What surprises will the 2017 Auto-Enrolment Review Bring?
11 August 2016
Asks Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas
Looming large in the in-tray for Theresa May’s new Pensions Minister Richard Harrington is the 2017 Review of Automatic Enrolment. As I was one of the authors of the last review – the 2010 Making Automatic Enrolment Work review – I thought I’d look back at what we’ve achieved so far and then glance forward to what next year’s review should address.
The first thing the new Minister will realise is the 2017 Review cannot be ducked. Whilst many things will be cleared from the Government’s decks to allow time and resource for Brexit preparations, this review is a statutory requirement, already baked into legislation. So it’s going to happen and to steal a phrase from the PM, “2017 means 2017”.
When the Minister launches the 2017 Review – and I’m expecting it to be at least signposted this autumn. Like the 2010 ‘making automatic enrolment work’ review, the title of next year’s review will give us a good clue as to where the DWP will be looking. Indeed, that was the case back in 2010, when the focus was about making tweaks to ensure the success of auto-enrolment. It’s easy for us now to proclaim AE as a great success, but back before it started consumer surveys from Aviva and Legal & General were forecasting a 45% opt-out rate and the Government’s own advertising with building blocks was gaining very little traction.
We were very concerned about building credibility pre- and immediately post-launch launch. And by that we meant credibility in the workplace, literally on the shop floor, not credibility in any sort of purist academic sense. My earlier experiences with large multi-site workplace pensions had shown that the same pension scheme can get very different take-up in Manchester and Bradford. Not because people are different the other side of the Pennines, but simply because what key opinion formers within each workplace are saying about the merits of the pension scheme makes a huge difference to individual employees’ decision to join. Do not under-estimate the importance of those casual conversations at the water cooler or in the staff canteen.
Today AE runs on inertia, so we don’t actually need people to be evangelising the importance of saving for your future. But we do need an absence of people saying that the whole thing is a waste of your time and money!
And so the 2010 Review cut out swathes of people who might not have gained from automatic enrolment. We raised the bar for AE, so that instead of applying to workers earning over £5,000 a year it was set at the income tax threshold, which was then already on a trajectory to reach £10,000 a year within that Parliament.
We then turned to short-term staff, mindful that Retail in particular is a sector that takes people on for short contracts where both employer and employee know that the position is for, say, the Christmas rush and will end in January. The hokey-cokey of putting those people in and out again was another largely pointless exercise that would have given ammunition to those wanting to criticise AE. This one took up a lot of the Review’s time as Government lawyers thought that we might be breaking some EU rule with this change. But we won them over and gained a three month waiting period for employers. That sorted highly seasonal casual work but did not satisfy everyone: I was reprimanded by a national charity that told me “we open our stately homes at Easter and don’t put the dust covers back on until October, so your three months is no help to us”.
Our terms of reference did not allow us to address the contribution rates, which had already been set by Parliament to start at the nugatory 1% for both employees and employers and run at that level throughout the staging process. So to prevent ridiculously low ‘penny’ contributions, we introduced a two tier earnings framework that set the eligibility threshold for being auto-enrolled comfortably higher than the lower earnings level at which contributions started to be calculated. With a few strokes of the pen we had excluded another two million employees from auto-enrolment.
But the world is now very different to how it was in 2010.
Firstly, AE has been a success. Opt out rates have held consistently low at around 10% and employer compliance so high that The Pensions Regulator’s much-lauded ‘educate, enable, enforce’ approach has rarely got out of second gear, with a mere 127 escalating penalty notices issued in the first four years . Secondly, the recession brought on by the financial crash resulted in a surprising change of working patterns. Thirdly, and most importantly, our nation has now embarked on a project to create a truly great Great Britain outside of the EU.
So the 2017 Review needs to build on the success of AE to date and cement into the national conscience as a whole, the thinking that we should all be saving for our retirement. Those boundary changes we made in 2010 to quietly stack the odds in favour of success are no longer needed and I for one would not regard it as a criticism of the 2010 Review if the 2017 Review now reversed them. Let’s create a wider AE regime that everyone can benefit from.
A socio-economic change that has taken many of us by surprise has been the dramatic increase in part-time working. It was a feature of the last recession that many employers avoided widespread redundancy programmes, instead retaining skilled staff but on lesser hours, often on a part-time basis. And not surprisingly those same staff went and found another part-time job.
Statistics are hard to come by here, as the population censuses that will show this take a long time to come through. But I asked my colleagues at NOW:Pensions, where I also work part-time as well as at Dunstan Thomas and TISA, to scan their own database and the results are staggering.
Over 10,000 members of NOW:Pensions AE master trust are part-timers, with a second part-time job, where both employers happen to have chosen NOW:Pensions as their AE provider! Given that NOW:Pensions have just under one million members and a roughly 10% share of the AE market, this just hints at the iceberg of people with multiple jobs we have today.
Where someone has two part-time jobs, and the employers are making minimum AE contributions, then the earnings offset of £5,824 is applied twice. In total, only earnings above £11,648 per annum count for pension contribution calculation purposes. If they have three part-time jobs, I’ll leave you to calculate the effect of applying the earnings offset three times!
Rather than structuring a rule to prevent this abuse of this growing group of part-time portfolio workers, the 2017 Review should get rid of the qualifying earnings lower limit altogether. Even for people with one full time job it’s very discriminatory. Someone on £15,000 per annum - the minimum wage - will get around about half the headline 8% AE contribution or 4.9%, because of the first £5,824 non qualifying earnings threshold. Meanwhile, someone on £40,000 per year will receive contributions of 6.8%. And yet actuaries have worked out that people on lower incomes need a higher replacement rate in retirement because they have less scope to cut back on luxuries in retirement.
There’s also an upper limit to qualifying earnings which has received very little attention. The statutory minimum contributions also ignore earnings over £43,000 a year. People used to tell me that higher earners are more capable of looking after themselves. But the evidence is that many of them are middle professionals who do not have the scope to negotiate their own employment contract and in many cases with employers who have set up minimum AE contributions, applying both the lower and the upper limit to qualifying earnings. Maybe it’s time for the upper limit to be removed as well.
The other key limit that the 2017 Review should look at is the threshold that triggers AE, which is set at the level of the income tax Personal Allowance, which will rise to £12,500 by 2020. The 2017 Review should conclude that we just don’t need this anymore, as we are no longer threatened by a few small contributions damaging AE’s credibility.
This all offers the prospect of a major cleaning up of AE rules, drastically simplifying the rule set. We should auto-enrol all workers over age 22, irrespective of their salary, and make pension contributions on every pound of earnings. A whole raft of monitoring whereby employers must watch wage levels every month will be swept away. In addition, the injustice of lower contributions for lower paid workers which indirectly discriminates against women and workers of ethnic origin as they disproportionately occupy lower paid jobs, will be corrected.
To borrow another of the new PM’s favourite phrases, if the 2017 Review adopts these changes, it will ensure that auto-enrolment ‘works for everyone, not just the privileged few’.
Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas