More low-earning workers are losing out in pensions as the problem of net pay schemes keeps getting worse, writes former pension minister Ros Altmann.
Auto-enrolment has been a celebrated success.
But, while I don’t want to see confidence in workplace pensions undermined, I’m afraid there is an issue with the potential to do just that.
A hidden scandal which could surface at any time, yet the Government is doing nothing about it.
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Tax relief for low earners
The problem concerns employers auto-enrolling workers who earn less than £11,850 a year – mostly women – into a pension scheme.
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.
Such schemes force the low earners to pay 25% extra for their pension, yet the workers have no idea they are paying so much more.
If their employer had chosen a scheme administered on the alternative ‘Relief at Source’ system, these low earners would not lose out.
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.
Low earners cannot reclaim the money they overpay.
No control
Most of these employees – and indeed their employers – are unaware of this problem, and the problem has just become significantly worse, as contribution rates tripled in April this year and will rise again from April 2019.
So these low earners will keep losing more and more.
If or when they discover they have paid much more for their pensions than they should have been, what will they do?
They had no control over the choice of pension scheme – it was arranged by their employer.
Every penny counts
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.
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No solution in sight
If members discover they have been overcharged, there could be a legal test case to try to reclaim the tax relief they have been denied.
But it is not entirely clear who would be responsible for compensation. Indeed, it could be that legally nobody has this responsibility.
Claims may be brought against the providers, who knowingly auto-enrolled these low earners even though the Net Pay scheme was not suitable for them.
Or will they try to challenge the Government for denying them the chance to claim the tax relief?
Or perhaps workers will sue their employer, for choosing a scheme which was not appropriate for them.
In turn, employers may claim that the Pensions Regulator did not do enough to ensure they were properly warned that they should not use this kind of pension scheme for auto-enrolment.
This could particularly apply to schemes which were given the MasterTrust Assurance quality mark and listed on the Pensions Regulator’s ‘How to Choose a Pension Scheme’ page on its website, without suitable risk warnings for employers about the Net Pay problem for low-paid staff.
Passing the buck
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 MasterTrust 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. How long will it be before this becomes a new headline scandal?