My Lords, noble Lords will understand that I believe that this amendment is vital to the ongoing success of automatic enrolment.
I add my congratulations to the noble Baroness, Lady Drake, for the work that she did with the original Pensions Commission, which set up automatic enrolment. It has been a success. My amendment seeks to build on auto-enrolment by introducing protections particularly for low earners—at least 70% of whom are women—and provides that the Secretary of State must make regulations that require the trustees, managers, administrators and employers of these workplace pension schemes to ensure that the scheme is suitable for low earners and treats them fairly.
I seek to introduce this into the Bill because, currently, more than 1 million women who are earning below the personal tax threshold, which is around £12,500 in any one job, are required to pay—unwittingly and unknowingly in probably all cases—25% more for their pension because their employer has chosen a particular pension scheme that is not suitable for them because it charges them so much extra.
The noble Lord, Lord McKenzie, referred to addressing pensioner poverty and undersaving. Clearly, the fact that the lowest earners in the country have an extra 25% added to the cost of their pension, which has to come out of their pay, makes them more likely to have affordability issues and could, potentially, lead to them opting out of the pension because of the extra costs. These are, generally speaking, the people who most need help to build up a pension for later life and who are at greater risk of pensioner poverty. That is what the auto-enrolment system was meant to address, given that we have the lowest state pension in the developed world.
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Therefore, there is an important lacuna in the automatic enrolment framework, in that an employer merely has to set up a pension scheme without having to decide, investigate or even consider whether the scheme is suitable for its staff. I am particularly concerned about low earners. The types of scheme that they are being put into are better for higher earners and higher-rate taxpayers—and better for the scheme providers—because they bring more money into the scheme. For low earners, however, there is a significant issue.
There is understandable concern about putting too much burden on employers. People say, “It is bad enough that they have to set up pension schemes and pay into them for their staff even if they employ only one person, so let us make it easy for them.” I accept that, but a social injustice in the current system has worsened: it was not such a problem before the changes
in personal tax thresholds. I have been trying to find a resolution for it for several years and nothing has changed.
I felt, therefore, that this Bill might provide the opportunity to place such a requirement on employers. I have been working with an industry group, the Net Pay Action Group, which is attempting to persuade the Treasury to ensure that Her Majesty’s Revenue & Customs uses the annual reconciliation of individuals’ PAYE data to identify low-income workers making pension contributions under the net pay scheme and to provide tax relief equivalent to what they would have received in another scheme.
The current problem is that, if their employer uses one of the master trusts that mostly operate a net pay arrangement, as it is called, low earners have to pay their own tax relief and cannot in any circumstances reclaim it from the Treasury. This is about £150 a year, and one of the arguments used to justify it is that it is not a lot of money. Frankly, however, to a woman who is a low earner, £150 is not nothing. Even £50 a year is not nothing. It is money that they would have if their employer had used a scheme like NEST, or a scheme that operates a relief-at-source system, where they get the tax relief that they are entitled to automatically.
Even if there was a resolution—there is no sign of that at the moment—every month, these workers are being charged an extra amount that is going into their pension scheme, unbeknown to them. The sooner we sort this out, the better. Notwithstanding any resolution, there should be an obligation on an employer that is putting its staff into a pension scheme—given that staff cannot control which scheme their employer uses—to set up a scheme that is suitable, specifically for low earners but one could expand that more broadly.
I hope, therefore, that noble Lords will recognise that this would be a way to improve the operation of auto-enrolment. For example, if the employer has one or two low earners but most of the staff are highly paid and it wants to use a net pay scheme, it would be fine if the employer paid those few extra pounds into the scheme on behalf of its low-paid staff. High earners do not have to reclaim the higher-rate relief in one of these schemes and it may be considered more convenient for those high earners, but the problem is for those earning below the personal tax threshold. Nobody is compensating them for the fact that they are being charged 25% too much. We have capped charges on default funds in pension schemes at 0.75% a year, yet this is 250 basis points that these women are paying extra for no good reason. They are not getting a better pension; they are getting the same as the others.
I would be grateful if my noble friend could help me to understand whether the Government might consider accepting this or whether they have other plans to address urgently the problem of low-earning women paying too much for their pensions in their employer’s scheme, in what I genuinely believe is a very successful auto-enrolment system that I want to see thrive. Unfortunately, this has the potential to damage confidence in auto-enrolment significantly if more and more women are affected; as I say, that number is probably well over 1 million now. I beg to move.