Extending automatic enrolment? Be careful what you wish for!

07 February 2022

Henry Tapper, chief executive officer for AgeWage, discusses the potential expansion of automatic enrolment (AE), and why caution should be exercised


While everyone agrees that pension AE has been a success, views differ as to whether what we have is a proper second pillar pension, or just a proof of concept awaiting a second nudge to get us to the contribution levels seen in Australia.

Those who see AE as a glass awaiting a top-up include member of parliament, Richard Holden, who, on 5 January 2021, introduced a private member’s Bill that is due to be read for a second time on 25 February 2022.

Holden’s Bill calls for an extension of AE to all ‘jobholders’ aged at least 18. It also calls for the removal of the lower qualifying earnings. It doesn’t call for changes to the earnings trigger, which would mean that many workers would still be excluded. It is silent about the self-employed.

Steve Webb was dismissive, prophesying the Bill would “go to the back of the queue for a Friday in the spring and die a quiet death at the end of the current session”. Why the scepticism? This could be because Holden’s Bill is similar to the recommendations that arose from the 2017 AE review which the Department for Work and Pensions promised will be implemented in ‘the middle of this decade’.

The delay was originally explained as giving AE staging time to bed-down, but it was also stated that the fiscal cost of an extension of tax-relief needed to be planned for. AE is now in a steady state, but nothing in the meantime suggests the cost to the exchequer will have diminished; indeed the British public has shown no sign of being nudged too far.

The pandemic has taught us that people are resilient and do not opt-out in the face of uncertainty. According to 2020 Office of National Statistics estimates, some 19.4 million of us are saving into workplace pensions, of whom most are not contributing against the first £6,240 of their earnings. Removing the lower earnings limit would lead to a billion pound a year loss to Her Majesty’s Revenue and Customs.

The 2017 AE impact analysis ran to 192 pages. Fiscal pain runs like a watermark throughout it. What’s more, this Bill is being read at a time when public and private finances are under some strain

We are on the brink of a cost-of-living crisis for many on low incomes. In April, the National Insurance increases announced last year will bite. In the same month, fuel bills are likely to increase by 50%. Low earners are still coping with the loss of the £20 universal credit top-up. The Treasury is under considerable pressure to ease fuel poverty.

Steve Webb is right to be sceptical. Departments are not going to be bounced into bringing forward the legislative timetable for a private member’s Bill unless that Bill enjoys popular support – this one will not.

 

So, what hope do we have of seeing an extension of AE?

One clue to the Treasury’s thinking may be found in the mysterious timing of the solution proposed for the net pay anomaly. The problem is not being addressed until 2024, and it won’t be until 2025 that the 1.7 million currently missing out on savings incentives will see the equivalent of tax-relief appear in their pay cheques.

No reason has been given for this delay, but the timing may be coincidental with plans for implementing the 2017 reforms.

The decision is being taken in the context of other long-term considerations for government. The decision not to deploy the triple-lock in April will mean pensioners don’t just get an earnings growth increase, but at 3.1%, they won’t even get consumer price index. This highlights the fragility of the state pension, both in terms of financial and political support.

Statisticians are currently talking of ‘demographics as destiny’. Our demographics suggest a problematic destiny for UK pensions. Despite the pandemic’s excess deaths causing a short-term blip, the long-term trend in life expectancy in the UK is up and the long-term trend in fertility is down.

The government has called on Lady Neville-Rolfe to review the state pension age and it looks likely the timetable to push it back to 68 will be brought forward.

In his 2014 quinquennial review of the state pension’s finances, the government actuary at the time, Trevor Llanwarne, explicitly linked expected improvements in private sector pension saving to options from 2020 to put the state pension on a ‘more sustainable footing’. The ‘waterbed principle’ applies, as in, a bulge in one place leads to a depression in another.

We should be wary of letting the success of AE become a reason not to upgrade the state pension. With the state pension providing more than half of retirement income to today’s pensioners, it would be easy to make AE a pension tax. 


 

Featured in the March 2022 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.