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Self help

The White Paper has largely ignored the lack of self-employed provision

When faced with a difficult question, there is sometimes a temptation to sweep it under the carpet. The Department for Work and Pensions seems to have given into this temptation when considering the plight of the self-employed in the context of pension reform.

The White Paper runs to 222 pages, including appendices, but spends minimal time discussing the self-employed. It does mention that there are around three million of them and highlights the steady decline in the proportion contributing to a private pension from 66 per cent in 1991/92 to 49 per cent in 2003/04. Given that the self-employed are a growing sector, it is worrying that fewer than half contribute to a private pension.

The reason the Govern- ment may not be tempted to address this group is that it does not believe they need help. The White Paper states: “In terms of total wealth, the self-employed as a group have much higher total wealth than the employed.”

This disguises the diverse nature of this population, which ranges from successful entrepreneurs through to those seeking to move out of unemployment and many modest earners in between.

I get the niggling feeling that the self-employed could be the biggest losers when it comes to pension reform. Personal accounts could work effectively for employees who will be enrolled automatically when they join a new employer and receive employer contributions to supplement their own. Receiving these contributions means it is more in their favour to join personal accounts and less likely that their own contributions will be means-tested away. But the self-employed will not have either of these comfort blankets, so will be less likely to join.

They seem to lose out on state pensions as well. Linking the basic state pension to earnings from 2012 will benefit them, as will improved state pension credits for carers, as this group often balance home and work responsibilities. But they are not allowed to join S2P and this is not on the table to be considered at a later date. S2P is highly redistributive from higher to lower-earning employees. In relative terms, this means the lower-earning self-employed are doubly disadvantaged by not being eligible for S2P.

The self-employed are the group most likely to fall back on means-tested benefits as they have the choice of not making any savings for retirement. Is there anything that can be done to help them? The problem centres on how you introduce quasi-compulsion and collect personal account contributions in the absence of an employer. There may be a very simple answer. The National Insurance system could be used as an effective way to pick up contributions from the self-employed, perhaps comparable to those paid by employees towards S2P. These could be collected every year in arrears and paid into the pension scheme of the individual’s choice. The Government could then encourage additional contributions to be paid above this amount.

This is not a perfect solution. It means compelling the self-employed while the employed still get the option of opting out of personal accounts. The self-employed also lose out on the 3 per cent employer contribution.

But at least it is a solution. If not taken forward, the Government has to fall back on clear communication for this group, especially when considering the interaction with means-tested benefits. The Government should make sure that the self-employed have unhindered access to regulated advice if they need it. That crosses over into the FSA’s deliberations on the future role of RU64 and needs to be considered within that sphere as well.

Sometimes there is not an easy answer but that does not mean we have to stop looking. The self-employed are too important a group to leave them out in the cold.

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