Pensions
Where next for AE?
Henry Tapper, chief executive officer of AgeWage , discusses the issues, proposals and timelines
A t the time of writing, the Pension Schemes Bill (https://bit. ly/2GP8wkO) is working its way through the committee stages of the Parliamentary process and is expected to be enacted shortly, maybe even this year. It has been three years in the making and in that time much has happened including the conclusion of staging of automatic enrolment (AE) and the publication by the Department for Work and Pensions (DWP) of Automatic enrolment review 2017 – Maintaining the momentum (‘the report’) (https://bit. ly/3pl48vi). The report identified three shortcomings in the way AE was operating: ● contributions were too low to ensure retirement financial security for a great many savers ● many were excluded from AE through choice (self-employment) or by accident of working (the various shades of the grey economy) ● many who were automatically enrolled had not engaged with their workplace pension or the cashflow implications of being retired. Improving funding of workplace pensions The DWP agreed to make a number of interventions to the way that AE works, and was specific about what these would be. The DWP’s proposal to reduce the lower age limit, from 22 to age 18, would simplify workforce assessment for employers so that all eligible workers would benefit from AE from age eighteen whoever employs them. The DWP proposed to change the framework for AE so that pension contributions would be calculated from the first pound earned, rather than from the lower earnings limit, then set at £5,876. The department also pledged to monitor the impact of the fully phased contributions both in absolute terms and in terms of the
split between savers and employers. It made no promises to increase the headline rate of 8% of earnings within the band. While the scale of the promised interventions was exact, the timing was not. The DWP’s ambition was to implement these changes to the AE framework in the mid-2020s. The government is repeatedly reminded of this timetable and pressed for more detail, most recently in the reading of the Pensions Schemes Bill, but pensions minister Guy Opperman has refused to be drawn. Including the excluded By maintaining the minimum earnings threshold at £10,000, the government has included more workers in AE – though this has exacerbated the net-pay anomaly where those enrolled but not paying tax can miss out on an incentive that saves 25% of the real cost of the contribution. Those impacted are workers (mainly women) who earn more than £10,000 but below the basic rate income tax threshold. It’s estimated that as many as 1,700,000 savers may be missing out. So, the ‘inclusion measures’ that have been implemented have worked out with mixed results. Other plans in the report included tackling the problem of the 2,000,000 self-employed who’d chosen not to be employed. Unlike the proposals to increase funding for those who were ‘in’, those for including the self-employed were delivered in classic civil-servant waffle: “We will test targeted interventions with the aim of establishing what works to increase pension saving for the self-employed. “We will use the evaluation of these to inform implementation options and will consult on specific proposals prior to any changes to legislation.” The paper also expressed concern for those who found themselves in self- employment, mainly because they had fallen into the gig economy. While The Pensions
Regulator argued that many of these people had contracts that could identify them as ‘workers’ and eligible for AE, the DWP decided to ‘outsource’ this can-of-worms to Matthew Taylor, a think-tanker who delivered a report on the gig-economy that has been filed under ‘for the mid 2020s’. Increasing member engagement The third of the report’s three identified challenges related to what we now call ‘getting to know the workplace pension’. As well as an advertising campaign, the DWP promised “to galvanise efforts to build a sense of personal ownership of workplace pension saving amongst individuals … we are setting out specific areas where there is scope for pension providers, the advisory community and employers, working with government where necessary, to do more to support individuals’ engagement with their savings and to deliver better value for their customers”. To be fair to the DWP, this they have done through a variety of means. These have included the simplification of pension statements announced this autumn, the strengthening of AE pensions through the introduction of the master-trust authorisation framework and improvement to disclosures through trustee chair statements – both of costs and charges and of investment strategies. How does the government rate on its promises? With regards increasing funding, the government’s promises are still to play out, but ‘mid 2020s’ is a big playing field. Attempts to include the self-employed, including those in the gig-economy, have been woeful. The measures adopted to improve engagement have been good, though the most important of them, the introduction of the pension dashboard, is running around five years behind schedule. Has DWP kept its promise to maintain the momentum of AE? I would give it seven out of ten for recognising that doing nothing when something is working, is probably the best policy. n
...ambition was to implement these changes to the AE framework in the mid-2020s.
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| Professional in Payroll, Pensions and Reward |
Issue 66 | December 2020 - January 2021
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