Pension saving is something a lot of people don’t think about often. These days, however, you don’t have to think about it thanks to automatic enrolment. Many who would never have saved into a pension otherwise are now on track for a better retirement.
This isn’t true for everybody, though. Auto-enrolment only applies for those earning above £10,000 annually – referred to as trigger earnings – at a single job.
Trigger earnings are intended to protect those at risk of poverty. For the most vulnerable low-earning individuals, every penny of earnings counts. Their standard of living is either already inadequate by most definitions or at risk of becoming so.
Earning a small salary doesn’t always mean you are experiencing lower than adequate living standards
Diverting some of their income towards pensions could worsen their circumstances and their problems can be addressed in different ways: through employer contributions or by supplementing their retirement income with benefits and the state pension.
The nuance to this situation is that the above does not describe all low earners.
Our modelling has identified the largest profiles within the low-earning population and it demonstrates that earning a small salary doesn’t always mean you are experiencing lower than adequate living standards.
Many low earners, for example, are young people working part-time, who rely on their parents for money or housing. Others are parents, particularly mothers, who juggle caring and working, but whose partners or families bring much higher earnings into the household. Others are people nearing retirement, who have built up significant savings and are gradually reducing their workload before retiring fully.
The differences between low earners highlights the challenges with blanket policies, such as the earnings threshold, which target a large, heterogenous, group of people. However, those at risk of poverty need some mechanism to protect them.
We can’t assume those who should not be pension saving would proactively opt out
Just as higher earners tend not to opt out or make any other change to their default arrangements after being auto-enrolled, neither should we assume people who should not be pension saving would proactively opt out.
On the other hand, those low earners who do not need protecting are being given less access to a system that could bring a real increase to their standard of living in retirement.
Even if their contributions are small, and even after factoring in the retirement income of higher earning partners, our modelling shows extra contributions could still give a significant boost to their retirement income. Higher earners are currently benefiting from auto-enrolment, through increased pension savings, and it could be a missed opportunity to exclude other people who would also benefit from it because they earn less.
Our analysis demonstrates a large majority (90.5%) of low earners have some mitigating circumstance that would mean that, if they were to be auto-enrolled, their living standard is unlikely to be reduced below an adequate level.
To include more of the right people in auto-enrolment would be a worthwhile achievement
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 auto-enrolment for other reasons.
Our research also found those low earners that have no identified mitigating circumstance are a highly diverse group with no single neat profile they fit into. There are only a few things common across the group, such as tending to be paid by the hour.
This group, however, is the group most likely to need some kind of protection – this could be trigger earnings, benefits or ensuring the right to opt out, and when to exercise that right, are well understood by everyone.
As auto-enrolment policy is further developed, it is worth considering whether levers can be introduced to 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, auto-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.
John Upton is policy analyst at PPI
