More and more people are working for themselves, and their low savings rates could spell disaster for the state. Can auto-enrolment be expanded to cover the self-employed, and how should it be done?
“It seems somewhat of a rarity to meet self-employed people in their 20s, as I am, who already have a pension set up for themselves, or who have even thought about this seriously,” he reflects.
Balancing short-term spending and long-term saving is tricky for people of all ages and employment types, but Jennings says the precarious nature of self-employment income adds an additional layer of complexity.
The one group that auto-enrolment does really miss out is the self-employed
Daniela Silcock, Pensions Policy Institute
“The fact that your annual earnings are never truly set in stone does make it particularly tricky to know how much would be a suitable amount to put away,” he says.
For all the millions swept up by auto-enrolment since 2012, the Taylor Review of Modern Working Practices has identified a growing proportion of the workforce who are working for themselves. Self-employment now accounts for 15.1 per cent of total employment.
Previously, that growth might not have worried pensions policymakers. The stereotypical image of the self-employed is one of small business owners, who compensate for volatile income with things like property wealth.
A new era of self-employment
However, Steve Webb, director of policy at Royal London, notes that the recent increase in self-employment seems to have come from specific demographics.
“A lot of the growth in recent years has been at the two ends of the age spectrum,” he says.
That could mean that older workers are leaving their full-time jobs to continue their career part-time. The Taylor review has found that the level of part-time workers has increased.
And it also evidences the rise of younger self-employed workers, some of whom may be participants in the gig economy. Recent court cases have moved towards classifying these people as workers, but report author Matthew Taylor has warned that without a new classification, gig workers and the future of the gig economy cannot both be protected adequately.
An increase in young self-employed people is not a problem in itself, notes Webb: “The younger ones, if that’s just a transitory period and they then spend 40 years as an employee, you’ll get them [into the pensions system].”
But if these people remain self-employed, their prospects for retirement look bleak indeed. Just 13.1 per cent of self-employed people were participating in a pension in 2014-15, dropping to 4.2 per cent among those aged between 25 and 34.
“Auto-enrolment and the state pension reforms have together really been working on targeting those who have been left out of older systems,” says Daniela Silcock, head of policy research at the Pensions Policy Institute. “The one group that [auto-enrolment] does really miss out is the self-employed.”
If those low saving rates persist, inaction over the self-employed could land future governments with an enormous welfare bill as undersaved entrepreneurs fall back on the state.
It is for this reason many in the pensions sphere are focused on the task of bringing the self-employed within the scope of auto-enrolment. Indeed, the government’s review of the regime is expected to address the problem during the winter.
But translating words into actions is often tricky in a field as complex as pensions.
UK self-employed have not taken initiative
Looking abroad for inspiration, few countries with inert populations have managed to achieve good coverage of the self-employed.
The Netherlands consistently ranks above the UK in the Mercer Melbourne Global Retirement Index, and anecdotal accounts suggest good coverage of the self-employed.
Many Dutch self-employed belong to industry-wide defined benefit schemes. While these schemes are often compulsory for members of that trade, they have been set up independently of government, a level of self-employed engagement not reflected in the UK system.
Martijn Vos, pensions and insurance managing director at Ortec Finance, says a select group of his countrymen resent this compulsion to save, and they challenge it in the courts.
But he estimates 90 per cent do not, “because they say it is the only way” to get cheap access to retirement provision.
Self-employment “fits best with the non-compulsory type of decision”, he admits, but cautions that non-compulsory options should be set up to harness the power of institutional scale.
Most countries use compulsion
Glyn Bradley is a principal in Mercer’s innovation, policy and research unit, and works on the team responsible for the company’s index.
He notes that in other auto-enrolment countries such as New Zealand, membership remains voluntary for the self-employed.
Meanwhile, several Scandinavian countries lean on high levels of compulsory national insurance to ensure decent replacement ratios for workers of all statuses.
In a whole range of areas, the self-employed are akin to round pegs in a system built of square holes
Mike Cherry, Federation of Small Businesses
“There’s pretty much no distinction between employees and the self-employed,” says Bradley.
He highlights a key problem faced by auto-enrolment efforts: self-employed people are in charge of their own pay.
“You’d have to have a system where the money disappears but there’s some way of getting it back.”
The proposals so far
This, however, is the current focus of UK pensions policy, and one specific vehicle has received more attention than any others. First proposed by former pensions minister Webb, it involves auto-enrolling the self-employed when they fill in their self-assessment tax returns in January.
The method does have its drawbacks. Introducing the policy via a class 4 national insurance rise was effectively ruled out by the backlash to chancellor Philip Hammond’s spring Budget this year, and Webb admits that a mechanism would be needed to smooth contributions flow, instead of having two “lumpy” payments in January and July.
But with the right communications strategy, he says he feels the policy can still succeed. “You can then describe pension tax relief as a matching contribution for the government,” he says, which is “much more attractive” to prospective savers.
Other methods suggested to date include automatically converting a worker’s occupational pot to a personal pension with the same level of employee contributions, when they leave employment to work for themselves.
“For this to work it would be very important that something was done to ensure that the charges didn’t become unduly high when people moved,” says Silcock of the PPI’s proposal.
Are pensions the right vehicle?
Of course, all this misses the possibility that auto-enrolment, at least into a pension, might be unsuitable for the self-employed.
“In a whole range of areas, the self-employed are akin to round pegs in a system built of square holes,” says Mike Cherry, national chairman of the Federation of Small Businesses.
Cherry says an incentivised savings system must be found for the self-employed, but that this should be administered on an opt-in, not opt-out, basis.
“Our members say that not knowing how much income they will have from month to month is the top challenge they face as a self-employed person, which means other solutions should now be explored.”
AE process is still the right choice
Some concerns about being able to afford contributions are fuelled by a misconception “that the money that leaves your account is a fixed amount”, argues Benedict Dellot, associate director, economy, enterprise and manufacturing at the Royal Society of Arts.
A well designed solution for the self-employed might further protect savers by agreeing “a threshold whereby, if you reach a degree of profits or level of revenue, then money starts to go into a pension account”, he says.
Select committee hears evidence on how to get the self-employed saving
Proposals including an expansion of auto-enrolment and raising class 4 national insurance contributions, aimed at boosting pensions coverage in the UK, have been put before the Work and Pensions Committee as part of its inquiry into self-employed workers.
However, Dellot agrees that pensions as we currently know them do not provide enough flexibility for savers whose income and spending needs fluctuate significantly.
Instead, he favours more flexible arrangements, which also involve access to liquid savings.
“One of the things that we’re actually pushing for is the lifetime Isa and whether we can make that a better savings vehicle,” he says, adding that the Lisa should be available to over-40s and include some provision for short-term savings.
Whether that is achieved via the Lisa or a pension with a sidecar account, Dellot says the use of “forced questions” to engage the self-employed makes sense.
“What’s the worst that can happen? I think it’s a no-brainer to have some sort of assisted enrolment.”
