Pensions provision has not caught up with the 21st century phenomenon of the non-standard worker, as this type of employment now accounts for one in three jobs in OECD countries, a new report has revealed.
According to ‘Pensions at a glance 2019’, published by the OECD on Wednesday, non-standard workers usually earn less, often make lower contributions to earnings-related pensions, and cannot pay in to occupational schemes.
One possible solution is ‘pot follows member’; another solution is to have fewer schemes so that people who change jobs don’t have to change pension provider
Bob Scott, LCP
Even assuming a self-employed worker contributed during a full career, they would end up with around 80 per cent of the pension benefit that dependent employees would receive from mandatory schemes, on average, across the OECD. Part-time work is three times more frequent among women than among men, the report stated.
Stefano Scarpetta, director for employment, labour and social affairs at the OECD, noted that most “social protection systems were built on the premise of stable, linear careers, often with only one employer, and thus are ill-equipped to provide adequate income security for non-standard workers”.
“Many of them, be it in self-employment, short-term, gig, platform or click work, risk falling through the cracks,” he added.
Ensuring pensions portability is crucial
According to the OECD, access to personal pension plans should not discriminate between different types of workers, and people should more easily be able to transfer their pensions when they change jobs.
The report said: “Including all non-standard workers in mandatory pensions in the same way as standard workers limits the financial incentives employers and workers might have to misuse non-standard employment.
“Ensuring the portability of pension rights and assets helps individuals who are changing jobs to keep saving in the same arrangement, or to transfer their vested rights.”
Some countries have already taken steps to improve self-employed savings. Since 2012, Chile tried to include these workers through auto-enrolment into the funded pension scheme that is mandatory for employees, but the majority of them (80 per cent in 2017) opted out.
In Germany, the current coalition agreement plans to establish mandatory pension insurance for all self-employed workers. At present, self-employed who work predominantly for one client and do not have employees have been mandatorily insured in the pension system since 1999.
In Italy and Portugal, the contributions of independent contractors relying on single contracts are now topped up by their clients.
How to solve the UK problem?
Looking at the implications for the UK, Bob Scott, partner at LCP, noted that the OECD report recommends taking steps that would limit “leakage” from the pension system as people change jobs.
“One possible solution is ‘pot follows member’; another solution is to have fewer schemes so that people who change jobs don’t have to change pension provider,” he said.
“The Australian superannuation system features a relatively small number of funds, so people can keep their retirement savings intact even if they change jobs frequently.”
The pot-follows-member system – which was launched in 2015 to allow a saver’s AE pension to follow them from job to job – was put on hold by Baroness Ros Altmann when she became pensions minister to allow AE to be completed.
Mr Scott also noted that other aspects in the OECD report, such as widening eligibility and lowering earnings thresholds for contributions, “are sensible and are measures that the UK must surely embrace in future”.
He added: “We have seen some moves in those directions – with reference to the gig economy workers, for example – but such measures are not seen as vote winners, so the parties’ manifestos are disappointingly light on pension commitments.”
Self-employed pensions solution still needed
Lynda Whitney, partner at Aon, is more upbeat, as she believes the UK is doing fairly well against this list of suggestions of best practice from the OECD report.
“The areas where the UK faces challenges include how to bring the self-employed and low earners into the benefits that we have seen from auto-enrolment,” she said.
“A review of auto-enrolment limits, and consideration of issues like starting from the first pound and review of the net pay tax anomaly can all help. However, the self-employed will always be a tough nut to crack as they often see any enforced savings as a new tax.”
More action needed to help self-employed women
Reform should be pushed up the agenda to support self-employed women and reduce the biggest challenges of the gender gap, experts say.
Ms Whitney favours “keep saving in the same arrangement, or to transfer their vested rights”, either through pot follows member, or through the “employee rather than the employer selecting their auto-enrolment provider, more like the Swedish system”.
But Lizzy Holliday, head of defined contribution, master trusts and lifetime savings at the Pensions and Lifetime Savings Association, points to practical issues of pot follows member, such as lower investment returns and the need for liquidity.
She said: “Department for Work and Pensions projections from 2012 suggest in total there will be around 50m dormant workplace DC pension pots within the system by 2050, and that more than 12m of these will be under £2,000 – in 2012 earnings.”
