Having first been floated almost a decade ago, under the previous government, automatic enrolment into a workplace pension scheme finally got underway this month. For the first time, employers now have a legal obligation to enrol their workers into a pension, and make contributions set at or above minimum levels defined by statute.
Only the largest employers will be covered by the new rules at first, with full rollout not complete until 2017. Before the implementation process has barely even begun, however, the coalition government has proposed increasing the ‘earnings trigger’, and reducing the band of a worker’s earnings to which automatic enrolment applies. Many thousands of people could miss out on benefiting from the system as a result.
It is an open secret that not all workers will be included in automatic enrolment. The coalition government introduced the notion of an earnings trigger after taking office in 2010. This means that if you earn less than a specified amount, your employer does not have to automatically enrol you into a pension. The trigger is currently set at £8,105. According to the latest ONS data, around 3.5 million people earn less than this amount; three-quarters of this group are women. It is worth noting that around 40 per cent of this group can ‘opt in’ to workplace pensions saving (if they earn more than £5,564) and qualify for employer contributions, but will not be enrolled automatically.
The government has proposed increasing the trigger to £9,205 for 2013/14 – a 13 per cent rise, far above the rise in average earnings or the planned national minimum wage rise. This means that a further 585,000 employees will fall below the trigger and will not be automatically enrolled. 80 per cent of the newly excluded are women.
The ‘exclusion’ is of course only nominal for some, because the gradual implementation process means that their employer may not have been covered by the new laws anyway. However, the workplaces of the majority of the workforce currently not saving for a pension will be included by early 2014, during which period the higher trigger will be in effect.
The government has a disarmingly simple rationale for its decision: its belief that the earnings trigger should be aligned to the personal income tax allowance. Perhaps understandably, they are trying to keep the system as straightforward as possible for employers. But their approach to achieving this is not justifiable. The personal allowance is rising far more quickly than anticipated when the earnings trigger was first introduced, and eligibility for automatic enrolment is therefore being tightened simply as an unintended consequence of policy decisions in other areas, i.e. taxation. The personal allowance is due for another significant rise in 2014/15 (to £10,000), which will see even more low-earners excluded from workplace pensions saving.
The government has also proposed reducing the band of earnings to which automatic enrolment applies. That the new rules do not apply to an individual’s whole salary is another open secret of automatic enrolment. Currently £5,564 to £42,475, from April 2013 the band will instead be £5,720 to £41,450. Again, the rationale is to align automatic enrolment thresholds with recognisable tax thresholds. Reducing the lower earnings band limit means that fewer low-earners will be able to opt in to a pension in order to receive an employer contribution.
More generally, reducing the proportion of employees’ income to which the statutory minimum contribution rates apply sends entirely the wrong message about the value of workplace pensions saving at a crucial juncture in the implementation process.