I warned on this blog back in October about the potentially dire consequences of linking the automatic enrolment earnings trigger to the personal income tax allowance. But this is exactly what the government has done. From April 2013, anybody earning less than £9,440 will not be automatically enrolled into a workplace pension.
So they will not be saving for retirement, and they will miss out on receiving an employer contribution into their pension pot. Some will be able to ‘opt in’ (if they earn above £5,668) but the whole point of automatic enrolment is that it is supposed to remove the need for workers to make an active decision to join a workplace pension scheme, with employer contributions, which for all intents and purposes should be considered a standard and legitimate element of their remuneration.
The trigger for 2012/13 was £8,150. The rise to £9,440 therefore represents an annual increase of 16.5 per cent, or more than ten times the increase in average earnings over the past year.
The TUC has estimated that 3.5 million people earn less than £8,150. Government figures released yesterday suggest that 420,000 more low-earners earners will be excluded from automatic enrolment based on a trigger of £9,440 (the vast majority of whom are women – the TUC Pensions Scorecard showed that women are already far less likely to be in a workplace pension scheme than men). That the government has taken this decision, just after the launch of automatic enrolment (and just after their celebrity-stuffed ad campaign publicising the new rules) is a real blow to the credibility of the reforms, and the wide political consensus on automatic enrolment that has held firm for almost a decade.
We already knew that the government wanted to link the earnings trigger to the personal income tax allowance. The coalition’s review of automatic enrolment, a policy it inherited from Labour, had made this recommendation in 2010. But what that review did not consider is the implications of the personal allowance rising so quickly. The pace of the increase seems even to have taken DWP by surprise. The figure of £9,440 was not in the department’s recent consultation document on the automatic enrolment thresholds, which instead suggested the new trigger was going to be £9,205. George Osborne’s Autumn Statement announced a higher than anticipated allowance for 2013/14 –although it is worth remembering it is longstanding Lib Dem policy to raise the allowance to £10,000, and beyond.
How has the government sought to justify its decision? This quote was issued by the DWP press office on the day of the announcement:
Including those earning less than the income tax threshold in automatic enrolment could take vital money from the household budgets of a group that would not get the added benefit of tax relief.
This is an example of very dodgy doublethink. Automatic enrolment does not take money away from low earners; saving in a pension is a form of ‘consumption smoothing’. If the government doesn’t believe that anymore, then it throws the entire automatic enrolment agenda into doubt. And the coalition’s own plans for a single-tier state pension mean that individuals will keep every penny of their pension pot – saving will not be penalised by a concomitant loss of means-tested pensioner benefits.
The real loss to individuals arises not from being automatically enrolled into a pension, but rather from not being enrolled, because it means they lose the employer contribution into their pension pot. Admittedly, understanding of pensions among most employees is fairly low, meaning that they do not always recognise the employer contribution as part of their pay. But it very much is part of pay, albeit deferred until retirement. Changing the earnings trigger for automatic enrolment therefore amounts to a government-sanctioned pay cut for 420,000 people.
The fact that automatically enrolling people who earn less than the personal allowance means that they will not receive tax relief, does not mean they should also miss out on the employer contribution.
Furthermore, many people who earn less than the personal tax allowance will receive tax relief anyway. As the government’s consultation response acknowledges, if schemes use the ‘relief at source’ (RAS) method of claiming tax relief, it does not matter whether members are actually income taxpayers – they will still receive a government contribution into their pension pot. It also seems to be the case that more schemes are now using RAS rather than the alternative ‘net pay arrangements’, which does exclude non-taxpayers from tax relief. This should be welcomed, because what matters here is that the government is making a contribution into individual pension pots, to incentivise saving – and not that it happens to take the form of income tax relief.
The government also makes the argument that we need a higher earnings trigger in order to provide a de minimis gap, based on the assumption that people earning less than £9,440 would be making such low contributions that saving in a workplace pension is less worthwhile. While some form of de minimis gap may be sensible, it is worth noting that the whole design of automatic enrolment is geared towards making initial contributions very low, and rising slowly over several years. It is not until 2017 that the statutory minimum contributions rise above 1 per cent of qualifying earnings from both employers and employees.
In fact, the qualifying earnings band was also updated by yesterday’s decision. It is now going to be £1,209 lower than the 2012/13 band (with the thresholds changing from £5,564-£42,475 to £5,688-£41,450). Again, these changes are the direct result of changes to entirely separate National Insurance thresholds. The statutory minimum employer contributions have been widely billed as 3 per cent, but the impact of the earnings band and the gradual introduction of these contribution levels, means that in 2013/14 the actual minimum for median earners is 0.78 per cent of total pay. Even for someone earning at the top of the band, the minimum will be only 0.85 per cent.