Auto enrolment has brought millions more people into retirement saving as pension confidence recovers from past scandals.
Unfortunately, a new scandal is building behind the scenes, which could damage pensions again.
Workers are told the amounts they pay into their retirement pots will be topped up with both employer and government money.
But hundreds of thousands of low-earners never get the government tax relief, because their employers - often unwittingly – have chosen to use a pension scheme that does not pay it to them. Most of the master trusts do not allow it.
Employees earning between £10,000 and £11,850 a year – mostly women – therefore pay 25 per cent more than they should, with no mechanism to recover the money. Their pension provider effectively imposes a 25 per cent surcharge, without even telling them.
Net pay gives providers more assets to manage, delivering higher fees and profit – at the expense of the lowest paid.The tripling of auto enrolment minimum contributions to 3 per cent in April this year (rising to 5 per cent next year) will further compound the low earners’ losses.
Pension providers have two options for dealing with pension tax relief for their customers.
If they use a ‘net pay’ administration approach, low-earners lose out, but with the alternative ‘relief at source’ (RAS) method, providers can claim basic rate income tax relief from HMRC and add it to each worker’s pension pot.
Higher-rate taxpayers can reclaim their higher rate relief if their employer uses a RAS scheme - which may be inconvenient for them, but they need not lose out. Unlike low earners, who cannot reclaim the money, they overpay.
How could this be allowed to continue?
Net pay schemes benefit pension providers, because they add higher rate tax relief into high-earners’ pension pots, whereas a RAS scheme only receives basic rate tax relief. So, net pay gives providers more assets to manage, delivering higher fees and profit – at the expense of the lowest paid.
Astonishingly, the government’s recent auto-enrolment review, the Pensions Regulator’s ‘MasterTrust Assurance framework’ set up to identify ‘good schemes’, its recent consultation on making master trusts safer for customers and even the PLSA Committee, designed to improve master trust savers’ retirement income, propose no solutions to this scandal.
The government admits it appreciates concerns for low paid workers, ‘however, it has not been possible to identify any straightforward or proportionate’ solution.
Officials have even told me these workers are only losing small sums, so it does not really matter. That is surely indefensible. Most low-earners need every penny they can get. The money should be theirs, but they don’t know they are losing out – and often their employer doesn’t know either.
The parties supposedly responsible each claim it is someone else’s responsibility. The Treasury says the Regulator is responsible for auto-enrolment, while the Pensions Regulator says the Treasury is responsible for tax relief, the DWP is responsible for the master trust framework and employers are responsible for choosing the scheme.
Meanwhile, more and more workers lose money.
The bottom line seems to be that these low earners just don’t matter.
Sooner or later, they will discover they have been forced to overpay for their pensions than they needed to, what will they do?
They had no control over the choice of auto-enrolment scheme, which was arranged by their employer. But employers are not pension experts and don’t realise what is happening.
I believe pension providers and the regulator should have refused to allow low earners to be automatically enrolled into net pay schemes, unless they are reimbursed for the money they lose.
The last thing we need is another pension scandal but, sadly, that is what this is.
Baroness Ros Altmann is an independent pensions consultant and former pensions minister
