Treasury must act fast to ensure auto enrolment’s continued success

Clock face saying time to action

This week, the Department for Work and Pensions released its Automatic enrolment evaluation report for 2019. It revealed that the percentage of people saving for their retirement through a workplace pension scheme grew from 55% in 2012 to a healthy 87% in 2018.

That means 10.2 million more people have started to build their own pension savings since the introduction of auto enrolment in 2012. 

Work and Pensions Secretary Therese Coffey said: “Automatic enrolment has been an incredible success. It has transformed the retirement prospects of millions of people, bringing them into a workplace pension when they could otherwise have slipped through the savings net.”

However, the government needs to do much more to strengthen the auto enrolment pensions landscape.

The budget on 11 March is the ideal opportunity to tackle three key issues: the net pay anomaly, the £10,000 earnings band, and the growing numbers of deferred members of auto enrolment schemes.    

A solution to the net pay anomaly
The net pay anomaly currently requires low-earners to pay up to another £64 from their pay packet to get the same pension as their higher earning counterparts, which is unfair.

As a member of the pensions industry’s Net Pay Action Group, we’ve worked to identify a simple solution. Using the existing P800 tax form, HMRC could use the data it already collects from pay as you earn (PAYE) schemes to identify those savers who’ve contributed to a net pay scheme, but who also fall below the income tax threshold.

The group has presented the solution to HMRC and Treasury officials and it now only needs careful legislative drafting to put this into effect.

In the meantime, NOW: Pensions remains the only net pay scheme that credits low-earners with tax relief, which we do out of our own resources.

Getting rid of the £10k qualifying earnings band
Back in 2017, the Conservative Party pledged to review the £10,000 qualifying earnings threshold as part of the annual auto enrolment review. The threshold means that pension contributions are payable on all earnings, rather than starting at the current £6,136 minimum threshold.

Removing this limit will benefit lower paid workers and help close the gender pensions gap – three quarters of individuals who don’t meet the £10,000 threshold requirement are women.

Most of the disadvantage women experience in pension saving occurs during their 20s and 30s as they combine looking after a young family with working part-time or even exiting the workplace entirely. This has a greater effect than the gender pay gap.

The qualifying earnings band means low earners and part-time workers are potentially missing out on a pension contribution of 8% of their salary.

Deferred members with small pension pots
While auto enrolment has made pension saving possible for a wider range of workers, particularly transient workers, it has created a rapidly growing number of deferred, or non-contributory, scheme members.

People who frequently move jobs can find themselves with several small pension pots and the associated costs of maintaining these inactive schemes. This short-changes savers and threatens to undermine the value for money the industry aims to deliver for its members.

The government must find an effective solution to this issue to help this group of pension savers.

Adrian Boulding, Director of Policy, NOW: Pensions said: “The introduction of auto enrolment in 2012 has been a huge success bringing 10.2 million more people into pension savings. Many of these people were previously overlooked by employers offering pension schemes.

“Now that we are nearly a year into the highest planned minimum contribution increase, we have seen the vast benefits of the scheme. However, this is not enough – we must make auto enrolment work for everyone. NOW: Pensions was set up to make pension saving fairer for all and to help everyone build a pension pot for the retirement that they deserve. All of these matters have a financial impact and we need HM Treasury’s help to deliver these improvements to the pensions landscape.”