in resolving that is, or should be, apparent to everyone.

[Sir Stephen Timms]

The hon. Gentleman is right. The Government have usually—not always—applied the triple lock correctly, but it is absolutely vital that people build their own pension savings on top of that. Otherwise, a lot of people will get a very nasty shock when they reach retirement, and at that point it will be too late to do anything about it.

[Margaret Ferrier (Rutherglen and Hamilton West) (Ind)]

Understanding someone’s private pension is quite complex, particularly if they have had more than one job and been in several schemes. Does the right hon. Member agree the work that the Department for Work and Pensions is doing to deliver a dashboard with industry will allow people to access all that information?

[Sir Stephen Timms]

That is very important. We are expecting quite significant progress on the dashboard this year. The Select Committee will, I hope, be taking evidence about that in a session quite soon. That will be an important step, when it finally becomes available.

We recognised in our report that with the cost of living crisis now is not the right time to increase everybody’s pension contributions, but the ground needs to be prepared for increases in future. To quote the Financial Inclusion Commission, we need a “light bulb moment” to alert employers and the public to the gravity of the current under-saving problem. We need to start building a new consensus on what an adequate retirement income is and what is needed to deliver it.

[Jim Shannon (Strangford) (DUP)]

I commend the right hon. Member on bringing this forward. It is not just about the workers of today; we must start earlier. I know he has probably commented on that, but there have been numerous surveys. One, undertaken by Deloitte, states that younger people do not have a sound understanding of things such as ISAs, saving pots or pension pots. We must also note that some teenagers as young as 14 have jobs, so they should be knowledgeable about pensions and savings. Does he agree that consideration should be given to incorporating these matters into learning for life and work modules in schools across the UK nationally? Start it early, because that is when we build for the future.

[Sir Stephen Timms]

The hon. Gentleman makes an important point. It is helpful for people at school to develop an understanding of financial matters. Even a fairly brief exposure to these matters at school can be really helpful in forming an understanding that serves people well throughout their future working lives.

In their response to our call for work to start building this consensus, the Government said they had a range of metrics for adequacy, but that misses the point. Will Ministers work with others to identify what an adequate retirement income is, and will they then start laying the ground for sufficient saving to deliver it? The Department’s own analysis in 2017 was that 12 million people were under-saving—that is about 38% of the working-age population. Some 1.5 million were substantially under-saving. The Minister’s predecessor, the hon. Member for Hexham, told us that the number of under-savers was “up for debate” but “clearly substantial”. He said the Government would carry out further analysis and keep the Committee informed. When will the Department produce new estimates of the extent of under-saving? When will it publish its research on the pension saving issues for people with low incomes?

The 2017 auto-enrolment review recommended first lowering the minimum age at which a worker must be auto-enrolled from 22 to 18. Secondly, it recommended

“removing the lower limit of the qualifying earnings band”—

which is £6,240 at the moment—so that contributions are paid on the whole of somebody’s earnings. We heard there was “almost universal support” for thus helping people poorly served by the current system—in particular, low-paid or part-time workers—and we recommended doing so. In response, the Government restated their commitment to implementing the 2017 review in the mid-2020s, saying:

“We aim to bring forward legislation at a suitable opportunity and when parliamentary time allows.”

Well, the mid-2020s are approaching rapidly. We need legislation this year if that is to be achieved, and I would welcome any encouragement that the Minister can give us about the prospects for that.

A second big problem is tackling exclusion from auto-enrolment. As I have said, auto-enrolment has reversed the decline in the number of employees saving in a pension. By contrast, there has been a big fall in self-employed pension savings, from about 48% in the 1990s to 16% now. We have known about that for some time; indeed, the Department’s response to the 2017 auto-enrolment review said that it was

“a significant and complex strategic problem”,

which is a fair comment.

A lot of people giving evidence to our inquiry argued for mirroring auto-enrolment, using the tax or national insurance system to auto-enrol self-employed people. It is very disappointing that the Government have no plans to do either of those things. Instead, they say that they favour prompts and nudges through accountancy, plus opportunities from the Making Tax Digital programme, but none of that will be enough. Can the Minister tell us when the Department plans to report back on those efforts? I am afraid they are doomed to fail.

A key part of our report focused on the gig economy. The 2021 Uber case suggested to some people that auto-enrolment might be opened up to all workers, but there are big enforcement challenges. Uber gave us compelling evidence and told us about its auto-enrolment model for drivers, which it had invited competitors to join. None of them has done so yet. The Government say that many gig economy workers are already eligible for auto-enrolment, including fixed-term contract, zero-hours and agency workers. The Pensions Regulator ought to be securing employer compliance, but it told us about a “significant evidential burden”. It told us that employers routinely challenge it at every stage and that the guidance issued by the Department for Business, Energy and Industrial Strategy last July did not help.

Uber and the GMB trade union called on the Government to legislate for better enforcement, with a new body for that purpose. We repeated the recommendation that we made in two previous reports for an employment Bill to address these issues. We have no idea why that Bill has not been forthcoming. In their response, the Government referred to their backing for five private Members’ Bills on a range of employment issues. Those are all no doubt helpful, but none of them helps with delivering auto-enrolment in the gig economy. We called for the Department to work with the Pensions Regulator to estimate, first, how many people in the gig economy should be workers for auto-enrolment purposes and therefore should be auto-enrolled, and, secondly, what resources or powers the Pensions Regulator needs to make sure that employers comply with their obligations, which they are most certainly not doing at the moment. I hope the Minister will be able to tell us something about what the Government will do to stop people working in the gig economy missing out on their entitlement.

The third important gap was referred to in evidence to us from a number of bodies, including Age UK, which told us the gender pensions gaps remains a serious problem. It reflects differences in labour market participation and hits women at retirement, when there is very little they can do about it. Nobody in government produces any data on the gender pensions gap, so the Prospect trade union produced a definition. It suggested the definition should be the percentage difference in average gross pension income for men and women receiving the state pension, and it currently estimates the gap to be 37.9%. There has been very little progress in reducing that since Prospect started reporting five years ago.

[Margaret Ferrier]

Last year, I carried a private Member’s Bill through the House to Royal Assent.  That legislation addressed sex-based inequality and guaranteed minimum pensions, which is just a small aspect of the pensions pay gap. Does the right hon. Member agree that because women are likely to earn less than men, and therefore their pension contributions will be lower, further and widespread work is required?

[Sir Stephen Timms]

Yes, I think the hon. Member is quite right. It is not just that women’s earnings are lower and therefore their pension contributions are lower; a lot of women earn below the current auto-enrolment earnings threshold, so they do not save anything at all. NOW: Pensions says that of the 14.6 million employed women in the UK, 17% do not meet the automatic enrolment criteria, compared with 8% of male employees. That is a big part of the problem as well and, as the hon. Member said, it is very much tied up with lower earnings.

I warmly welcome the announcement that the Department is working across Government to develop a coherent framework for assessing this gap and to find a definition to enable the measurement of progress to reduce it. Will the Minister tell us when she expects that work to be complete? In her helpful letter to the Work and Pensions Committee, which was published yesterday, she said that she was looking at

“regular reporting on the gender pension gap….to better highlight the issue publicly.”

When does she expect “regular reporting” to begin? When she says “regular reporting”, does she envisage that happening annually?

Auto-enrolment has been a big success in increasing the number of workers saving in a pension, but there is a lot more to do for the pension system to deliver adequate retirement incomes. The Department agrees with the Committee on the problems that need to be addressed; now we need to get a move on and address them. After the 2017 review—some six years ago—the Department said that its focus was

“for individuals to keep saving and to save more after minimum contributions reach 8 per cent in 2019”

and

“to ensure that younger people, part-time workers and the self-employed can achieve more security in later life.”

Momentum has now stalled. The Department has not even progressed the recommendations of that review. In winding up, will the Minister make a start by telling us when the Government intend to make progress on those recommendations?

--- Later in debate ---

[The Parliamentary Under-Secretary of State for Work and Pensions (Laura Trott)]

It is a pleasure to serve under your chairmanship, Mr Hosie. I thank the Work and Pensions Committee for its report and the important role that it plays in scrutinising the work of the Department. I also extend my thanks to the Chair of the Select Committee, the right hon. Member for East Ham (Sir Stephen Timms), for securing this debate. We have had thoughtful contributions from everyone here.

The Committee’s report rightly raises key areas for reflection in our ongoing story of pension saving. The pensions landscape has undergone substantial change in recent years with the new state pension, increased pension saving through automatic enrolment, and increased choice through pensions freedoms, backed up with free, impartial guidance. We have laid a solid foundation to enable people to take responsibility and plan more effectively for the retirement that they want.

We have had numerous pension successes, with the most notable mentioned by everyone here today: the successful delivery of automatic enrolment, which has got 10.8 million more people into saving for retirement. However, the way that people save has undergone a significant shift in recent decades by shifting the retirement outcomes responsibility on to individuals rather than employers. That has thrown up policy challenges, which we have discussed today and were rightly considered in the Committee’s report.

I turn now to the future of automatic enrolment. Last year was the 10th anniversary of AE, which was introduced under a Conservative Government. AE facilitated a dramatic shift in workplace pension savings, with 86% of eligible employees in the private sector now participating in a workplace pension. The Government are committed to building on the success of AE by implementing the outcomes of the 2017 review, as endorsed by the Committee. I am pleased that there is a widespread consensus on that.

We will reduce the age at which people are auto-enrolled from 21 to 18, as well as removing the lower earnings limit. I heard what the hon. Member for Glasgow East (David Linden) said about lowering the age to 16—he tells a powerful story—and we will keep that under review. The 2017 recommendations will change the landscape for the better. They will enable people to save for longer and begin their savings journey from the first pound of their earnings. That will give younger people and people in part-time jobs, particularly women, the opportunity to be brought into the world of pension savings for the first time. I know the Committee is keen for me to set out a timeline. I, too, am keen to set out a timeline, and as soon as I have collective agreement I will come back to the Committee and the House to announce that.

In its recommendations the Committee also asked the Government to look at measures to close the gender pensions gap, which is something we can all agree on. My Department regularly monitors the contribution and participation rates by gender and regularly publishes the data in our workplace pension participation and savings trends publications. As discussed, I want to take that one step further and begin monitoring and reporting on the issue regularly. Although many factors create inequality in pension outcomes, most notably the gender pay gap, I have started working with key stakeholders and colleagues across Government to create a framework to understand the challenge and also to produce a definition of the gender pensions gap.

Agreeing a definition, as discussed by many Members today, is a crucial first step. That will allow us to agree a suitable metric to monitor progress and begin reporting on the issue. Again, I need collective agreement before I can say more, but I will come back to the Committee when I have a timeline for that.

[Sir Stephen Timms]

I welcome what the Minister has just said. Does she envisage annual reporting? Is that the sort of frequency she has in mind for monitoring the size of the gender pensions gap?

[Laura Trott]

I think annual reporting would make sense, but this is something that we need to look into further. I will come back to the right hon. Gentleman and his Committee.

The hon. Member for Glasgow East spoke about the gender pensions gap. We have seen progress in women’s participation, particularly in automatic enrolment, where they are now slightly ahead of men, but I agree that we need to see further work on the issue. I intend to drive that forward.

I turn to measures for the self-employed. When I started this role, I found it striking how low pension savings were among the self-employed. As the right hon. Member for East Ham is aware, the success of AE is down to the employer enrolling the member, which is clearly something that the self-employed do not have. Nest Insight has recently published the results of its trials on behavioural messaging and savings mechanisms on financial digital platforms and money management apps, to test the role of tech-based nudges and the value of flexible savings.

My intention is to make retirement savings easier for the self-employed. To do that, I want to better understand the touchpoints through which the self-employed engage with the Government, which will be the most effective at encouraging them to save into a pension pot. So far, the most obvious point is the tax system. We have begun work with the UK trade body for business software developers to help us better understand the software market and explore the opportunities, both current and new, to support self-employed people to save for their retirement. This includes scoping the feasibility of building and testing retirement savings solutions with incompatible software used by the self-employed to manage their money.

We are also keen to explore and test hybrid saving vehicles that combine accessible and illiquid savings, which could preserve some control for individuals in managing their short-term finances alongside saving for retirement. The next stage of trialling will also build on the evidence from the work with HMRC to test the capacity of nudges to pension guidance systems installed within the existing assessment system, with a view to encouraging the self-employed to start saving. The Government have no intention to make automatic deductions for the self-employed via the making tax digital system, and we agree with my hon. Friend the Member for Torbay (Kevin Foster) that although we welcome all ideas for boosting self-employed pension savings, we do not think that mixing them with the national insurance system is workable.

Many Members mentioned the gig economy, and we are continuing to work with the Pensions Regulator and BEIS on this complex issue. As the right hon. Member for East Ham outlined, the Department’s view is that many gig economy workers are already eligible for automatic enrolment, including those on fixed-term or zero-hours contracts and agency workers. I heard what he said about the guidance produced by BEIS, and I will feed that back to that Department.

[Sir Stephen Timms]

I am grateful to the Minister for giving way again. I hope she is right and the legal position is as she said, but delivering enforcement clearly is not happening at the moment. Does she recognise that the Pensions Regulator needs more powers in order to do the job that she is saying it should be doing already?

[Laura Trott]

I understand and respect the right hon. Gentleman’s concerns, and I will be having further meetings with the Pensions Regulator about this issue. I look forward to discussing the outcomes of those when I appear in front of his Committee.

--- Later in debate ---

[Sir Stephen Timms]

It has been a useful debate, and I express my thanks to the Backbench Business Committee for scheduling it. There is no dispute that we need people to save more towards their pensions—that was accepted by the Minister in her speech—but we do need to get a move on in making it happen. We are certainly not demanding that minimum auto-enrolment contributions ought to be raised now, but they will have to be raised, and the Government should draw up and publish a plan for when that will happen, and build a consensus around it.

The Minister said she could not wave a magic wand. Nobody is asking her to wave a magic wand, but we are asking her to get a move on and bring forward the plan, so that people know what will happen in two, five or 10 years. The longer we delay, the larger the numbers will be of people who suffer a terrible shock when they reach retirement, start drawing their retirement income and discover that it is way below what they expected and what they need.

I am pleased to hear the Minister confirm that the Government are committed to implementing the recommendations of the 2017 review. I assume she means by the mid-2020s, as has repeatedly been said. We look forward to hearing soon how that will be achieved. I also welcome what she said about monitoring the gender pensions gap. I welcome the prospect of annual Government reporting on that subject. I hope she is able to secure the cross-Government agreement she needs to deliver that.

The hon. Members for Amber Valley (Nigel Mills), for North Norfolk (Duncan Baker) and for Glasgow East (David Linden) all talked about the case for at least trying out automatic enrolment into an appointment with Pension Wise. As we have heard, it is an excellent service. The feedback from people who use it is good, but take-up remains lamentably low.

When the pension freedoms were introduced in the middle of the previous decade, the talk was of a guidance guarantee. That is what we were told was going to be provided—a guarantee. What came of that was the Pension Wise service, which is taken up by a very small proportion of people. It is a good service, but taken up by a small proportion. We need more effort to be made to promote that. The Committee has repeatedly said that it is worth trying out automatic enrolment into a Pension Wise appointment for people who reach that stage.

My final point relates to the comment by the hon. Member for Amber Valley. He referred to the scheme suggested in the Committee’s report for auto-enrolment of self-employed people. The proposition would be to increase national insurance contributions for self-employed people that would allow them to direct their additional payment into a pension, alongside a matching contribution from themselves. That would replicate the attractions of auto-enrolment for self-employed people. The Minister rejected that proposition, but we need to do something. We simply cannot carry on with five sixths of self-employed people not saving for retirement. We think that proposition is well worth pursuing, and I hope the Minister will take another look at it.

Question put and agreed to.

Resolved,

That this House has considered the matter of saving for later life.