Michelle Donelan MP: One million UK employers now part of auto-enrolment scheme but still room for improvement
Conservative MP Michelle Donelan writes following her Westminster Hall debate on Pensions auto-enrolment in which she notes that only one in seven self-employed people are part of the scheme with 75% of employees already benefitting.
Introducing auto enrolment in the UK was a huge landmark – it was introduced as part of a package of policies designed to foster a saving culture and a new generation of savers, whose long term financial needs are prioritised as much as their short-term ones. It was an example of fiscally responsible policy that paves the way for a better tomorrow by enabling people to have greater financial security and independence in retirement.
Just over a week ago we hit the milestone figure of one million employers signed up to a workplace pension. The effect can be seen across the country, in my own constituency of Chippenham 1,030 employers have introduced automatic enrolment schemes which means 9,000 people are benefitting.
To appreciate the success of the roll out, it is important to consider the context because saving for retirement has traditionally been a thing that can be put off and was put off. It has also always had connotations of being difficult, complicated and expensive to organise especially as a large proportion of employers didn’t offer schemes. So, traditionally we have had low levels of engagement with pensions and a reliance on the State pension and if need be pension benefits. Though this is no longer tenable with the ageing and expanding population. Auto enrolment however, helps make the system more sustainable, by in effect supplementing welfare payments with private provision.
The state pension has traditionally been seen by many as the universal scheme that will be enough but I have seen in my own constituency that the introduction of auto enrolment has dramatically started to shift that mind set. The ABI sum it up well stating “Engaging people to save adequately for their retirement is one of the biggest public policy challenges we face.” They also go on to affirm their belief in automatic enrolment as the best means to ensuring people save adequately for retirement.
There are many reasons why the roll out is proving successful, perhaps most importantly auto enrolment is simple and basically done for the employee. In addition the employer contribution is a strong incentive. The rates of the employer and employee contributions have also been going up in increments - helping businesses to prepare and employees to get into a pension saving mind set. On this point, it will go up to 8% in 2019, but it’s crucial that we don’t just leave it there so as to ensure that pensions provide enough money for retirement and are therefore are fit for purpose. In fact, The Pensions Policy Institute conducted an international comparison of auto enrolment schemes and found that our employer contributions lag far behind our European counterparts. In addition, higher statutory minimum contributions are phased in over 2018 and 2019, employees will find themselves bearing more of the burden than their employer and this could drive opt outs. The art will be getting the balance right between employee and employer contributions as well as the rates to ensure saving and also not damage business.
Being ‘an opt out scheme’ has helped make auto enrolment successful with lower than expected opt outs. Department of Work and Pensions modelling had actually assumed opt out rates of around 25% but in 2017 the opt out average was just 9%. In fact 23% more of the working population now participate in a workplace pension than in 2012.
Looking at the success for different groups is interesting and important as traditionally it has been hard to engage young people with pensions as they tend to prioritise their disposable income over a pension for 50 years plus time. This means that people either never opt in or they opt in later which does not allow them enough time to accrue a decent pension plan. However auto enrolment has so far driven the largest increase in participation for those aged 22 to 29. Auto enrolment has also helped participation rates of women to catch up, being only 40% in 2012 to 73% of eligible women in 2016.
One of the concerns around AE was how the small business community would respond, however they have not only coped but embraced it so it is important to thank them. As the CBI state “Automatic enrolment is a successful policy built on sound principals – employer support is key to this.” The main concern was around perceived bureaucracy and time to administer the system. Though a 2017 Qualitative research with small and micro employers commissioned by the Department of Work and Pensions showed that most employers found the cost and time burden involved to be lower than they had anticipated.
Talking of outcomes vs expectations it is important to note the key points from the government’s review of AE published last December. The plans will increase median earners’ private pension provision by over 40% and lower earners by over 80%. These include offering auto-enrollment for aged 18 and above rather than 22 which is essential in ensuring we foster a generation of savers and will bring in a further 900,000 people into pension saving. They also plan for the scrapping of the £5,876 lower earnings limit so that now every pound of earnings will be pensionable, for example someone with a career average salary of £27,000 would build up an extra £50,000 over 40 years. The review also stresses the need to increase engagement to reach all and partly by building a sense of personal ownership of pensions – through initiatives such as the pension dashboard.
A key area that the review considered was what to do with the self-employed pension problem. The self-employed are currently not eligible for auto enrolment yet the number of self-employed in the UK is rising and by 730,000 between 2008 and 2015 alone. This has been combined with a decline in the number of self-employed with a pensions to only 19%. In fact it is estimated that within 20 years nearly 30% of the employment market will be self-employed – so if things continue, then nearly a 1/3 of the employment market will be without a pension – the opposite to auto enrolments vision.
I was delighted that a commitment to making auto-enrolment available to the self-employed was in the 2017 manifesto. I have noted however, the valid concerns raised in the government review and will shortly set out my own idea for how it can be implemented effectively. I am not alone in calling for auto enrolment for the self-employed in fact The PLSA have called for it to be considered and the Taylor Review did state that the Government should treat self-employed people like any other section of the labour market – which I would argue can never be the case without an auto enrolment scheme for the self-employed.
Creating an auto enrolment scheme for the self-employed is not simple, the obvious problem is, that there is no employer to pay contributions plus there are also no international examples to learn from. Many point to the diversity of the self-employed market, although the policy could be administered along the lines of AE qualifications and a recent PPI report, estimates that 38% of self-employed would be eligible for automatic enrolment if they were employed. In addition the income of the self-employed is often much more volatile - discouraging people from committing standard pension provision.
Aviva and Royal London reviewed four options which I will briefly summarise and analyse. The first being published before in Royal London’s Britain’s Forgotten Army paper - this proposal works by increasing the rate of Class 4 National Insurance Contributions by 3% for pension contributions plus they would pay a matching pension contribution from profits. This would put all the outlay on to the self-employed with little incentive plus it would look like a tax rise.
The second proposal uses the government as the ‘employer’ matching equally self-employed payments at 4%. Whilst this offers the incentive – it would be costly plus there is also no room to increase payment contributions from the self-employed unless the government follows which limits the long-term scope of the policy.
Thirdly an ‘opt-in’ tick box on tax returns for pension provision was suggested - perhaps with a 1% government top-up. This makes it easy and offers the 1% incentive but it relies on an opt in and many self-employed would just match the 1%, making it unfit for purpose. Life time ISAs were looked at too but I do not believe that they could address the problem in full.
The report prefers some form of default pension option as part of the annual tax-return. In fact the government review suggested that the possibility of a behavioural prompt into the accounting process should be looked at. This concept has merits which my plan builds on and I do believe linking a system to self-assessment is the best approach and simple. Simplicity has been one of the reasons for the success of auto enrolment plus if auto enrolment has shown us anything it is also the ‘power of the opt out.’ However there does need to be an incentive especially for the self-employed as all the research shows their pension saving mentality is different because incomes are much more volatile. This was highlighted by the disparity before auto enrolment was even introduced. So we need to give the self-employed a compelling reason to commit to and prioritise pension contributions. It is also undeniable that opt out rates are low with auto enrolment because the ‘employer contribution’ acts as an incentive for the employee not to opt-out of the pension scheme. However I take on board the 1% drive to the bottom so, I think we should offer a Government contribution of 1% for the self-employed who invest 3% and 2% to those investing 5% - the rates at which the government contribution kick in can be increased as we develop a pension saving psych but it does not intrinsically link government and employee contributions. This is also cheaper than the 4% concept and incentivises saving a higher rate
A common argument against the government acting as the employer is, it would represents a substantial transfer of tax from the employed to the self-employed which could be seen as unfair. Firstly, to address this concern I have benched this lower than the employee system will be from 2019. Secondly, our entire system is based on redistribution, and acts as a giant insurance scheme so this exists in thousands of other ways anyway. Thirdly, in the long run it will cost the state less because otherwise a massive cohort of the population will be reliant on the state for pension provision. Fourthly, we are currently in danger of the opposite as Zurich’s Martin Palmer stated “We are creating a rapidly growing new divide between those who are employed, with access to auto-enrolment, and the self-employed. We need to ensure nobody is excluded from the chance to build up a nest egg simply because they don’t work the standard nine to five.”
I do not believe a default nudge is the same thing as an auto enrolment system nor will it be as successful so, I do urge the Minister not to discount auto enrolment for the self-employed and to commission a detailed review into of the options with the government as the employer. In reference to the employer – employee relationship, the Taylor review did say “The Government could look to establish a similar principle for the self-employed” but the 2017 review dismissed the option without even costing it.
In conclusion automatic enrolment has already reversed the decline in workplace pension saving and total annual contributions are at their highest for a decade so around 10 million people will be newly saving or saving more by 2018. The policy is proving successful but there is room for improvement which the review highlighted. However to create a truly sustainable long-term solution for pensions, we must ensure we have system that works for the self-employed given that only one in seven of the UK's self-employed are saving into a pension versus ¾ employees whilst the rate of self-employed is increasing at a record rate.
Michelle Donelan is the Conservative MP for Chippenham