Former pensions minister Ros Altmann celebrates 10 million workers saving into a pension scheme, but details major flaws that need correction.
It is great to see the auto-enrolment programme continuing its successful path. So far, it has extended coverage of workplace pension saving dramatically, ensuring that millions of workers are paying into a pension scheme for the first time with the help of their employer.
The behavioural theory behind the policy design is working brilliantly, as inertia has ensured that workers who are automatically enrolled do not decide to opt out. All the work is done by firms, which must set up the scheme for their staff and pay in contributions, ensuring that every pay packet has had tax, National Insurance and pension contributions deducted appropriately.
But there are some significant failings of the policy so far that have the potential to undermine its long-term success and which need urgent attention.
Women and low earners
Although auto-enrolment has brought millions of low earners into pension saving for the first time, it covers only those who earn more than £10,000 a year with an employer. Many part-time workers, mostly women, who earn less than this, or who have more than one employer and earn below £10,000 from each one, are left out of the auto-enrolment process. They lose out on help from their employer towards their retirement income.
The net pay scandal
This relates to the lowest earners who are automatically enrolled into a pension scheme, but who are being forced to pay 25% extra for their pension, without knowing that they are being charged so much extra and without being able to get the money back.
This problem stems from the complexity of pensions administration and Inland Revenue rules. If employers choose a pension scheme for their staff that administers on a “net pay” system, then all workers earning less than the personal tax allowance (currently £11,850 a year) have to pay the equivalent of the basic rate tax relief themselves, which means that they cannot have the 25% government bonus that they would receive if their employer used a different type of scheme.
This so-called net pay scandal must be corrected urgently. It has the power to undermine confidence in auto-enrolment, and it is also hitting increasing numbers of low earners, predominantly women.
As minimum contributions are set to double from April this year, the amounts of money that lower earners lose will keep rising.
Another serious failing is data errors that are not being properly monitored or corrected. Workers would naturally expect that the contributions deducted from their pay and paid into the pension scheme are correct.
The pension auto-enrolment rules are so complicated that workers cannot realistically be expected to know whether the amounts paid in are accurate. Working as chair of pension fintech firm pensionsync I have seen that the administration of pensions does not ensure that there are robust error checks or regular reconciliations.
Worryingly, 50% of the initial filings for small- and medium-sized firms are wrong. Many of these errors are waved through with manual processes, which prioritise expediency over accuracy.
Automatic integration between employer payroll and the pension provider could ensure that such errors are automatically corrected, but the vast majority of employers still rely on the manual process.
In about one in 20 cases, the contributions paid on behalf of workers are incorrect, because of confusion caused by the net pay issue. This can lead to employers being asked to repay money to the tax authorities and, possibly, facing fines.
The government and The Pensions Regulator should introduce robust requirements for data accuracy. Knowing that so many pension errors have already occurred, and bearing in mind that the pensions dashboard project is supposed to be introduced later this year, it is clear that an urgent process of data cleansing must be introduced.
The regulator does, in theory, require employers to pay the correct amounts and also requires providers to check that contributions are right, but accuracy is not being properly checked or enforced.
If the pensions dashboard is to achieve its aims of helping workers see how much pension saving they have, finding their records all in one place, then it is absolutely essential that the data are reliable and accurate.
This is a major flaw in auto-enrolment so far and the longer it takes to begin the clean-up process, the most costly it will be.
The low paid also lose out most, as the first £6,032 earned is ignored for the contribution calculation. The qualification and contribution rules are also extremely complex, which adds to the problems of calculating correct contributions and paying the right people, making it more burdensome for employers to operate pension processes.
Sooner or later, I would hope that pensions auto-enrolment will be extended to every employee, regardless of earnings and that the contributions will be paid on the entire salary.
At the moment, minimum requirements specify that the pension contribution relates to a part of each person’s earnings, not the entire amount. Deductions must just be based on ‘pensionable earnings’, which ignores the first £6,032 a year earned. Therefore, someone earning £10,000 a year only has pension contributions based on less than £4,000 a year. This means that low earners have less going into pensions on their behalf.
There is significant concern over the increasing number of self-employed workers who are left out of pensions altogether. Those in the gig economy, or those who are building their own company, get no outside help from the policy initiative. Of course, including such workers is not easy because the whole thrust of the policy is that workers have their employer set up a pension scheme for them and pay extra money into it.
This “free money” is a significant incentive for workers to stay enrolled. Clearly, the two big benefits of auto-enrolment cannot be easily applied to someone who is their own employer.
Nevertheless, pensions are normally the best way to save for retirement and the tax benefits are attractive.
The pensions industry has a chance to rise to the challenge of attracting and engaging all those who are omitted from auto-enrolment and help millions more workers build up resources for later life.
Ros Altmann is a former UK pensions minister.