A lower threshold for automatic enrolment in a workplace pension scheme

The Shadow Secretary of State for Work and Pensions, Rachel Reeves, announced last week that the Labour party was looking to move to lower the earnings threshold for automatic enrolment in a workplace pension scheme from its current level of £10,000 to the Lower Earnings Limit for National Insurance, currently £5,772 a year.

As The Times pointed out “The threshold was first conceived at a lower level but was raised by the coalition under pressure from businesses fearful of the costs.”

The government in their review of the level in December 2013* said

“The earnings trigger determines who gets automatically enrolled. If the trigger is too high then people whom the policy is designed to target may miss out. If the trigger is set too low people who are very likely to receive a high replacement rate from the State may be included.

The Secretary of State considered all the review factors against the analytical evidence and the policy objectives and decided that the PAYE personal tax allowance at its 2014/15 level of £10,000 is the factor that should determine the value of the trigger for 2014/15.”

The response to Rachel Reeve’s announcement has been, as would be expected mixed.

The Association of British Insurers welcomed the proposals, although they wanted to “ensure they could be implemented with minimum unnecessary cost to scheme administrators and employers.”

The CBI said “Businesses would face increased costs from this change, and it’s not clear that automatically enrolling this group of low earners is necessarily in their long-term interests.”

The government tweeted that “Extending auto enrolment to those for whom it may not make -financial sense would be unfair and irresponsible.”

There is little surprising in these responses but one factor has been entirely ignored in the announcement, in the government’s review and by, as far as I can see, all the commentators.

Universal Credit.

Under the Universal Credit scheme, the bulk of low paid workers will see a cash increase in their benefit of £6.50 for each £10 they paid into a pension scheme in the previous month.

Unlike Tax Credits, the current in-work benefit for those working full-time (a complex definition in itself), Universal Credit will be based on net earnings not gross earnings. Part-time workers currently claim, normally, means tested Job-seekers Allowance (JSA) which is based on net earnings.

Tax Credits disregard pension contributions when calculating the income used in assessing entitlement but, because gross income is being used and the thresholds and tapers are complex, it is difficult to compare with net income based means-tests.

JSA disregards half of pension contributions when calculating net income for its means test.

Universal Credit is more generous; it disregards 100% of pension contributions.

In its means-test, Universal Credit is reduced by 65% of income, after any general earnings disregards have been applied. The result is that paying £10 into a pension scheme will reduce the income taken into account by £10 and increase the Universal Credit payable by £6.50 – the amount that would otherwise have been deducted.

I looked, a couple of years ago, at the increased generosity of the disregard here

(and at the way in which pension contributions can have a perverse effect on the benefits cap here)

As I said then,

It’s hard to see why anyone in this situation would not take advantage of what is in effect a 65% subsidy of their pension pot from the public purse. The beleaguered pension industry must surely be rubbing their hands in glee at the prospect (or will be, when they wake up to the consequences).

This doesn’t take into account the additional longer term tax advantages of pension contributions which further add to the attractiveness of the situation, for those who can afford the smaller drop in actual disposable income that increasing contributions brings.

* Review of the automatic enrolment earnings trigger and qualifying earnings band for 2014/15: supporting analysis. – DWP December 2013

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