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.
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 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.
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.”
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.”