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 significant because it is the threshold above which employees currently need to earn to be enrolled into their employer’s workplace pension scheme.
The findings of the research indicate that eliminating the auto-enrolment trigger for individuals earning less than £10,000 has the potential to improve retirement outcomes by 7-13% 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 automatic enrolment into pensions on the basis of their low earnings. Although being covered by the policy does involve people contributing 5% of their earnings to a pension, not doing so means they miss out on tax relief and on the employer contribution of 3%.
Characterising low earners
The report, ‘Uncovering the Profile of Low Earners in the UK and the Potential for Pension Saving through Auto-Enrolment,’ found around one in nine employees, equivalent to 3.17 million people in 2022, meet the age criteria for automatic enrolment but earn less than the trigger income of £10,000 a year.
This group represents a complex demographic, comprising diverse subgroups who may be earning modest incomes for varying reasons. They may be earning lower amounts for a short period with potential for improvement in the future, or have lower earnings for a longer period.
Despite the variations in circumstances, younger people are the most over-represented demographic group among low earners. There are also a significant number of people close to retirement age, and an over-representation of females. Low earners are also more likely to be paid by the hour compared to the wider working population.
Those at risk of over-saving
The study sought to understand whether removing the £10,000 earnings trigger so people earning below this threshold automatically begin contributing to a pension would cause harm by squeezing their current income and living standards. It also sought to explore whether better understanding the profile of this group would present opportunities to mitigate this risk through policy interventions.
In order to arrive at a figure for the number of low earners who could be “at risk”, certain groups were identified as having a reasonable mitigating factor reducing their risk of detriment. For instance, if an individual was already paying into a pension they are already used to making those financial contributions. Another example of those less at risk are people on a low income who live in a household where another person – perhaps a partner or spouse – earns more.
After removing those groups deemed at a lower risk, the research found an estimated 300,000 people, out of 3.17 million total lower earners, who could be at a higher risk of financial detriment if brought within the scope of automatic enrolment.
Retirement income benefit for nearly three million
The findings of the research indicate that removing the auto-enrolment trigger for individuals earning less than £10,000 could have a potential positive impact of between 7-13% on retirement outcomes.
But 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 automatic enrolment, 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 potential policy measures include but are not limited to the following:
- keeping 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 more generally, and the intersectionality of different characteristics are needed before a final decision could be made on whether to amend the current £10,000 earnings threshold.
The PPI’s detailed analysis can be found in its technical report, ‘Every little helps: Should low earners be encouraged to save?’.
Nigel Peaple, Director of Policy and Advocacy at the PLSA, said: “The £10,000 earnings threshold for automatic enrolment 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.
“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.
“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.”
John Upton, Policy Analyst at the PPI, said: “Our modelling demonstrates that nine in 10 low earners have some mitigating circumstance that would mean that, if they were to be automatically enrolled, their living standard is unlikely to be reduced below an adequate level. These mitigating circumstances could be things like living in a household with a high overall income, expecting higher earnings after graduating university, being already enrolled anyway, or being ineligible for automatic enrolment for other reasons.
“As automatic enrolment policy is further developed, it is worth considering whether levers can be introduced which ensure greater involvement of low earners who will not be disadvantaged by saving. With low earners being such a complex group, this is no mean feat. However, automatic enrolment has been one of the greatest success stories of pensions policy in recent history, and to include more of the right people in it would be a worthwhile achievement.”
Mark Smith, Head of Media Relations
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Cali Sullivan, PR Manager
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