As press releases go, this speculative sound bite from NOW Pensions’ Policy Director Adrian Boulding takes some beating!
“The Chancellor’s announcement today has catapulted the self-employed in the spotlight and, with the increase in national insurance, we believe now is also the time to include self-employed in auto enrolment. Auto enrolment has been a great success, but the 5 million self-employed in the UK are excluded. With the auto enrolment review taking place this year, the government has an opportunity here to ensure that the self-employed, as well as employees, are able to look forward to adequate income in retirement.”
Turned round at 1.45pm yesterday, only minutes after Philip Hammond sat down, this was opportunistic! But Adrian Boulding is not a cheap publicist, indeed he was (along with David Yeandle and Paul Johnson) one of the troika who (at Steve Webb’s request) gave auto-enrolment the green light back in 2010.
Adrian is someone whose integrity, intelligence and insight I value.
The Auto-Enrolment review is upon us, we are asked to consider the scope of AE and how it might be extended to nudge our growing self-employed into the fold.
The problem is neatly demonstrated by this graph shared by Aviva’s Alistair McQueen.
The squiggly line shows the numbers of the self-employed increasing over the past 15 years. The purple columns show the numbers actively saving into personal pensions decreasing.
While the media comment has focussed on national insurance increases as tax-rises, Boulding is focussing on them as a portent of pensions to come (presumably in NOW’s direction!).
It has been some time since the DWP used the national insurance mechanism as a means of funding pensions. Of course state pension rights are based on a national insurance contribution history but the self-employed weren’t eligible for the state second pension (SERPS or S2P) and so have never had a link between the size of contributions and pension accrual.
Auto-enrolment is all about earnings related contributions which are defined by bands of earnings and set tiers of contribution. In a PAYE environment, this makes nudging pretty simple, AE to payroll is just another deduction – a quasi tax.
But the self-employed are not part of the PAYE network and – much as the Treasury would like them to be – they are not yet fully in the RTI reporting mechanism that is doing so much for tax-collection and revenue forecasting.
While the obvious reason to increase see off the messy class 2 and increase class 4 in line with employer NICs is to raise revenue. It gives a joined-up Treasury/DWP team, the opportunity to use the howls of indignation at this tax on entrepreneurship to introduce concessions.
What- for instance – if the self-employed could elect to sacrifice increased NICs into a workplace pension?
What if the 1% increase due for April 2018 could be averted on the production of a contribution certificate showing an equivalent amount had reached NOW, NEST or another qualifying workplace pension provider?
What if, the default position was set this way and the self-employed opted out into higher national insurance contributions?
And in case you are thinking that master-trusts can’t receive contributions from the self-employed, re-read Pensions Act 2008 which gives occupational schemes this provision. NEST already has the capacity to receive contributions from the self-employed.
This is of course highly speculative and I was only prompted into this line of thinking by Professor Pat-Pending’s runic utterance
we believe now is also the time to include self-employed in auto enrolment
But my memory had been jogged…..
Here’s Sir Steve Webb, a year ago, having a similar idea in a report on Britain’s “Forgotten Army”.
The report recommends that the special category of National Insurance Contributions (NICs) paid by self-employed people on their profits – Class 4 NICs – should be charged at a rate of 12% rather than the current 9%. But, instead of the additional contribution being retained by the Government, self-employed people would be able to opt to have that money diverted to a pension or Lifetime ISA, provided that they made their own direct contribution of at least 5%. The combined contribution of 8%, would match the statutory minimum under automatic enrolment.
Whilst self-employed people would not be forced to take out a pension, this would be the only way they could benefit from the additional 3% of NICs that they had paid in. This is very similar to the way in which employed earners can only get a 3% employer contribution if they stay enrolled in a workplace pension – if they opt out, the employer contribution stops.
It is estimated that around three million self-employed people would be covered by the new scheme and it could increase the number of self-employed pension savers by well over two million if opt-out rates are similar for this scheme as they currently are for automatic enrolment.
For Steve Webb’s policy report press here.
For recent discussions in the DWP Select Committee on self-employed AE pensions follow this link. http://www.pensions-expert.com/Law-Regulation/Select-committee-hears-evidence-on-how-to-get-the-self-employed-saving