When you’ve reached the top, there is only one way to go – and so it could prove the case with auto-enrolment.
There is no doubt that getting 10 million more workers saving will prove one of the greatest pension policy achievements in decades.
We should rightly celebrate this. But at the same time, the chances of auto-enrolment being a thumping triumph for those who need it the most – society’s poorest workers – risks being undone by intransigence from employers and injustice in our tax system.
Around 1.75 million of the lowest paid pension savers are currently worse off to the tune of £63 a year each because they are auto- enrolled in a net pay pension and while they qualify for tax relief, they don’t actually pay income tax.
As a result, their pension contributions cost 25 per cent more than those of someone in a relief at source scheme.
These workers are more likely to encompass ethnic minorities, those with disabilities and carers.
But not only is this a social issue, it’s a gender one too – around three-quarters of those affected are women.
Yet few in power seem to care, and even the unions can’t seem to find the energy to shout about it.
Raise the issue with some employers and they shrug their shoulders and say that tax relief is a matter for HMRC.
The longer this impasse drags on, the more the injustice metaphorically and mathematically compounds, the greater the threat to undermining the success of auto-enrolment.
It highlights the issue of who is responsible for ensuring that savers are getting the full benefits of pension schemes. This first raised its head with the Whitbread split, when Coca-Cola put in a bid for Costa Coffee last year.
Whitbread operates a net pay scheme and the nature of its hotels to coffee shops business means that it has a high number of low earners, many who are likely to have missed out on tax relief.
Following the split in the company, the pension scheme liabilities were separated. Where once Whitbread was responsible, now Coke is.
This means that when, or rather if, baristas and cleaners at Costa suddenly realise they have missed out on tax relief there is the troublesome quandary over to whom they complain: the big American company that now employs them but has no historic responsibility for the scheme, or their former employer who no longer has any liability? In essence the loss has crystallised.
Certainly trying to claim historic relief from HMRC could prove impossible.
Not all pension schemes are so carefree about the plight of their lowest paid – and some have set up relief at source schemes as an option for those affected.
But for many companies this is an administrative burden that is a step too far. Besides, they feel strongly it is the responsibility of the Revenue to sort out this mess.
This just highlights that as well as the erosion in value that has hit savers following the demise of final salary schemes, they’ve also experienced the destruction of accountability. It’s a sad reality that DB trustees – for the most part – took their responsibility towards employees far more seriously than those running DC schemes. There was simply more to worry about. It felt like everyone was in it together, while with DC they’re not.
Employers need to do everything they can to ensure their workers are claiming all tax benefits: at the very least that means proper communication to those on pay bands most affected. They have the data – it’s time to use it.
But it’s HMRC that needs to carry the can for this shambles. Even if Treasury ministers were not aware of the problem before, they have been for at least three years.
They had the option of tweaking the Revenue’s systems when they had to make adjustments for Scottish rates of income tax, but chose not to.
Fixing the Revenue’s computers for this one issue has fallen in to a giant pile of papers in Whitehall titled ‘Too difficult’
That just shows you how much government really cares about low-earners.