More pensions for low earners and young workers as auto-enrolment extension bill goes through House of Lords

• The legislation will ensure Government moves auto-enrolment to next stage, improving coverage and adequacy of workplace pensions
• This is designed to pave the way for all workers under age 22 to be auto-enrolled and provide much larger pensions for lower earners

On Friday, the Extension of Auto-enrolment (No.2) Bill received its Second Reading in the House of Lords and should become law in coming weeks. This will help increase the coverage and adequacy of workplace pensions. The legislation will enable two things:

1. extending auto-enrolment to workers under age 22 – improving coverage of pensions
2. removing the lower earnings contribution limit, thereby increasing pension funds for the lower-paid and improving pensions adequacy.

These measures were both recommended by the 2017 Auto-enrolment review which the Government committed to implement by the mid-2020s. Following the passage of this Bill, which was a Private Member’s Bill introduced by Jonathan Gullis MP in the Commons, the Government will have to consult on the rules and lay regulations to decide the details of the next stage of auto-enrolment as it moves the policy to the next stage.

Auto-enrolment has been a celebrated pension policy success.  It has brought over ten million more people into pensions since the programme started in 2012, with over 2 million employers complying with their duties, and an additional £33 billion in real terms being paid into workplace pensions. It is now time to move on to the next stage. The major 2017 review of auto-enrolment policy, recommended ways for the Government to improve people’s private pensions, which are provided for in this Bill. Once passed, the new rules will help establish even more clearly the principle that workers in this country can expect their employer to cover tax, NI andpension for them.

Removing the legal minimum age requirement from auto-enrolment to include under 22s:Currently, auto-enrolment rules only require employers to automatically provide pensions for workers over age 22. This Bill ensures new regulations will be introduced, after consultation, to determine whether an alternative minimum age, such as 18, is introduced instead. I must admit, I would much prefer removing the age altogether. Why should 16 and 17-year olds be excluded?

This can help more than 600,000 young people start saving sooner and receive better pensions:Official statistics suggest over 600,000 workers age 18 – 21 would benefit and, of course, removing the minimum age altogether could help even more people. Automatic enrolment before age 22 will help people start the pension habit earlier. The under 22s can request to join their employer pension scheme, but this ‘opt in’ option is not widely used. At the moment, only around one third of those aged 18 to 22 are paying into a pension at work, whereas nearly 90% of the over 22s are remaining auto-enrolled once they are put into the scheme by their employer automatically. Clearly, the behavioural nudge of auto-enrolment policy is having a dramatic impact. The earlier they start paying into a pension fund, the longer they have to benefit from the compounding of investment returns over time and receive better pensions in later life.

Removing the current minimum age can simplify administration, reduce opt-outs and improve inclusivity: Replacing age 22 with age 18, still requires pension administrators to monitor the age of younger workers, rather than just ensuring that every young person who is employed can receive the benefit of an employer pension contribution. If administrators have to check when some reaches their 18^th birthday, there is one more variable to check, with a risk of errors in each rule.  And there is a risk of more young workers opting out of pensions as soon as they turn 18, due to a possible fall in take-home pay when they start pension contributions.

Removing the lower earnings limit will significantly improve lower earners’ pensions:Allowing the Government to abolish the Lower Earnings Limit of the qualifying earnings band will increase the overall amounts being saved as pension contributions under auto-enrolment will be calculated from the very first pound of earnings, not from £6240. 

Pension funds of workers on £10,000 a year could more than double if they want: Employer contributions for lower earners who want pensions will be significantly higher. Instead of someone earning £10,000 a year receiving contributions on just £3760 of earnings, the full £10,000 will be used to calculate their own and the employer contribution, so instead of just £300 going into their pension fund each year, £800 will go in. Their employer will pay more if the worker is happy to stay in the pension scheme.

Helping to narrow the gender pension gap:  The ABI estimates the average woman aged 65 has a pension pot just one fifth the value of a man of the same age. Due to lower paid work, lower lifetime earnings, interrupted careers and more part-time jobs, women have always lost out in the earnings-related private pension system. By ensuring that all their earnings are used to calculate contributions in future, even lower earning women will build much bigger pensions. Of course, these measures alone will not solve the gender differentials, but they will help. One in three of all working single mothers are ineligible for a workplace pension under current auto enrolment rules despite more than half (59 per cent) being employed. Latest research from the Pensions Policy Institute suggests over 1.5million single mothers are especially losing out in pensions, as more than half work part-time (compared with only one fifth of the average working population) and even those who are automatically enrolled into a pension have an average £885 a year going into their pensions, compared with the overall UK average of £1573. Increasing contributions for part-time, younger and lower paid workers will improve national pensions in years to come.

Will also help other under-pensioned groups:  Apart from the huge gender gap, pension coverage is not evenly spread across the population and these new measures will ensure other under-pensioned groups, such as lower earners from ethnic minorities, the disabled and multiple job holders can receive better pensions in later life. 

Net Pay problem to be addressed after 2024 and can ensure safer start for these measures: I have raised the scandal of lower earners who are being forced to pay an extra 25% for their pensions, if their employer uses a ‘Net Pay’ pension scheme, rather than one that administers tax relief via Relief at Source.  It would be problematic to bring even more low earners into pensions and increase their contributions, if they will continue to have to unknowingly pay that 25% penalty in a Net Pay scheme. It is shocking that it is taking so long to sort this out, but the Treasury has announced a new system which will make top up payments to low earners in Net Pay schemes, many of whom are women, which will address the problem. However, it will only be introduced for contributions from 2024/25 onwards. The start of the new measures will likely be timed to coincide with these tax relief changes.

Still more to do – such as helping self-employed and reducing numbers of small pots: These new measures will be an excellent next stage in the expansion of automatic enrolment, but there is more to do. For example, finding ways to help extend pensions coverage to the self-employed, who cannot benefit from an employer sorting out their pension, is an outstanding challenge. In addition, increasing coverage of pensions for younger and lower-paid workers could increase the number of small pension pots which are already causing concerns about poor value pensions. Helping people consolidate pensions into one ‘lifetime’ pension fund could help in this regard and the Government is consulting on measures to address this problem.

These measures are welcome improvements, building on the success of auto-enrolment: I am delighted to see the new Pensions Minister aims to bring the benefits of pension saving to more younger people and to improve pensions for those hard working, lower paid workers, including many women with caring responsibilities, who deserve their opportunity to build a more secure retirement for themselves and their families.