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Auto-enrolment for the self-employed: The future or destined for failure?

The auto-enrolment rollercoaster

An estimated 80 per cent of the self-employed are not saving in any significant way for their retirement.

Roughly 10 million people are set to be brought into pensions saving thanks to auto-enrolment. 8 million have already made the leap. But that still leaves around 5 million self-employed people that need to ensure they have adequate pension provision.

As a wide-ranging report on the future of the self-employed is set to be released tomorrow, and as the industry is queues up to offer its own solutions, Money Marketing asks if auto-enrolment is the answer to the self-employed savings gap.

Political power

The Government commissioned Royal Society of Arts chief executive Matthew Taylor to conduct a review of modern employment practices in October.

The report is set to recommend that workers in the “gig economy” become entitled to more rights like sick pay and holidays, but will also draw on the availability of savings products for the self-employed.

Last week, a joint report from Royal London and Aviva suggested a plan for self-employed auto-enrolment, which Taylor said he would attempt to work into the review.

The proposal is for either an income tax top-up or an increase in Class 4 National Insurance contributions to be directed towards a pension rather than the taxman.

A set of check boxes when filling out tax returns would force the self-employed to either opt out, place money into an existing pension, or default into a randomly assigned qualifying provider on a carousel-style rotation.

Contributions would then get a top-up from the Government, provisionally set at 4 per cent plus 1 per cent tax relief.

The prospects for the proposal

In theory, achieving opt-out rates as low as those among the employed would provide a significant boost to self-employed savings.

Aberdeen Asset Management head of retirement savings and former shadow pensions minister Gregg McClymont says: “If you step back why should self-employed people be outside of an auto-enrolment system? I don’t see any material reason for that to be the case.”

Combining this idea with a carousel has a further advantage of giving providers a fair shot at self-employed pension money. However, it also comes with its critics.

It does not promote economies of scale at existing master trusts, and the randomly allocated nature eliminates the kind of choice employers have when they choose where they auto-enrol staff.

First Actuarial director Henry Tapper says: “I don’t think the carousel is particularly sensible. We have seen the carousel before, it’s what Nest wanted to do to get rid of their annuities.

“But it doesn’t make sense to me. Either you are engaging people with what they are buying or you are not. If you are not, you just default everyone into Nest. If you are, then there are other ways that are extremely cost effective, to get an informed choice based on putting a small amount of information in to discover what’s best for them.”

The carousel idea was also suggested in the context of potential master trust regulation where, if one failed, there would be a carousel of providers to guarantee benefits on a rotational basis. That idea was not taken forward.

Tapper-Henry-First Actuarial-2013
First Actuarial director Henry Tapper

Tapper says: “I really don’t think self-employed people will take kindly to being put in a carousel, their financial future coming up depending on what comes round.

“I find it hard to see why the self-employed should be given less choice than employers.”

But Tapper says given NICs were previously used to fund personal pensions, that is a system that could work well again – despite a potential logjam after the Government’s U-turn on NICs in the last Budget – and would be easier in practical terms than using an income tax top-up.

Practical pains

Achieving buy-in on a system that could appear like a tax rise for the self-employed or, potentially worse, unfair on the employed who already pay higher NICs but receive the same pension, are just a few of the practical barriers that would need to be overcome.

McClymont says while making the tax system digital will make practical issues simpler over time, a political challenge with a carousel would be to make sure every provider was offering the same terms and conditions.

He says: “We are not the only country to be grappling with these issues. The obvious starting point in terms of the self-employed is they used to be a proxy for being relatively well off. It’s no longer the case. Their average income has come down dramatically.

“If [the growth in the self-employed] proves to be a long-term trend, which at this stage seems likely, then the Government will ultimately have to do something significant. But as the old saying goes, it’s one thing being right, but you need to be right at the right time.”

Forging forward

It is expected that Taylor’s review will take a high level look at increasing pension saving for the self-employed, but will not make any recommendations on detail.

Standard Life pensions strategy head Jamie Jenkins is chairing a group responsible for reviewing the coverage of auto-enrolment as part of a separate Government review. Speaking as chair of that group, Jenkins says he would like to see the wider savings environment for the self-employed assessed, not just whether auto-enrolment would be feasible.

He says: “It’s right to say there are elements of auto-enrolment we want to copy from the employed, but the real question is how do we get [the self-employed] saving rather than just auto-enrolled. Some of the aspects of it, like having the employer as the facilitator, just aren’t there.

“I’m really looking forward to hearing Matthew’s findings, particularly anything that generates clarity to the job definition of the population that are included in the self-employed to help us consider what the boundaries we are dealing with and who we find solutions for.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Absolutely, unequivocally and definitely, destined for failure.

    1. “An estimated 80 per cent of the self-employed are not saving in any significant way for their retirement”. How accurate is that? Many self-employed game the system. Many deal cash in hand. There is really no reliable way of telling what they have or don’t have.
    2. The self-employed are such because in the main they are of independent mind and dislike being told what they must or must not do. Is all this push hiding the possibility of banning opt-outs and making AE compulsory? As long as there are opt out’s many of the self-employed will avail themselves of this option.
    3. AE is based on earnings – see point 1 above. There are plenty of perfectly legal scope to manipulate your earnings when self employed
    4. What of those not inconsiderable numbers who have perfectly good personal pensions? They will surely opt out in favour of these.
    5. It is completely overlooked that the self-employed do not have regular earnings. I believe that the liability to contribute will be based on tax returns, will that mean contributions have to be in one or two lump sums like the tax? (Quarterly tax returns may not necessarily be appropriate for lower earners). Or will the contributions be based on the previous year? Either is hardly ideal for the self-employed with fluctuating earnings.
    6. Finally what a great way to disincentivise the entrepreneurial class.

  2. Robert Milligan 10th July 2017 at 5:28 pm

    Auto enrolment is a scam, The only justification is the “”Employers”” contribute, I can assure you, I have never yet met an employee who works for an employer because of the pension on offer, those days are far gone, Pay people properly and let them decide what’s best, we have all we need The ISA a & now the LISA, I can see no justification for any other savings product, unless of course I was employed in the pension Industry

    • Basically I think you are spot on. I however do think that the LISA is a waste and that there is just about a justification for pension saving (PPs or SIPPS – not the woebegone AE). Any more meddling and pensions will be a dead duck.

  3. I broadly agree with Harry however surely the elephant in the room is that large numbers of ‘self employed’ aren’t in fact self employed – they are employed but use a self employed designation to benefit the employer and/or themselves.

    Setting aside the AE debate, if only genuine self employed people fell outside of AE then it’s perhaps a different debate (Harry’s point 2 aligning to my viewpoint) – for the time being, however, we have ‘self employed’ looking to their ‘non employer’ for pension provision, sick pay and holiday pay etc which makes the whole thing ludicrous.

  4. Robert Milligan 25th August 2017 at 1:25 pm

    Auto Enrolment for the Self Employed, You must be self injecting!! As an IFA I value my PI no claims history, and Who would Recommend it as being in the clients Interest

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