BLOG: Shoulda, woulda, coulda

The new Covid-19 job retention scheme will offer many people in the UK a much-needed lifeline in the midst of an otherwise overwhelming situation. It will give those who may otherwise have faced unemployment in the current crisis a steady income, providing as much as 80 per cent of usual wages, with employers having the option to ‘top up’ this amount.

The recent news that government grants would also allow for auto-enrolment contributions, up to the statutory amount of 3 per cent, was welcomed by the pensions industry who had expressed concern that those already facing a lower income could now also face a blow to their pension.

However, many of those worst hit by the current crisis are likely to be existing low earners, and are therefore still likely to miss out on these crucial auto-enrolment contributions, albeit inadvertently.

As pension contributions under the job retention scheme are done on the basis of employees’ furloughed wages, often at 80 per cent salary, the ‘normal’ salary threshold for auto-enrolment contributions has effectively risen to £12,500 for furloughed employees.

Of course, some savers may rejoice at this news, for example it seems likely that those who had been previously caught out by the net pay anomaly will now fall below the auto-enrolment threshold if furloughed on 80 per cent of their wages. Not to mention that at a time of significant financial hardship, many workers are likely happy to take a break from their pension contributions.

Commenting on the impact of the new scheme on low earners and their pension savings, a TPR spokesperson stated: “Our focus is to support savers and employers during this challenging time.

“We welcome the measures announced as part of the government’s job retention scheme which means employers are supported in meeting their automatic enrolment responsibilities and savers will receive the pensions they are due.”

But some savers simply won’t receive the pension they would otherwise be due, with lower earners facing a reduction in contributions should they fall below the £10,000 threshold and losing out on potentially months’ worth of not only their own contributions, but the ‘free money’ they would’ve otherwise received from their employer.

The 'success' of auto-enrolment is somewhat protected though, as Lane Clark and Peacock partner, Steve Webb, clarifies: “If workers on furlough earn less than £10,000 per year or the monthly equivalent, this does not mean they drop out of the pension scheme.

“It simply means that this is a month when the employer and employee have no duty under automatic enrolment legislation to make contributions.”

Although Webb adds that if the employer has made a contractual commitment to pay a certain percentage rate of pension contributions, this contractual duty will continue to apply, albeit at the new lower salary.

But the true success of AE has been in making pension savings the ‘norm’, often being praised for pushing low earners in particular into pension schemes. It seems like a step in the wrong direction then for these members to now fall out of the boundaries. I would question whether someone is truly auto-enrolled when there is nothing going into their pension.

Industry experts had called for the minimum threshold to be lowered in the past, with The People’s Pension predicting earlier this year that a reduction to £6,000 would see an additional 1.2 million people saving for their future.

In fact, even the Department for Work and Pensions own automatic enrolment review proposed the complete removal of a lower earnings limit. But these changes were never put in place, and whilst the government had committed to a ‘mid 2020’s’ timeline for further AE developments, designed to support lower earners, it seems likely that this could be pushed even further down the road. And by then, it could very well prove too little too late.

At a time when prioritising is crucial, issues like this simply must be put on the backburner, but this is often at the detriment of savers. While the majority will be protected by the government scheme, lower earners must once again lose out on contributions, and some may do so without even realising it.

Equally, the loophole that caused the net pay anomaly won’t disappear. Instead, the window of who is being caught out by it will shift slightly, with those on a salary of around £13,000 losing out on tax relief should they be furloughed on 80 per cent wages. Though perhaps here we should be thankful that members are having to prioritise too, and many may not notice this lost tax relief.

Of course, the support packages being offered are hugely welcomed, and it’s perhaps not fair to expect the government to be able to create a perfect offering, especially in such an unprecedented crisis. But that just makes it more important that as an industry we continue to look out for and support members.

Now is not the time for shoulda, woulda, coulda. It’s time to make the best of a bad situation, and that starts by actually talking to members and communicating the changes to their pension.

Everywhere you look, people and companies are trying to accommodate to the current circumstances, from huge government packages to a single rent holiday from a private landlord. The pensions industry has a chance to help too, by communicating the changes to pensions, what they mean for workers, and what steps members can take to mitigate the impact on their savings. This will undoubtedly mean bad news for some savers, but giving them the information to at least arm themselves is crucial.

The good news is that this too shall pass, and when it does, the pensions industry will have a chance to support low earners whose contributions were hit in rebuilding their retirement income. There will be barriers to this too, such as the money purchase annual allowance, and it will be up to the industry to fight to break these down.

Now may be the time to prioritise, but when this has passed, there will also be time to fight for those who were on the front line. This includes low earners who are currently caught out by tax anomalies and thresholds, and those at the NHS who have faced near constant pension struggles for the last year.

None of these issues are new, and while now is the time to support everyone in an incredibly difficult and bizarre time. Change will have to come.

Next time ‘shoulda, coulda, woulda’, might not be a good enough excuse.

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