21 July 2017
- Who will help sort out this auto-enrolment pension scandal?
- Low earners losing money but don’t know it yet
I want to highlight a major pensions injustice concerning employers who choose an auto-enrolment scheme administered on a net pay basis.
Such schemes cannot add the 25 per cent bonus of tax relief to contributions of workers earning less than £11,500 a year from the employer.
Auto-enrolling these employees – mostly women – into a net pay scheme forces them to pay extra for their pension. Every £10 that someone on more than £11,510 a year puts into a pension will cost only £8 but every £10 low earners contribute costs them the full amount. So the lowest paid are paying £2 more for the same pension.
If their employer were to use a relief at source scheme instead, no one would have to pay more than £8 for their £10 of pension. But most employers would not understand the difference between choosing a net pay or relief at source scheme.
When discovering this as Pensions Minister, I tried desperately to address it but nobody was interested in helping the low earners. Officials said “It’s not much money”, which I found unacceptable.
Firstly, it may not be much money, but it could and should be theirs if their employer had chosen a different scheme.
Secondly, auto-enrolment contributions will quadruple and personal tax thresholds will rise, so the numbers of low earners and the amounts of money they are losing will just keep growing. When I was Pensions Minister I was astonished to find that even though I asked The Pensions Regulator to alert employers to the issue, they refused to listen. The first reason they have was that it is not illegal to deny low earners this money, so the Regulator could not get involved. I was so disappointed at this.
I then highlighted that the Regulator’s own template letters and website, designed to help employers choose a scheme and explain auto-enrolment, misleadingly said workers would receive employer contributions and tax relief under auto-enrolment when this was not necessarily true if they were low earners in a Net Pay scheme. After many months I eventually persuaded it to change this but the wording was weak and fails to explain the issue clearly.
I met the people running the MasterTrust Assurance Framework, asking them to assess whether net pay schemes were being honest with employers and members about this issue as part of its seal of approval. But they too did not consider it an important issue.
I asked Treasury ministers to help. They initially replied that tax relief was being consulted on. Then I asked them to amend the rules or at least allow net pay schemes to reclaim the extra relief for their low earning members but was turned down every time. I did have one real success. Now:Pensions MasterTrust, which operates only on a net pay basis (Nest uses relief at source and The People’s Pension offers both) offered to pay the extra 25 per cent bonus to all low earners from its own resources. This was not widely publicised but it deserves high praise.
Since leaving Government, I have asked a series of Written Parliamentary Questions on this issue which have been replied to with non-answers. Ministers just continually ignore my requests to solve the problem, claim they do not know how many people it affects and that it is up to the Regulator to help and inform employers about how to choose a good pension scheme. Clearly, the current situation is unacceptable. All I can do is keep flagging it.
If or when these workers discover they have been charged more for their pensions than they should have been, what will they do? They had no control over the choice of scheme; it was arranged by their employer, who may have used an adviser or relied on regulator and Government guidelines. It is not clear the workers have any protection under the law, this hasn’t been challenged yet. But if the situation remains unresolved, I do believe this could turn into another scandal – which is the last thing pensions need. The injustice is only going to get worse. The sooner this issue is properly sorted, the better, and I would welcome help from you in pressuring for change.