The government has come under fire for increasing the lower earnings limit when it has been recommended to reduce it. But is it that simple?
Earlier this month, the Scottish National Party held a parliamentary debate, calling on the government to set out a timetable for the implementation of one of the key recommendations of the 2017 auto-enrolment review – the removal of the lower earnings limit for the calculation of minimum contributions.
This was set at £6,032 and increases to £6,134 this month. But is the government guilty of hypocrisy, as claimed by the SNP?
At first glance, increasing the limit while the recommendation is to reduce it does look counter-intuitive. However, as is always the case with pensions, there are many different factors at play.
There are a number of reasons why the auto-enrolment review recommended removing the limit.
One argument is simplicity. It will make the system much easier to understand – and to administer – if every £1 earned is eligible for a pension contribution. It also brings the system into line with expectations.
How many people realise their pension contributions are currently based on band earnings rather than all of their pay?
What is more, it increases the overall contribution levels without necessarily making the contribution rate look higher, and it has a disproportionate impact on lower earners. Removing the limit increases the contributions of everyone enrolled by the same cash amount, which is proportionately larger for low earners. In percentage terms, their contributions will increase more.
As well as better pensions for those in auto-enrolment, it can also boost the benefit of opting-in, which might become more common as workplace pension saving becomes the social norm.
However, removing the limit also means higher contributions from the employee as well. Care must be taken to ensure this does not lead to people stopping saving on affordability grounds. This is why the recommendation is for the limit to be removed gradually over time to avoid sudden changes.
This gradual approach is entirely in keeping with the way in which auto-enrolment has been introduced in the UK.
The staging of employers by size and the phasing in of contributions over time has so far been successful.
Wait and see
We have to remember that even this first part of auto-enrolment is not yet fully rolled out.
The final planned phasing of the minimum contribution level does not come in until April, and although the available evidence from the initial increase in contributions last April has been positive, it makes sense to see what happens with this one and to learn from that in implementing further changes.
In this context, it might also make sense to increase the lower earnings limit for contributions this year. The higher limit will partially offset the higher contributions, softening the impact of phasing.
If this helps retain people in workplace pension saving, it could be a good thing.
So, there are good reasons for not rushing to remove the lower earnings limit.
However, there is also something to be said for the SNP approach. All the major changes to auto-enrolment have so far been very well signposted.
The auto-enrolment review recommendation is to remove the limit (and lower the age for auto-enrolment to 18 from 22) by the mid-2020s. We enter the 2020s next year.
If the limit is to reduce gradually, the process needs to start before too much longer, and auto-enrolment implementation has shown that a policy of giving notice and no surprises can be very beneficial.
For this to happen, work on the precise way in which the limit is to be withdrawn and the timetable for withdrawal needs to start soon.
This could even start with a freezing of the limit at current levels.
Even if there is unexpected evidence of higher-than-expected behavioural change from the increase in minimum contributions next month, this would start to become apparent by the end of this year and should be factored in to planned changes. This would be easier than having to make changes more rapidly and potentially better than delaying implementation.
It is highly unlikely this will be the last change to auto-enrolment policy, and it could be just the next phase of the increase in the minimum contribution level rather than the final word.
While there should be no rush to remove the limit earlier than expected, it is important there is a clear plan and timetable for withdrawal of the limit to give the policy the best chance of success.
Chris Curry is director of the Pensions Policy Institute