Auto-enrolment will damage businesses and fail to help low earners

The IEA comment on the proposal to lower the earnings threshold for automatic enrolment in a workplace pension

Commenting on the proposal to lower the earnings threshold for automatic enrolment in a workplace pension, expected to be announced in a speech tomorrow by Rachel Reeves MP, Prof Philip Booth, Editorial and Programme Director at the Institute of Economic Affairs, said:

“Extending auto-enrolment down the earnings scale will nudge people into joining pension arrangements who can ill afford to do so. Many such people will move to full-time employment later in life and, at that stage, it will become appropriate for them to start to save for their retirement.

“The proposals will also load yet more costs onto employer – both administrative costs and costs of the employer matching contribution. Politicians should be making it easier – not more difficult – for employers to take on more staff.

“The effect of these proposals will be to exacerbate cost of living pressures by putting downward pressure on take-home pay.”

Notes to Editors:

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Detailed response to Rachel Reeves’ statements:

“Under David Cameron millions of working families facing a cost-of-living crisis are finding it harder and harder to save for their retirement.”

Response: This proposal does not give employees more money to save for their retirement except by loading more costs onto businesses. It simply involves enrolling people in pension schemes regardless of the suitability of the scheme for their needs.

“The government’s failure to encourage more people to save threatens to store up huge costs for taxpayers in the future with a rising benefits bill.”

Response: Whilst the fall in pension saving, partially – if not largely – caused by the last government over-regulating defined-benefit pension schemes, increasing taxation of pension funds by £5bn a year (in 1997 prices) and eroding rebates for contracting out of state pensions is regrettable, this statement is simply not true. The proposed flat-rate state pension will take the vast majority of people out of the means-testing net in retirement. The Labour Party should be aware of this as they are supporting its introduction.

“We are considering detailed proposals which could ensure the 1.5 million workers excluded from workplace pensions, are able to save for their retirement.”

Response: It is simply not true that such people are not able to save for their retirement. They can save through ISAs or personal pensions. 

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
 

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