Tisa backs AE pause for strapped low earners but no respite for employers

Low earners may be getting needlessly in debt or going short on the basics of life to fund their AE payments, according to The Investing and Saving Alliance.

It is seeking reforms to allow temporary halts to AE contributions from low-paid and financially vulnerable employees earning less than £17,500 a year, with employers still obliged to pay their pension contributions. “The AE framework should not fail this cohort,” the group states.

In demands for the biggest overhaul of AE to date, Tisa has also fine-tuned three other proposals in phase two of its Getting Retirement Right campaign.

Employers may think that there is enough complexity in auto-enrolment rules as it is

David Robbins, Willis Towers Watson

A new AE minimum of 12 per cent of salary, split equally between the employer and employee, should be phased in over a period of six years at a rate of 0.5 percentage points a year, commencing in 2023. It also recommends resolving the net pay anomaly, which leaves low earners missing out on tax relief, through a HM Revenue & Customs reconciliation process using real-time information data. 

Commenting on the Tisa initiative, head of retirement Renny Biggins says: “We hope to continue working closely with the government to realise these proposals, most notably to protect the lowest earners.”

Can any low earners afford to save more?

However, some have doubted whether an increase in contributions for the low-paid is welcome at all, even if it does include an option to level down temporarily.

The Institute for Fiscal Studies states: “Even among the least financially secure 3 per cent of eligible private sector employees — those with little or no savings, unable to afford necessities, on very low incomes and with poor health — participation rates are above 90 per cent.

“Given their current financial difficulties, it is not obvious that most in this group should be reducing their current gross earnings, even by 3 per cent, in order to save for a pension.”

Indeed, David Robbins, senior consultant at Willis Towers Watson, points out: “There is nothing to stop employers offering opt-down options, including ones where employer contributions continue to be paid.”

“Any proposal to make this compulsory for lower earners would have to work through some practical details. Would employers have to review earnings in each pay period to see whether an individual’s earnings fell below the pro rata equivalent of £17,500? If so, would the individual then be able to opt out of employee contributions, even where this was expected to be a temporary blip?”

He continues: “If their earnings subsequently rebound, would they retain the right to withhold employee contributions until the employer’s next triennial re-enrolment date?

“What would be required of employers whose schemes use salary sacrifice, and don’t technically have employee contributions? Employers may think that there is enough complexity in auto-enrolment rules as it is.” 

Mr Robins explains that earnings are only a weak signal of affordability of pension saving for an individual, with wider household income varying widely.

“We should also remember that, for those on universal credit, a reduction in benefit entitlement will eat into the disposable income gain from stopping employee pension contributions,” he says. 

Holistic approach could work better

Kay Ingram, director of public policy at LEBC, says the answer to help the lower paid, and other workers who are financially stretched, “is to offer employee financial well-being support”.

“This could include help with budgeting, advice on debt, access to subsidised childcare, and support with in-work benefit claims,” she says.

Philip Audaer, principal in the defined contribution team at LCP, notes that a “salary of £17,500 equates to a daily personal contribution — using qualifying earnings, excluding tax relief — of less than £2”.

He agrees that “there’s a stronger case to be made for the creation of a more holistic financial wellbeing framework, which would allow people to assess if such a daily amount [and subsequent proposed increases] is actually affordable”.

Mr Audaer’s experience of working with schemes that are non-contributory from an employee’s perspective shows “that it is invariably challenging to encourage members to pay any personal contributions, even if they have been suspended for good reason — if you know you’re in a pension scheme where your employer pays everything, it is often the case that your expenditure expands to fill the void”.

Even so, Tisa’s proposals have widespread support from the industry. Pete Glancy, head of policy at Scottish Widows, sums up the view of many: “The pensions system unfairly penalises those who are in low-paid work, and we are therefore hugely supportive of an earnings-linked opt-out option for personal contributions, where employees continue benefiting from their employer’s contributions.” 

On whether Covid-19 could cause yet more procrastination, Phil Brown, director of policy at The People’s Pension, says: “The government’s focus has to be on dealing with the economy-wide challenges of Covid-19 and of Brexit. Reforms of contributions and thresholds should be paused and taken up again once these storms have passed.”