One of the advantages of the Christmas period is that it allows those of us with extra time on our hands (and a sometimes-urgent desire to get away from family pressures) to duck away into the office to carry out some “vital” work-related research.
After all, there is only so much inane chatter one can listen to visiting friends and relatives, who want to tell you all about their pet’s flatulence problems or the strange customs of new neighbours.
In my case, I escaped to some of the websites I subscribe to and finally made time to read some of the stories I promised myself I would get around to when I had a spare minute.
And so I picked up on the articles about the auto-enrolment review, and the announcement that 18 to 21-year-olds will be automatically enrolled by their employers into workplace pensions.
The measure means an extra 900,000 people will eventually be drawn into saving for their pensions, boosting their long-term retirement income. In addition, the Department for Work and Pensions has said it will also scrap the lower earnings limit for pension contributions to start, leading to an extra £2.6bn being saved.
Making earnings pensionable from the first pound would mean those on low salaries in particular seeing a larger proportion go towards pensions and also receiving more employer contributions and tax relief.
The DWP announcement was generally welcomed by commentators. Pensions Policy Institute director Chris Curry was quoted as saying the aim of removing the earnings band was to ensure “that auto-enrolment contributions are actually 8 per cent, rather than 8 per cent of a band of earnings that can fluctuate from year to year”.
The problem is that the change to auto-enrolment when implemented, will only come into effect from the mid-2020s. Everyone knows that the sooner you start saving the better. Those seven years could make a vast difference to the final outcome for an entire generation of young workers.
Hargreaves Lansdown has helpfully number-crunched the difference in financial outcomes for someone who is 22 (the current lower age for auto-enrolment), who pays no contribution on the first £5,876 (the current lower earnings limit).
Based on earnings of £28,000 a year increasing in line with inflation and net investment returns of 5 per cent, the pension pot at retirement would be £146,000. If you enrol at 18 and scrap the lower earnings limit, as is being proposed, the value of that pension pot climbs to £213,000.
Delaying the start of this measure by seven years flies in the face of this reality. If the DWP truly believed it is important for millennials to start saving into a pension right away, it would do everything in its power to bring the process forward, not move with such glacial speed.
The other problem from the DWP’s own analysis is that, even after this announcement, there are still about 12 million individuals under-saving for their retirement. This works out at a massive 38 per cent of the working age population.
Those particularly affected are so-called gig economy workers on basic hours contracts. While officially classed as self-employed, they scramble to put together a living income by holding down several jobs at once. They will be left out of auto-enrolment, as will lower earners on salaries below £10,000, which is the minimum you need to earn from one job before you are auto-enrolled into the pension scheme.
According to the DWP, 13 per cent of workers with more than one job do not qualify for auto-enrolment, despite earning more than £10,000 in total.
The problem extends more widely among the self-employed population. It is becoming clearer the commitment on the part of self-employed individuals to saving into a pension has fallen sharply in the past 15 years — from 1.1 million to just 380,000 between 2001 and 2015, according to the Pensions and Lifetime Savings Association.
These figures are revelatory. What they tell us is that the old-style assumption of self-employment as an option that permitted people to plan for their future has been superseded by a new reality, where people are desperately scrambling to survive financially in the here and now.
In the Conservative party’s pre-election manifesto, the Government had suggested extending auto-enrolment to 4.8 million self-employed individuals. Now the DWP says it plans to test a series of “targeted interventions” to increase self-employed pension contributions.
In that sense, it is understandable from a political perspective if self-employed people are spared what would seem to many to be an additional – and unaffordable – levy on their incomes.
That said, in the long run, a solution will need to be found that addresses this issue.
Never mind young gig workers, most of whom are probably not sympathetic to the Conservatives anyway, but if a by-product of inactivity on the pension front leads to the bizarre anomaly of retirement underfunding among the Tories’ more loyal electoral constituencies – the self-employed – the consequence could be widespread anger.
Quite what that does to the prospect of scrapping the triple lock on state pensions is anyone’s guess.
Nic Cicutti can be contacted at firstname.lastname@example.org