Automatic Enrolment: Lower Earnings Limit

Part of the debate – in Westminster Hall at 4:30 pm on 12th March 2019.

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Photo of Mhairi Black Mhairi Black Shadow SNP Spokesperson (Pensions), Shadow SNP Spokesperson (Youth affairs), Shadow SNP Spokesperson (Children and Families), Shadow SNP Deputy Spokesperson (Equalities), Shadow SNP Deputy Spokesperson (Disabilities) 4:30 pm, 12th March 2019

I beg to move,

That this House
has considered the lower earnings limit for automatic enrolment.

I am very grateful to have been granted time for this debate, especially during a rather chaotic week. It serves as a reminder that although all eyes are on Brexit, a number of massively important issues still need to be dealt with; that is the day job for some. One of those problems is the low earnings limit for automatic enrolment.

I want to make it clear that we support automatic enrolment. It has had a lot of positive impacts, as I am pretty sure all hon. Members agree. An estimated 10 million workers have been enrolled in workplace pensions by more than 1.4 million employers. That is an estimated £18.4 billion a year extra in workplace pensions due to auto-enrolment. Opt-out rates have been lower than expected, and participation by eligible 22 to 29-year-olds has increased. There are obvious moves in the right direction but, as with most things relating to pensions, the devil is in the detail.

The first issue is the delay in scrapping the limit. I have a problem with the lower earnings limit, and I am glad that the UK Government agreed to scrap it eventually, but I cannot understand why it is taking so long. All we have been told is that no changes will take effect until the mid-2020s. TUC research shows that a delay of six years in scrapping the limit could cut a saver’s pension pot by £12,000. That is for workers with annual earnings of £10,000, and it includes missed contributions and investment growth on funds. An employee who earns £10,000 would get more than double the amount of employer pension contributions when the limit is scrapped. The UK figures show that that would mean an extra £2.6 billion a year going into workers’ pensions, including £1 billion more from employers. If we are serious about creating a culture that recognises our ageing population and the problems relating to pensions that are on the horizon, and if we want people to save persistently throughout their lives, the low earnings limit cannot continue. It does not make sense.

The positive impacts of auto-enrolment are evidence that it is working and that things are moving in the right direction. We should be trying to include everyone in auto-enrolment. Those who are paid the least are the very people we should be looking out for the most, because they are the most likely to slip through the cracks. Their pension pot, no matter how small it is, is probably the only useful capital they have in retirement. Will the Minister give a concrete guarantee, rather than a vague timescale, about when the limit will be scrapped?

The second issue is that those on the lowest incomes are the most likely to lose out as a result of an increase to the lower earnings limit. For the lowest earners, £6,136 is a large proportion of their earnings. If employers do not include that amount in people’s earnings when calculating pension contributions, pension savings will be affected considerably. Worryingly, the changes will predominantly affect women in multiple part-time jobs, as the rise means that less of a low earner’s salary attracts pension contributions. The TUC has rightly pointed out that there is no mechanism to include those working multiple jobs with earnings below £10,000 in auto-enrolment.

The Pensions Policy Institute calculated that if income from multiple jobs was taken into account, a further 80,000 people could be saving for retirement. That breaks down to 60,000 women and 20,000 men. Once again, the Government are not responding fast enough—or, arguably, at all in some cases—to women’s concerns about their pensions. That is a theme that I have seen since I was elected.

Those concerns have been raised previously. Baroness Drake put it perfectly when she said:

“we are designing a private pension system that does not work for women who work part-time.”—[Official Report, House of Lords, 10 February 2014;
Vol. 752, c. 201.]

I would argue that women do not have an adequate state pension to rely on at the moment. Ultimately, this increase is contradictory to the apparent aim of scrapping the limit altogether.

The third issue is that as the gap widens between the personal allowance and the lower earners limit, low earners are in a pension lottery through no choice of their own. The Treasury has said that the personal tax allowance will rise to £12,500. However, under the net pay method, pension contributions are deducted before tax is calculated, and savers’ tax relief is based directly on their marginal rate. That means that savers who earn less than the £12,500 tax threshold do not receive the 20% relief that they would through their employer if they were in a relief-at-source scheme. This issue affects more than 1 million people who earn more than the earnings trigger of £10,000, but less than the personal allowance of £12,500. As auto-enrolment brings in more lower-paid earners, the number caught in the net pay trap is likely to increase.

I am grateful for the fact that Her Majesty’s Revenue and Customs has said that it recognises this issue and is looking at ways to resolve it. It has said that one of the possible routes is a digital answer. I only hope that it is within closer reach than the so-called digital answer to the Irish border question. It would be helpful if the Minister could update us and say what conversations he has had with colleagues in HMRC about potential fixes.

On top of that, there are rumours that the UK Government will reduce tax relief on pension contributions in the upcoming Budget. Will the Minister give us a concrete commitment that that will not happen under this Government? Has he sought confirmation from the Chancellor that the inconsistency between the net pay schemes and other schemes will be corrected before the spring statement?

I have made these comments in this Chamber and elsewhere quite a few times. Pensions are a mess just now, and anything we can do to get more people saving has to be seen as a positive. The evidence so far suggests that auto-enrolment is a positive, so I ask the Government to stop dragging their heels and get this in motion.