There is a strong case to start cutting the earnings threshold for auto-enrolment (AE) before the move to contributions from the first pound. To understand why, we need a little history.
Initially, anyone earning more than the bottom of the earnings band would be auto-enrolled. But after the 2010 election the new government set a new earnings trigger at the basic tax allowance (then £8,105), higher than the bottom of the earnings band (then £5,564). For those earning less than this new threshold they said it was not worth saving the small contribution payable; it was an unnecessary chore for employers to collect, and inefficient for a scheme to hold it in a micro-pot.
But for reasons that had nothing to do with pensions, raising the tax allowance became a flagship policy for government. By 2014, the start of the earnings band had crept up to £5,572 while the earnings trigger had leapt to £10,000. Many low-paid part-time workers – overwhelmingly women – now missed out on AE. Workers with multiple jobs could earn over the trigger level overall, but fail to beat it in any of their jobs.
To be fair, the earnings trigger was frozen at £10,000, but pay has been in the doldrums since the 2008 crash so there is still a big gap between the bottom of the earnings band at £6,136 and the trigger.
But the government now says that from the “mid-2020s” it will abolish the bottom of the earnings band and collect contributions from the first pound of pay – a major boost for the low paid.
At present, if you earn a penny less than the £10,000 trigger, you miss out on 8% contributions on £3,864 (the trigger minus the £6,136 lower earnings band). But when contributions change you will lose almost triple, as you lose a share of the full £10,000.
It is hard to argue that this would not be worth saving, and it will need to change. But we should not wait. Moving contributions to the first pound could well be phased and such changes often get delayed. If ministers say that we should only change one thing at a time, the risk is that the threshold will stay at £10,000 for years with millions missing out.
In our latest annual report to the secretary of state for work and pensions, NEST’s members’ panel is therefore calling for a phased reduction in the earnings trigger to start now.
Even if the earnings band stays, there is a strong case that the trigger could be lower and still provide worthwhile contributions. But, when the low paid get contributions on everything they earn, they will get a big boost in their savings. The argument for the current trigger melts away. What might be a micro-pot now will be part of bigger and worthwhile retirement savings in the future.
Whether we keep a (much lower) earnings trigger, or go back to the initial plan to auto-enrol, everyone does not have to be settled now to start reducing the threshold by £1,000 or £2,000 a year.
This will help low-paid women workers and manage a move to auto-enrolling many more. Of course, there could be more opt-outs as some low-paid workers are in real poverty, but phasing a lower trigger can only help people get used to saving.
Nor is it hard to do. The government reviews and sets the trigger every year. Next time it should take it out of the deep freeze.
Nigel Stanley is chairman of the NEST members’ panel and was a member of the advisory panel to the Department for Work and Pensions’ 2018 AE review.