In the Pensions and Lifetime Savings Association's (PLSA's) regular column for Professional Pensions, the trade body's director of policy and advocacy asks if auto-enrolment (AE) could improve the retirement outcomes of lower earners.
In the realm of pensions policy, there exists a significant knowledge gap when it comes to understanding and addressing the needs of low earners. While various segments of the population have been subject to extensive research, individuals with low incomes who are still engaged in employment have remained relatively understudied.
The PLSA commissioned the Pensions Policy Institute (PPI) to evaluate the issue of low earners and whether AE could provide a way of improving their retirement outcomes.
The subsequent report - Uncovering the profile of low earners in the UK and the potential for pension saving through auto-enrolment - is focused on those who earn below £10,000 and not currently automatically enrolled into workplace pension schemes.
The £10,000 earnings threshold for AE was employed to protect workers on the lowest earnings from saving for the future when they might be better off having more money in their pockets today.
However, it means they miss out on accumulating savings in a pension, as well as employer contributions (3%) and pension tax relief.
Characterising low earners
Low earners are a complex demographic, representing diverse subgroups. They may be temporarily earning lower amounts, with the potential for improvement in the future, or have lower earnings for extended periods.
Younger people are shown to be the most over-represented demographic, but there are also a substantial number of people at the upper pre-retirement age, and an over-representation of females.
Key subgroups from the research:
- young people aged 16-22 working part-time, who may or may not be studying
- low earning mothers aged 30-49, and
- people aged 50-64 across a range of household circumstances.
Those at risk of over-saving
The research explores whether removing the £10,000 earnings trigger would cause harm to the low earners by squeezing their current income and living standards. It also evaluates whether better understanding this group would present opportunities to alleviate this risk through policy interventions.
When evaluating those at risk, certain groups were identified as having a reasonable mitigating factor which reduced the danger of detriment. For instance, if an individual was already paying into a pension, and therefore already used to making financial contributions, or low earners who live in a household where another person - a partner or spouse - earns more.
After removing those lower risk groups, an estimated 300,000 people, out of 3.17 million total lower earners, could be at a higher risk of financial detriment if they were automatically enrolled.
Retirement income benefit for almost three million
The research also considered how much the inclusion of people earning less than £10,000 per year might benefit in terms of retirement income. Removing the AE trigger for individuals earning less than £10,000 could have a potential positive impact of between 7-13% on retirement outcomes.
Future policy implications
Interestingly, this research shows that not all those earning less than £10,000 per year would be unable to afford to save for a pension under AE and many of them might benefit. More analysis is needed to understand if AE is desirable and beneficial to low earners, especially on the impact of their current expenditure and whether it might put them at risk of over-saving.
There are several policy approaches that could reduce this risk:
- keeping and/or lowering, rather than fully removing, the £10k trigger for some low earners,
- creating other short- or longer-term savings options, such as emergency or ‘rainy day' savings,
- providing family or carer top ups through the welfare regime,
- implementing temporary opt-down, rather than only opt-out options for contributions,
- other measures specifically tailored to hourly-paid workers who might also benefit from wider financial resilience measures such as through automatic saving.
Further research on low earners, the needs of under-pensioned workers, and the intersectionality of different characteristics are needed before a final decision can be made on whether to amend the current £10,000 earnings threshold.
In the meantime, we also look forward to the speedy introduction, planned by the government, of pension savings from the first pound of earnings for those who already meet the criteria for AE. Beyond this, the PLSA continues to call for the gradual increase of AE saving in the late 2020s from the current level of 8% up to around 12% over the next decade, with a 50/50 split between employer and employee. If Britain does not increase its pension saving, many more people will fail to have the pension income they hoped for and be left with no choice but to keep working late into their 60s.
Nigel Peaple is director of policy and advocacy at the Pensions and Lifetime Savings Association