The Department for Work and Pensions is collaborating with the industry to test ways of encouraging the self-employed to save for retirement. Is the focus on marketing messages, tech and behavioural prompts enough to turn things around?
There is a widening gap in retirement savings between the employed and the self-employed. The problem is that the characteristics which make self-employment attractive can also make regular saving difficult. Flexible working patterns give rise to irregular income, and having no boss also means nobody to facilitate workplace pensions and match contributions.
To address these problems, the government is working with various partners in the financial services and technology sectors to test a range of approaches designed to encourage the self-employed to save for the long term.
The recent Department for Work and Pensions report, Enabling Retirement Savings for the Self-Employed, sets out the broad remit of these trials, which will focus on marketing messages, behavioural prompts and technological tools.
However, is this approach likely to achieve the desired results?
Limited but a start
Many commentators point to the government’s need to gather evidence of what works before making any policy changes, to avoid getting reforms wrong.
Tracing the government’s thinking back to the 2017 auto-enrolment review and last year’s TechSprint – a joint event from the DWP, Association of British Insurers and the Treasury – some see the forthcoming trials as an obvious starting point.
“TechSprint generated some genuinely interesting innovations,” says Altus head of retirement strategy Jon Dean. “These focused on targeting interventions at logical points in the regular business cycle of self-employed people.”
Ideas that came out of TechSprint included automated savings linked to gig economy platforms such as Uber, as well as invoicing and tax reporting technology platforms.
“Marketing and nudges may seem limited but they are a start, and this is a way to look at the issue from the viewpoint of the self-employed,” comments Dean.
Director, Sheraton Financial Planning
Marketing is not going to make much of a difference because self-employed people can be very cynical about pensions and are hard to deal with in respect of long-term planning.
Property is often their big thing; a lot of my self-employed clients like buy-to-let because they see it as “proper money” and think the government won’t change the rules every five minutes like it does with pensions.
Some sort of advice voucher system could help, as would the pensions dashboard, but compulsion is really the only way forward.
View from the inside
Pension providers Aegon and Aviva are both involved in the saving trials. They point out that the self-employed comprise a range of groups with different needs.
These differences could translate into a range of responses to various communications and prompts.
The task is to find out which method works for which section of the self-employed population.
“We have a database for our products, often general insurance products, of people we know are sole traders,” explains Aviva head of workplace savings and retirement Malcolm Goodwin.
“We have marketing permissions for the database and we will be sending emails to the different categories of self-employed and addressing them in slightly different ways, which is one of the things we are testing.”
Goodwin says the emails will click through to a link with pension and Isa information side by side, to test which savings vehicle appeals to which category of worker.
“If the trials solve the problem and get the self-employed to save, fantastic, the government doesn’t need to do anything else,” he says. However, if the trials show that a different tack is needed, he expects the government to think about forming policy around some sort of push. “But we are a long way from that,” he adds.
Aegon pensions director Steven Cameron says although a voluntary approach is being explored at this stage, there are indications that the self-employed are receptive to modest contributions to retirement savings by default.
“There is a stat in the DWP report that 60 per cent of the self-employed would prefer to make a small cutback in lifestyle to make retirement savings – so we shouldn’t discount some sort of automatic mechanism,” he says.
“The obvious one is National Insurance contributions but that seems to have been made politically toxic after the U-turn on raising contributions for the self-employed.”
Director of public policy, LEBC
We accept that nudges and advertising can be effective in getting people to take on board the need to save. However, we were disappointed this was the only response from the government, as we do not think it is enough.
It is time for the government to level the playing field in terms of the tax relief and support offered to the employed, which is simply not available to the self-employed.
In fact, we wrote to the pensions minister and asked for the government to consider two simple measures: introduce a tax-free advice allowance so that the self-employed can offset up to £500 a year to access regulated advice, and reintroduce carry-back relief for pension savings.
Too woolly to work?
Some commentators believe the trials will not make much difference and that a degree of “semi-compulsion” is needed to increase retirement saving among the self-employed.
Clifton Asset Management chairman Adam Tavener thinks the government’s heart is in the right place but does not expect the trials to work.
“I do not think what is proposed at the moment, albeit only in trial form, will make a significant difference. The impediments to committing to significant savings within the sector are too great for marketing and nudges to overcome,” he says.
In Tavener’s experience, the irregularity of cashflow, preferring to use spare cash for a deposit on a property or to grow their business, and a feeling that retirement is too far away to be a priority are the main obstacles to long-term saving among the self-employed.
“One mechanism that could be made to work is using the role of HM Revenue and Customs in collecting NICs,” he says.
“HMRC could collect pension contributions and round them up or down, depending on the trading year you’ve had.”
Tavener believes that the self-employed would be more inclined to make pension contributions if they had to actively opt out of doing so and if they could claim a rebate.
He also proposes allowing people to use their pension contributions on a loan basis to fund a deposit on property purchases.
“The only way you can make retirement saving relevant to the here and now is being able to use it in another form, such as buying a house,” he concludes.