From the TUC

Freeze the auto-enrolment thresholds to keep women in pensions

08 Feb 2012, by in Pensions & Investment

The coalition government’s review of pensions auto-enrolment made two major changes to how  pensions auto-enrolment will work from the worker point of view.

  • There will be a three month wating period after someone starts a job before their employer has to auto-enrol them into a pension.
  • Instead of being auto-enrolled as soon as someone’s pay exceeds the bottom of the earnings band on which contributions have to be paid (£5,564), a new auto-enrolment trigger was introduced. This was set at the level at which people start paying income tax (£7,745). In other words as soon as your pay exceeds £7,745 you are auto-enrolled in a pension, and you and your employer both have to pay contributions on your earnings in excess of £5,564.

The government’s consultation on uprating these thresholds has just closed. Our big concern is that the government keeps the link for the auto-enrolment trigger to the personal income tax allowance as the coalition agreement, on Lib Dem urging, says that this should rise to £10,000 a year.

Women would be the main losers from a new higher earnings trigger as the vast majority of workers with pay between the lower limit of the earnings band and the income tax threshold are women working part-time. The auto-enrolment trigger should therefore be frozen.

A £10,000 earnings trigger could eventually stop around two million women from being auto-enrolled into pensions. More than one in seven female workers (15.5 per cent or 1.9 million) currently earn more than the current lower earnings band (£5,564) but under £10,000. One in three female part-time workers (1.7 million) earn between the current lower earnings band and £10,000.

Men are less likely to be affected by this change as just half a million men earn between the current lower earnings band and £10,000. Nearly one in five workers (4.4 million) currently earn less than £10,000, although this includes two million workers who earn less than the current lower earnings band and would never have been auto-enrolled into pensions. A table at the end of the post shows the figures in more detail. (We asked ONS to do a special run of these figures for us from ASHE, but used the NI primary threshold figure rather than the personal tax allowance – but they are close enough to show the same picture).

What we need instead is a bit of fiscal drag. Those who know their economics jargon will know that this is the term used when government freezes tax thresholds. As pay generally goes up, it means that more people pay more tax without any rate actually changing in cash terms.

The government could freeze the lower limits (ie the bottom of the earnings band and the auto-enrolment trigger) but increase the the upper limit of the earnings band to £42,475. This would increase the band of earnings on which contributions have to be paid. This  new upper limit would keep the link with the National Insurance Contributions upper earnings limit, as recommended by Lord Turner’s Pensions Commission.

The government’s decision to further extend the timetable for auto-enrolment will leave those in the first wave starting later this year on a one per cent employer contribution for a full five years. This is disappointing but if the lower band is frozen, then at least there’s a chance that the amount they put into a pension will increase as their pay goes up (if it does!).

If however the bottom of the earnings band goes up in line with average earnings, this is likely to reduce the amount lower-paid workers put in their pension as low pay tends to increase at a rate less than average pay.

This is not a very deep measure of this, but the table shows that cash pay for the biottom decile increased 24.1 per cent over the last ten years, while it went up 29.2 per cent for the median and 33.9 per cent for the top decile.

2001

2011

increase

10

95.6

118.6

24.1%

20

163.7

207.6

26.8%

25

191.1

244.4

27.9%

30

216.4

277.9

28.4%

40

263.4

339.9

29.0%

50

312.5

403.9

29.2%

60

367.8

479.3

30.3%

70

436.4

572.8

31.3%

75

476.8

625.6

31.2%

80

519.4

689.9

32.8%

90

668.1

894.9

33.9%

 Employees earning between lower earnings band (£5,564), national insurance primary threshold (£7,605) and £10,000

 

 Total  employees (1,000s)

Earning less than lower earnings band

Earning between lower earnings band and national insurance primary threshold

Earning between lower earnings band and £10,000

All employees earning less than £10,000

All UK employees, per cent

 

8.3

4.6

9.8

18.1

Total UK employees

24,385

2,024

1,122

2,390

4,414

Males, per cent

 

4.4

2.1

4.4

8.8

Total males (thousand)

12,370

544

260

544

1,089

Females, per cent

 

12.2

7.2

15.5

27.7

Total Females (thousand)

12,015

1,466

865

1,862

3,328

Female part time, per cent

 

26.5

15.8

32.7

59.2

Total female part time (thousand)

5,160

1,367

815

1,687

3,055

Source: Annual Survey of Hours and Earnings 2011

– Figures are all workers, including those outside the age range for auto-enrolment. This is likely to overstate low paid workers.