Most auto-enrolment schemes have trustees responsible for looking after member interests, ensuring schemes are well-run, communicating clearly with members and offering suitable investment options. But many pension trustees are overlooking the interests of an important group of their members. The lowest earners in auto-enrolment – who are mostly women – are over-charged for their pensions.
Employers contribute to their workers’ pension scheme and takes contributions from their employees’ salary. Staff should also receive a Government incentive, of at least 25 per cent of the amount each worker pays in. But hundreds of thousands of low-earners never get the Government money.
Pension providers have two options for dealing with pension tax relief for their customers. Using a ‘relief at source’(RAS) method, the pension scheme claims basic rate tax relief from HMRC and adds it to each worker’s pension pot. However, a ‘net pay’ administration approach means the tax relief is settled before contributions are made, and those earning below the tax threshold do not receive the basic rate relief, equivalent to 25 per cent of their contribution.
Employees earning under £11,850 a year – mostly women – therefore pay 25 per cent more than they should for their pensions, if their employers – often unwittingly – have chosen a net pay scheme. Most of the new auto-enrolment master trusts operate on a net pay basis, so these pension providers effectively impose a 25 per cent surcharge on any members earning less than £11,850 a year.
Trustees often spend significant amounts of time and resources in selecting investment offerings and they usually pay careful attention to the charges members face. The amount that auto-enrolment pension schemes can charge for investment options is capped at 0.75 per cent a year, but trustees may try to reduce the charge to 0.5 per cent or below. But one has to question why trustees are agonising over 25 basis points, when low earners could be charged one hundred times more than this, if their scheme is set up on the wrong basis for them.
Have trustees of net pay pension schemes shown sufficient concern for these low earners who are paying an extra 25 per cent for their pensions but cannot do anything about the overpayments because their employer chooses the scheme, not them?
It would certainly be interesting to explore whether trustees are meeting their fiduciary duty to such members. Are these workers being treated fairly? Is a net pay scheme actually suitable for these low earners? Should trustees be ensuring that they are enrolled into a separate scheme, in which they would automatically receive the tax relief they are entitled to. Do trustees not have any duty to look after these members’ interests?
Astonishingly, the Government’s recent auto- enrolment review, the Pensions Regulator’s ‘Master Trust Assurance framework’ set up to identify ‘good schemes’, the new master trust authorisation rules, and even the PLSA Committee, designed to improve master trust savers’ retirement income, propose no solutions to this scandal.
The Government admits there are concerns for low paid workers, but it has not addressed the issue. Most low earners need every penny they can get and are at risk of poor pension outcomes.
So who should be taking responsibility? Everyone seems to be passing the buck.
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 but says employers are responsible for choosing the scheme. Meanwhile, more and more workers lose money.
Employers are not pension experts and often do not realise what is happening, but trustees are supposed to be overseeing the workings of the scheme and member interests.
It is possible to set up a net pay and RAS joint approach, with automatic integration between payroll and pension provider directing all low earners to a RAS scheme if set up.
Sooner or later, these low earners will discover they have been forced to pay more for their pensions than they needed to.
The last thing we need is another pension scandal but this problem has the potential to derail newly-building confidence in pensions. We must not let that happen.