Official Report: Minutes of Evidence

The Chairperson (Mr Gildernew): I welcome Dr Rachel Scarfe from the University of Stirling. Rachel, can you see and hear us OK?

Dr Rachel Scarfe (University of Stirling): Yes, I can see and hear you. Can you hear me OK?

The Chairperson (Mr Gildernew): Yes, we can see and hear you clearly. Thank you for that. Rachel, we have your briefing paper in front of us. I invite you to make a brief opening statement of five to 10 minutes, if possible, before we move on to members' questions. Thank you.

Dr Scarfe: Great. Thank you for inviting me to give evidence today. My evidence relates to a paper that I have written with some colleagues. It speaks to a question in your consultation about whether there might be any unintended effects of widening the automatic enrolment policy to include more people. In our research, we considered whether there were any unintended effects from the original automatic enrolment and the roll-out, which, as was said earlier, was staggered by firm size, and whether that had any effect on employees' pay.

We looked at the roll-out between 2012 and 2016. Our data set did not cover Northern Ireland; it was just Great Britain. We focused on people who did not already have a pension and looked at what happened to their pay, particularly whether some of those pension contributions — the costs to firms — were offset through lower pay.

We started by looking at total compensation, and then we broke it down into three elements. The first element is basic pay. We found that there was no effect on basic pay. The additional employer contributions, which were initially 1% of eligible earnings, did not, as far as we can tell, have any effect on basic pay. Then we looked at employer pension contributions, which is another element of compensation, and found that, as you would expect, those increased. Finally, we looked at what we call extra pay, which is things like bonuses, shift pay, overtime pay and meal allowances. We found some evidence there that, relative to smaller firms that were not yet required to automatically enrol their employees, larger firms were able to pass on some of the costs of higher pension contributions by paying lower extra pay. Our central estimate for the amount of passed-on costs is that, for every pound of pension contributions that the larger firms had to pay, they were able to offset about 40p of that. That is a very imprecise estimate. We think that that provides some evidence that larger firms are able to recoup some of the costs. We have hypothesised that that effect is possibly driven by the fact that larger firms have more sophisticated pay schemes and are able to make small adjustments to pay in response to smaller costs.

I have two further things to say. First, this sits in a big strand of research on the effect of mandatory benefits, which is what automatic pension enrolment is. In general, the research finds that some element of the cost of those benefits is passed on to employees. There is evidence from the US on maternity benefits and sickness insurance protection; evidence from France about payroll taxes; and some evidence from the Netherlands that pension contributions are, to some extent, passed on to employees.

I turn to the specifics of the proposal. Our research covers the initial roll-out, in which employer contributions were only 1% of eligible earnings. Employer contributions then increased to 3% and then to 5% in 2018 and 2019. We did not study those increases, because, at that point, all firms had to adopt those increases at the same time. We do not have the econometric ability to see what happened, because, effectively, we do not have a treatment group and a control group.

We are now in a situation where employers have to contribute 3% of an employee's salary. We are talking about the higher contributions applying, first, to more employees and, secondly, through this proposal, to all of their salary, rather than to the eligible portion that Dr Jonathan Cribb discussed in the previous session. This is a bigger increase to employers' costs, and it might be the case that they are more likely to look for ways to shift some of those costs on to employees. Obviously, that could have effects on employees' take-home pay. It is worth noting that, since automatic enrolment was initially rolled out, starting in 2012, we have had a cost-of-living crisis. So far, opt-out rates have been quite low, particularly, as Jonathan said, among young people. Potentially, we may see more opt-outs in the future.

The proposals are very sensible, and they are definitely worth very serious consideration, but careful evaluation of any unintended effects, particularly on pay, is needed.

The Chairperson (Mr Gildernew): Thank you, Dr Scarfe. That was very interesting. You mentioned the cost-of-living crisis at the end. We took evidence from the Youth Assembly, and its Members raised that issue. They felt that the potential to contribute would be extremely curtailed, given the low levels of pay. That speaks to the work that our Economy Minister is doing on good jobs and the need to provide those to people.

This issue is a bit outside the Bill's scope. I know that you gave a caveat by saying that it is hard to calculate, but larger companies being able to claw back up to 40p in every pound is quite significant. In the circumstances of the Bill's passing, that could increase. It may be something for our report, but can you identify any way to address that or prevent it from happening?

Dr Scarfe: In the UK, we have a relatively high minimum wage. I cannot give figures off the top of my head, but it is probably the case that a lot of people who are not yet covered by automatic enrolment but will be covered are at or quite close to that minimum wage. In that case, employers would not be able to reduce employees' pay: they have hit the limit and cannot go below that, so that would not happen. That does not really answer your question, I suppose.

The Chairperson (Mr Gildernew): Are there any measures that the Government can take? The purpose of the Bill is to provide people with decent pay and a decent pension. If some increases to pensions are clawed back through other measures, is there any way that we can prevent that? I am conscious that, in one of our earlier sessions, a witness talked about the need to advertise pension rates. Being able to compare rates and see what is happening might help. Are there any longer-term ways to prevent employers undermining the pension element by taking it off people's pay in other ways?

Dr Scarfe: Sure. There are two things. First, advertising is important. Lots of evidence shows that people pay quite close attention to job adverts. The more information that people have, the better informed they will be. You will then have more competition between employers for employees.

The second thing is a longer-term policy. We know that the basic element of pay — your hourly, monthly or annual wage — is much more rigid. It seems that it is much harder for employers to fiddle around with that element than it is for them to fiddle around at the edges with meal allowances, shift pay and overtime. If we can think of ways to encourage employers to move more compensation towards basic pay, they are less likely to make those small adjustments when their costs change. It is about thinking of ways to encourage employers to do that.

The Chairperson (Mr Gildernew): The Bill will grant the Minister powers to make regulations. Does there need to be wide-ranging communication and consultation, particularly with young people and business, before any regulations are enacted?

Dr Scarfe: Yes. There also needs to be careful evaluation if regulations are enacted. We are talking specifically about pensions, but there will be other policies on other mandatory benefits in the future. We do not know what those are yet. When we come to make new policy, the bigger the evidence base, the better. In the previous session, Jonathan talked about a staggered roll-out not necessarily being the right way to implement this update of the policy, but that did allow us to evaluate quite well the effects of the initial policy. We should build on that evidence base when possible.

The Chairperson (Mr Gildernew): OK. Thank you, Dr Scarfe.

Ms Mulholland: Thank you so much for your engagement today. It is really appreciated. Do you have any ideas on what unintended consequences we should be looking for? One of the issues with unintended consequences is that, sometimes, you do not know what they might be in order to look for them. Do you have ideas of what we should be looking for and how checks could be put in place?

Dr Scarfe: You should keep an eye on the variable elements of pay, which are often forgotten but are important to people. One of the things that makes evaluating policy in the UK difficult is the fact that we do not always have good data. Until recently, we did not have good data on people who do not work fixed hours and who are in casual jobs. It has been hard to evaluate those people, for example. It is important to keep an eye on how those different elements of pay are moving. It is difficult to say for sure, before you implement something, what will happen, because we just do not know.

Ms K Armstrong: One of the issues that we have had with the elements of pay that are additional to contracted hours has been whether holiday pay or entitlement has been applied. As part of these regulations, would one way to ensure that we measure all those elements and whether they are being taken up be to ensure that they are pensionable?

Dr Scarfe: Yes, for sure.

Ms K Armstrong: OK. Thank you.

Dr Scarfe: It is worth noting that it is possible that we will have a lot of change in worker rights over the next few months. I have not read the draft Employment Rights Bill, because I was preparing for this meeting this morning, but this policy needs to be considered in consort with that Bill.

Mr McHugh: Doctor, unless I have interpreted it wrongly, you implied that part of the cost of implementing such a scheme could be passed on to the lower-paid, and that that has been the experience in other countries. What strategies can be adopted to ensure that that does not happen? It would be absolutely unfair and undermine the very purpose of the scheme in the first instance if those costs, no matter to what extent, became a burden on the lower-paid.

Dr Scarfe: Employers can pass costs on to employees when there is no competition for employees. In a holistic way, the more good jobs that we can create, the more competition there will be amongst employers for employees, and the less opportunity, as it were, they will have to pass on costs. Effectively, when you are competing for employees, you have to pay them more. It is question of creating jobs that people want to do. Then, if they are not being paid well, they can go elsewhere.

Mr McHugh: Is it possible to include it in the legislation that an employer is prohibited from passing on such costs?

Dr Scarfe: Yes, you definitely could include that. The trouble is that, while you can say that basic pay cannot fall as a result, when you have all those elements of extra pay, it becomes very difficult to tell whether someone not getting quite as many overtime shifts in a week, for example, is due to pension costs or something else. It is difficult to see how you could point specifically to that in this legislation.

The Chairperson (Mr Gildernew): I flag to members that officials are coming in after the break. Some of these questions can be directed to them.

Mr Kingston: Rachel, you have looked at our proposed legislation and compared it with that in GB. I just want to clarify the current situation and what is proposed. Automatic enrolment in a pension scheme will apply only if you are earning more than £10,000, and that will remain the same.

Dr Scarfe: Yes.

Mr Kingston: The level at which your earnings are calculated from is currently £6,000.

Dr Scarfe: It is £6,200 or something.

Mr Kingston: That will reduce to zero. We were given the figure there. Eight per cent of £6,000 is £480 to £500: that is the additional cost that there will be between the employee, the employer and the Government. The automatic enrolment age in GB is currently 22. Has the legislation to reduce that to 18 been passed, or is it still going through?

Dr Scarfe: I think that it is still going through, and they have to consult.

Mr Kingston: So, it is just us, but what is currently proposed here will be fully aligned with what will be the case in GB.

Dr Scarfe: Yes.

The Chairperson (Mr Gildernew): It is essentially the same Bill going through here and across the water.

Mr Kingston: That is fine. Thank you.

Ms Ferguson: Rachel, I have a quick question for information purposes. What is the minimum number of years that you need to pay into a pension before you can cash out? From my general knowledge, I assume that it is age 55 or if you move to another job, but I could be wrong. Is there a minimum number of years? I am conscious that there is a four-year difference now. Can people cash out early if they want to?

Dr Scarfe: I am not sure. Different schemes have different rules. It is worth saying that we looked at private-sector schemes, which tend to have defined contribution schemes rather than defined benefit schemes.

Ms Ferguson: Thank you, Rachel.

The Chairperson (Mr Gildernew): Rachel, I have just one more question before we let you go. I think that that is members' questions virtually all covered. Largely, this is impacting — positively, we hope — on young people and people in more precarious gig economy-type jobs. What communication methods do you think are most effective to encourage such people to avail themselves of the benefits, or to explain the benefits?

Dr Scarfe: Lots of research on job adverts has shown that people read them very carefully and compare them very carefully. It has been suggested to us that pension contributions should be mandated as part of job adverts and that that should be put alongside salary, so that people can look at the two together when comparing jobs. That is extremely important, especially for younger people, who might not have pensions at the forefront of their mind when they are looking at jobs. That information needs to be there with the salary so that they can see that there are two elements of compensation.

The Chairperson (Mr Gildernew): Do we know where young people of that age look for work? I presume that they do not all read the 'Belfast Telegraph' or 'The Irish News'. What is your experience of where people of that age cohort look for work?

Dr Scarfe: That is not my area of expertise, but I think that, nowadays, it is online.

The Chairperson (Mr Gildernew): No other members have questions. Dr Scarfe, thank you for that very interesting take, the provision of your written document, and your taking of members' questions. It has been extremely helpful. I wish you all the best for the future.

Dr Scarfe: Thank you very much.