Almost three million low earners currently excluded from the UK workplace pension savings system could be brought safely within the scope of automatic enrolment, according to a recent study.
The PLSA commissioned the Pensions Policy Institute (PPI) to examine the profiles of employees earning less than £10,000 to investigate whether automatic enrolment could provide a way of improving their retirement outcomes.
The £10,000 figure is the threshold above which employees currently need to earn to be enrolled into their employer’s workplace pension scheme.
The research indicates that eliminating the auto-enrolment trigger for individuals earning less than £10,000 has the potential to improve retirement outcomes by 7 to 13 per cent for nearly three million people.
One of the key reasons why some groups, such as women and carers, have lower pensions than average is due to them being excluded from auto-enrolment on the basis of their low earnings.
Although being covered by the policy, it does involve people contributing 5 per cent of their earnings to a pension.
Not doing so means they miss out on tax relief and on the employer contribution of 3 per cent.
Nigel Peaple, director of policy and advocacy at the PLSA, said: “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, the existence of the threshold does result in certain groups, notably women and carers, having lower pensions than average.
“We wanted to understand the make-up of this under-researched group and explore whether policy interventions could safely improve their retirement outcomes without hurting their standard of living in the here and now.”
Retirement income benefit
Before the policy can be recommended, further consideration must be given to the group of lower earners at risk of over-saving to ensure they can afford to save more.
If it were decided to bring this group within AE, there are a number of policy approaches that could be used to reduce the risk of over-saving, and all would need to be carefully considered and tested before a change in the regime, the research found.
The potential policy measures include the following:
- keeping or lowering rather than fully removing the £10,000 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.
Peaple said: “This research suggests it could be feasible to safely bring the majority of low earners into the automatic workplace pension savings system without significant detriment, provided there are also carefully designed policy measures to protect those at risk of over-saving.
“However, we believe more research is needed to be certain of this and that, if this is the case, further work will be needed on designing appropriate changes to the design of automatic enrolment, or the overall regime, to support the retirement income of low earners.”
He added: “We have been consulting with industry, stakeholders, consumer groups and other representative bodies on a set of policy proposals put forward in October last year, ‘Five Steps to Better Pensions’, and will be publishing a further set of recommendations on how to improve pension outcomes in the Autumn.”
