Ros Altmann: The hidden scandal of net pay and low earners

Auto-enrolment (AE) is a celebrated success, with millions more people having workplace pensions as a result. We want this success to continue - nobody wants to see confidence in workplace pensions undermined.

However, there is an issue with the potential to do just that. A hidden scandal which could surface at any time and to which we need to find a resolution as soon as possible.

The problem concerns employers auto-enrolling workers who earn less than £11,500 a year - mostly women - into a scheme administered on a net-pay basis. Such schemes force these low earners to pay 25% extra for their pension, because they do not add basic-rate tax relief to their pension contributions. If the employer has chosen a 'relief-at-source' scheme, these low earners would not lose out.

Getting worse

Most of these employees - and indeed their employers - are unaware of this problem, and it is about to become significantly worse, as contribution rates are set to rise to 5% in April 2018. In coming months, the amount of money which low earners are losing will rise sharply.

If or when these workers discover they have been charged 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.

What are pension providers doing to stop low earners being auto-enrolled into net-pay schemes? What is The Pensions Regulator (TPR) doing to clearly and strongly warn employers? What is the government doing to ensure these low-paid workers do not lose out? The answer to all these questions is 'nothing'. No-one is bothering to help sort this out. These low earners just do not seem to matter and, because there are no easy answers, nothing is being done.

I have asked numerous parliamentary questions on this and the government says it has no plans to address it. How long will it be before this becomes a new headline scandal?

Small amounts

Some say that this issue isn't so important because 'it's not much money'. That is beside the point - these low earners surely need every penny they can get. Yet, when it comes to pensions, they are entitled to money that their scheme is not allowing them to receive.

And, of course, as the numbers of people being auto-enrolled and the minimum contribution levels continue to rise, the amounts of money being lost will keep growing.

Net-pay schemes cannot even reclaim the extra relief for their low earning members, because Treasury rules will not allow this.

If members discover they have been over-charged in this way, 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 an unsuitable scheme.

In turn, employers may claim that TPR did not do enough to ensure they were properly warned that they should not use this scheme for AE. This could particularly apply to schemes which were given the Master Trust assurance quality mark and listed on TPR'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.

The best we can hope for is urgent action to ensure low earners are not put into net-pay schemes and that providers find a way to ensure they do receive their due money. This is in all our interests, to avoid a new and damaging pensions scandal. 

Baroness Ros Altmann is a former pensions minister

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