Too many risk falling back on the state for help at retirement. Change is needed.
Automatic enrolment has succeeded in dramatically increasing the number of people saving via a workplace pension.
According to the latest figures from the Pensions Regulator, there are now over 1 million employers complying with their auto-enrolment duties, with 9 million employees having been nudged into saving for their retirement.
Opt-out levels have also confounded expectations (albeit during a phase when minimum employee contributions are just 1 per cent of banded earnings) and, touch wood, there have been no major scandals to send savers running for the hills. All-in-all, things have gone pretty well.
There are, however, vast swathes of the population not covered by the reforms. In fact, the latest official estimates suggest 8.3 million are currently excluded. The Government intends to at least partly address this by expanding coverage of the reforms to younger savers (reducing the qualifying age from 22 to 18), although this will only be done at some point in the mid-2020s.
The qualifying earnings bands will also be scrapped (again, the Government has declined to give a specific date), while the earnings trigger – currently set at £10,000 – will remain under review.
One of the biggest chunks of the labour market to be excluded from auto-enrolment – alongside the low paid – are the self-employed.
According to the latest Office for National Statistics data, the number of workers classed as self-employed increased from 3.3 million (12 per cent of the labour force) in 2001 to 4.8 million (15.1 per cent of the labour force) in 2017.
The self-employed are, of course, a pretty diverse bunch. Some earn huge sums of money while others struggle to make ends meet. To complicate matters still further, the very nature of self-employment has been turned on its head by the rise of the so-called gig economy.
But across the breadth of self-employed workers, one thing is abundantly clear: they simply are not saving enough for retirement.
According to ONS figures covering July 2014 to June 2016, a staggering 45 per cent of self-employed workers aged 35-54 had no private pension wealth, compared with around 16 per cent of employees.
This trend continues for ages 55 and above, with over 30 per cent of people registered as self-employed having no pension wealth versus 14 per cent of employees.
There will be a number of reasons for this. Some will expect their business to eventually pay them enough to live on through old age, while others might be using all their spare cash to grow today.
Inevitably, there will also be a group who simply have not got around to thinking about retirement at all, or are simply struggling to make ends meet.
But for the Government, the problem is crystal clear: a large and growing section of society are failing to save for retirement and risk falling back on the state at some point in the future unless something is done.
Dealing with the problem
In response to this, the Conservative manifesto promised to make auto-enrolment “available” to the self-employed. Following a narrow election victory, the Government’s response to a review into the scope of the reforms published at the back end of 2017 sketched out a little more detail on how this would be done.
There will be no attempt to replicate the incentive of an employer contribution through the tax system as some had hoped.
Instead, the Government hopes to “build on the successful principles underpinning auto-enrolment” by utilising nudge theory to test a series of targeted interventions aimed at encouraging more self-employed people to “recognise the value of pension saving and achieve a shift, over time, of saving behaviour.”
Advisers clearly have a crucial role to play here
There is absolutely no question policymakers, the regulatory bodies and the wider pensions industry need to get better at explaining the benefits of pension saving to the self-employed.
It will certainly be interesting to see how the Government intends to target these communications. My suspicion is convincing the self-employed a pension is a good investment without the push of an employer contribution will test the behavioural economic theories of Richard Thaler and Cass Sunstein to the limit.
Advisers clearly have a crucial role to play here, both in delivering messages on the ground and helping policymakers devise interventions that actually work.
One of the biggest barriers to workers of all categories saving for retirement is fear of the rules being changed at some point in the future – pulling the rug from under them.
If policymakers want to convince the self-employed and others of the value of pensions, they need to first create a foundation of stability which people can trust.
The answer, at least in part, is staring us in the face. Auto-enrolment was created through cross-party consensus built upon the recommendations of an independent commission. A similar commission should be established to review and reform (if necessary) pension saving incentives, with the Government subsequently providing a long-term, cast-iron guarantee not to embark on major changes to the system.
Tom Selby is senior analyst at AJ Bell