Pensions experts are calling on the Government to avert a savings disaster by bringing self-employed workers into automatic enrolment.
The reforms require every employer to enrol staff in workplace pensions by 2018 but exclude people earning less than £10,000, the under-22s, those over state pension age, and people without an employer.
At the same time, the self-employed’s share of the labour market has risen dramatically since the recession while the proportion of savers has plummeted.
So, could the Government move to bring people without an employer into the scope of auto enrolment or should it rely on boosting awareness? If so, where could the Treasury find extra cash to expand the programme?
Around 20 million people are eligible for auto-enrolment but the same number again are excluded, according to the Pensions Policy Institute.
This includes 4.6 million who are classed as self-employed, representing 15 per cent of the labour market, up from just 3.8 million in 2007, according to Office for National Statistics figures.
But the growth in people working for themselves has not been matched by increased participation in pension saving.
In 2002/3 there were 1.2 million self-employed contributing to a personal pension. By 2013/14 this had fallen to just 420,000.
Government-backed scheme Nest accepts self-employed members but to date only 1,500 have signed up.
Aegon regulatory strategy director Steven Cameron says: “People need something on top of the state pension and the self-employed are the group most at risk of having nothing other than a state income.
“Whether the Government goes for compulsion or behavioural encouragement it would be right to turn political attention to that group next.”
Tisa pensions strategy director Adrian Boulding was part of a three-man review of auto enrolment in 2010. He says the Government should clamp down on salary sacrifice arrangements and use the proceeds to fund an extension of auto-enrolment where the state plays the part of the employer.
In last month’s Autumn Statement, the Treasury said it “remains concerned” about salary sacrifice and “is considering what action, if any, is necessary”.
Boulding says: “There is a growing shock that the fabulous success story of auto-enrolment is only a partial success because a whole load of people were not in it.
“The self-employed miss out on being auto-enrolled, they miss out on the employer contribution and they miss out on the Government subsidy of employer National Insurance relief.
“The self-employed need a larger incentive from the Government to make up for the fact they are not getting that NI relief and they are not getting the employer contribution.”
He adds: “Salary sacrifice is a bit of a dodgy practice and the Government would save between £600m and £800m by unwinding the large salary sacrifice schemes. Some of these are just blatant tax avoidance schemes and could be stamped on by HMRC.
“That money could be put back into a self-employed pension for moderate earners as matching contributions from the Government.”
Boulding says high-street banks and building societies would begin actively selling pensions to self-employed customers if a savings incentive was created.
Hargreaves Lansdown head of retirement policy Tom McPhail says: “The logical place to go is via the tax and National Insurance system. I don’t see how else you could facilitate auto-enrolment for the self-employed.
“In terms of contributions we’re back to something that looks a bit like contracted-out Serps pensions, effectively saying to the self-employed, ‘you all need pensions; here’s the qualification threshold, we’ll collect a chunk of money and put it into Nest’.
“If the tax incentives are there, despite the lack of an employer contribution, you could still make it a logical and worthwhile proposition for the self-employed.”
There is no doubt there is a growing crisis among the self-employed but not everyone agrees the Government should step in and assume the role of employer.
The new single-tier state pension begins from April 2016 and the long-term self-employed are set to be one of the winners from the changes. Under the old system the self-employed were limited to the basic state pension but – as long as they have 35 qualifying years of NICs – they will get an increase of around £40 a week in the new regime.
Aviva head of financial research John Lawson warns against the Government helping one section of the population over others.
He says: “The self-employed are one of the big winners from the new state pension. They get an extra £40 a week or £2,000 a year. That’s equivalent to around an extra £70,000 to buy an annuity of the same value. It’s questionable whether the tax-payer should subsidise this part of the population. The taxpayer doesn’t do that for the low paid in employment to any greater degree so why pick out one section over another?
“The state is not an employer, so it doesn’t feel like a logical step to pay a contribution on behalf of the employer. In total around a quarter of an employee’s salary goes on NI, but the self-employed only pay 9 per cent. If anything the low-paid employed deserve more because they are paying more in tax.”
But he concedes the decline in adviser numbers and the disbanding of salesforces are likely to have hit the self-employed disproportionately.
Federation of Small Businesses senior policy adviser David Nash says around 40 per cent of its members are “one-man bands”. He says: “The Government needs to recognise this is an issue and use the 2017 review of auto-enrolment to think about how we can tailor it to the self-employed who don’t currently have any other forms of savings.”
Syndaxi Financial Planning director Rob Reid says: This is an accident waiting to happen. Self-employed people often say they will sell their business to fund their retirement and as an industry we try to sell them the idea of diversification so they have something else to fall back on. If the Government is going to start targeting the self-employed they are going to have to do a lot more than the “I’m in” campaign.
Government will struggle to fund auto-enrolment expansion
The automatic enrolment strategy has been built around people getting contributions from their employer to boost their savings. It is really hard to do something similar for the self-employed.
We also have to think about how the self-employed population has changed over the years. We need to do some more in-depth research to know what sort of work is being done by the self-employed. A lot of the growth has been from jobs that were traditionally employed roles, such as contract work.
People did not worry before about the self-employed in terms of pension provision because the feeling was they had a business they had built up which they could use to fund their retirement. However, it is likely that since the recession a lot of people have gone self-employed rather than becoming unemployed.
We also need to have a look at the overlap between self-employment and part-time working. There are still a fair proportion of self-employed people who are in that situation where in order to live off the business you have to realise it in some way, which is either selling it on or winding it up. But now many will have an intellectual business rather than anything that has physical value and it is harder to realise that kind of human capital into money when you retire.
One of difficulties at the moment is whenever we are looking to increase the amount of resources devoted to one part of the population, we are looking for places to take resources from.
Auto-enrolment is spreading the same amount of money over a larger group of people. If we introduce the self-employed without any extra money, then there is a question of whether anyone comes out well enough.
Unless more money is going to come from the self-employed themselves or from the Government – which seems unlikely in the current climate – it really is about more signposting and encouragement.
Chris Curry is director of the Pensions Policy Institute