Pensions have the reputation of being safe, reliable, but boring.
This year, however, pensions have come to the forefront of key debates about the future of the UK economy, first in the general election and now in Matthew Taylor’s long-awaited review of employment practices.
Taylor’s report calls for greater clarity in employment law to distinguish workers from those that are truly self-employed, so that individuals are not left in the position of not knowing their employment status and therefore what employment rights they are entitled to.
The review suggests creating a new category, a “dependent contractor”, so people are no longer wrongfully labelled self-employed and are given access to a “more limited set of key employment rights”.
The implications for the extension of certain benefits, including access to workplace pensions are significant.
Taylor also calls on the Government to explore ways to improve pension provision amongst the self-employed, welcoming the Conservatives manifesto commitment to automatically enrol the self-employed into a pension. The report lays out some initial thoughts on how to extending the auto-enrolment scheme making specific reference to an approach recently set out by Aviva and Royal London.
The holes in the net
But using the current automatic-enrolment triggers, would mean only around two million of the close to five million self-employed people would currently qualify. Implementing a savings policy for the self-employed is essential, but the terms of auto-enrolment would still see millions not contributing to a pension.
It is clear that nudge techniques are effective. But before jumping to the solution we need to fully flesh out the problem: why are the self-employed not saving into pensions? Will overlaying the automatic enrolment framework to the self-employed breed resentment and further disaffection? Do we need a nuanced solution reflecting that the self-employed may not react in the same way as employees?
Setting up the solutions
The Pensions Policy Institute, sponsored by Old Mutual Wealth, is currently conducting a comprehensive review of the saving strategies of the self-employed and has found that several of the key norms attributed to the self-employed are in fact, inaccurate.
For instance, the self-employed appear to have overall total wealth equivalent to employees, with those self-employed over the age of 55 having slightly more. It is also widely assumed that the self-employed plan to use their business to support themselves in retirement.
However, the research shows less than 20 per cent expect this to be the case. 27 per cent think property is more likely to be a key source of income for their retirement. 18 per cent of them believe that property in some form will be the largest part of their income, compared to just 10 per cent of the employed
Overall, the self-employed have a more positive perception of property than their employed peers both in terms of its safety and its profitability. When it comes to profitability, over half of the self-employed think it will make the most money, compared to 40 per cent of employees.
For safety, 43 per cent of the self-employed think it is the safest vehicle for retirement. Only a quarter of employees agree.
Bridging the gap
The self-employed may prefer property because of its characteristics: it provides an income itself that helps to smooth a self-employed person’s overall income, which would otherwise be subject solely to the volatility of their self-employed activity.
Whether their assumptions about property are right or wrong is of course up for discussion. However, what they reveal is that before we jump to policy recommendations for the self-employed, we need to consider what their current saving strategies are and why they have chosen them. Often solutions are put forward before understanding how they will be received by those they are targeting, which can often lead to the policy’s early demise.
Taylor’s review has made strides by bringing the retirement provisions of the self-employed to the forefront of discussions around workers’ rights. However, more work still needs to be done.
Jon Greer is head of retirement policy at Old Mutual Wealth