The Government is facing calls to conduct a wholesale review of the rules for auto-enrolment contributions after pensions minister Steve Webb confirmed the link between the earnings trigger and income tax could be scrapped next year.
A Department for Work and Pensions consultation, published last week, sets out four options to “maintain a strong balance for the threshold” for 2015/16.
The options comprise freezing the earnings trigger at the current level of £10,000; raising the trigger by indexation; retaining the income tax link and increasing the trigger to £10,500 next year; or using the Pensions Commission benchmark replacement rate for lower earners of 80 per cent.
The DWP says: “The Government is reviewing the current thresholds in readiness for next year and has decided the timing is right for a further consultation.
“Given the number of employers which have gone through the staging process, we hope to gain some valuable insight on the experiences of live running.
“We would also like to test whether maintaining the alignment between the earnings trigger and the income tax threshold remains right in the light of proposed increases to the threshold and suppressed earnings growth.
“If changes are made, these will come into effect on 6 April 2015. However, in order for as much of the process as possible to be automated, software providers will need advance notice of the Government’s intentions in relation to the new thresholds. We therefore propose to respond to this consultation in December, around the time of the Autumn Statement.”
Speaking to Money Marketing, Webb says: “With regard to the threshold, it is absolutely right to exclude people who should not be automatically enrolled. I make no apology for excluding someone I think shouldn’t be auto-enrolled.
“Consider the current trigger of £10,000: you pay National Insurance on that, end up on £9,000, take 80 per cent of that – which is the Turner adequacy number – and you get the single-tier number as near as damned. You’re not auto-enrolled but your take-home pay, 80 per cent of it is what you’ll get through the state pension. That’s our target.
“If you earned £11,000, you wouldn’t get to 80 per cent, so we need to auto-enrol you. I’m consulting on whether that’s the way we should define it.
“Linking to the tax threshold has been helpful in the rollout of auto-enrolment – it’s a number people are familiar with – but if the point of auto-enrolment is getting people to the Turner adequacy threshold, defining it in terms of the single-tier rate must be worth a look.”
Webb also ridicules Labour’s plans to cut the earnings trigger to £5,772 – the NI lower earnings limit.
He says: “The idea of going down to £5k or £6k or £7k when the state pension is £7.5k or £8k is absurd and small firms are already complaining to us about the cost of doing all this.
“It’s like Labour are in a time warp. When they were doing it, they had a lousy state pension relative to the single-tier rate so enrolling people at that level just about made sense. But the state pension has moved on since then and they don’t seem to have noticed.”
However, some in the industry want the Government to go further and reassess the way auto-enrolment contributions are calculated. Under current rules, total contributions must equal 8 per cent of salary between £5,772 and £41,865.
Now: Pensions chief executive Morten Nilsson says: “Rather than tinkering with the earnings trigger, our preference would be for all workers to be auto-enrolled as soon as they start paying National Insurance and for contributions to be based on all salary rather than a band of earnings.
“We urge the DWP to extend the scope of its consultation to include band earnings as well as the earnings trigger to ensure savers get a fairer deal.”
Rise in the auto-enrolment earnings trigger
November 2005: Turner Commission proposes setting the trigger at the same level as the National Insurance lower earnings limit (currently £5,772).
October 2010: Making Auto-enrolment Work review proposes linking the trigger to the income tax threshold. Government accepts review’s recommendation.
April 2011: Income tax threshold set at £7,475.
April 2012: Income tax threshold rises to £8,105.
October 2012: Auto-enrolment begins for large firms.
April 2013: Income tax threshold rises to £9,440.
April 2014: Income tax threshold rises to £10,000.
April 2015: Income tax due to rise to £10,500.