Thirteen long years for Pensions Commission report to be made reality
Pensions Minister Steve Webb has just announced the new detailed timetable for pensions auto-enrolment. This provides the small print for the delay announced in the Autumn Statement following lobbying by the small business lobby and the Beecroft review.
My strong impression is that this delay was forced on the DWP, and could even be seen as a victory over a strong push for the permanent exemption of small firms from pensions auto-enrolment. But it is still bad news.
Pensions auto-enrolment compels employers to put their staff into a pension scheme. Unless the worker opts out, both employer and worker have to make contributions. These are 4% for the worker and 3% for the employee on a band of earnings, with an extra 1% tax relief from the government. The government is currently consulting on the figures for the band of earnings, but in round numbers it will be about £5,500 to £35,000.
Auto-enrolment is undoubtedly a cost for business as they will for the first time have to make pension contributions. Auto-enrolment has therefore been both staged and phased.
Staging brings different employers in at different times. It starts with the biggest employers later this year, and finishes with the smallest. The announcement today changes the staging timetable.
Big employers (ie those with more than 250 staff) face the same timetable and will all need to auto-enrol by 2014. Medium sized employers will still start auto-enrolment in 2014, but the last batch will now be delayed until April 2015 – a relatively minor change.
But small employers (ie less than 50) will now not start auto-enrolling until 2015 and finish in 2017. This is a significant delay.
The minister rightly points out that most people work in big or medium firms. This means 70% of workers will be auto-enrolled by 2015. So does this really matter?
Yes it does. This is because changing the staging timetable also delays phasing – and that hits everyone who is auto-enrolled.
Phasing is the second way that auto-enrolment is being eased in. It means employers start off paying just one per cent of the earnings band. In the second phase, they pay 2% and in the final phase the full 3%.
The problem comes with the interaction of staging and phasing. The original plan was for a much shorter staging timetable. But both Labour and now the coalition have extended this. Phasing was designed so that early employers stayed on the first rung for longer and the second and third stages only kicked in once everyone had auto-enrolled for a year.
But the extended staging timetable means that people enrolled this year will now have to wait five full years until 2017 before the two per cent contribution kicks in and the whole system won’t be up and running with the full – but still modest – contributions until 2018. (Don’t forget the effect of the earnings band – the most that anyone will get is 6.8% of their pay, and anyone earning less than the top of the earnings band will get less.)
Delay also has a knock on effect for pension schemes. Most of the cost of running auto-enrolment schemes will depend on the number of members they have. If each member is only making tiny contributions then it will be hard to keep charges down even in those schemes that want to.
These cumulative delays means that it will be 13 full years from the Pensions Commission report that recommended auto-enrolment that it is fully implemented. Ironically the law requires a review of how auto-enrolment is working in 2017, even though it won’t be fully operational until 2018.
No wonder Brendan Barber in the TUC’s response said that this echoes St Augustine: Make me good, but not yet.