Auto enrolment: Could removal of £10k trigger help low earners save more into a pension

The report examined the potential of scrapping the limit in order to extend auto enrolment to nearly three million low earners who are currently excluded from the UK workplace pension savings system.

The PLSA commissioned the Pensions Policy Institute (PPI) to examine the profiles of employees earning less than £10,000, the threshold above which employees currently need to earn to be enrolled into their employer’s workplace pension scheme. 

The findings of the research did indicate that eliminating the £10,000 trigger had "the potential" to improve retirement outcomes by 7-13 per cent for nearly three million people.

It found one of the main reasons why some groups, particularly women and carers, have lower pensions than average is due to them being excluded from automatic enrolment into pensions on the basis of their low earnings.

The report - which looked at over 15 years of data - also found that many low earning women never fully regained their earning power, staying in low paid roles despite earning above £10,000 before they had children.

Although being covered by the policy does involve people contributing five per cent of their earnings to a pension, not doing so means they miss out on tax relief and on the employer contribution of three per cent.

Saving into a and low earners

The report, ‘Uncovering the profile of low earners in the UK and the potential for pension saving through auto-enrolment found one in nine employees, equivalent to 3.17 million people in 2022, meet the age criteria for automatic enrolment but earn less than the trigger income of £10,000 a year.

The PLSA said: "Despite the variations in circumstances, younger people were the most over-represented demographic group among low earners. There are also a significant number of people close to retirement age, and an over-representation of females. Low earners are also more likely to be paid by the hour compared to the wider working population."

Over-saving and auto enrolment

The study also looked at whether low earners who began contributing to a pension would be a risk of over saving, so sacrificing their standard of living if they had to put more into a pension. After removing groups considered lower risk, the research found only 300,000 people would be a financial detriment if brought within the scope of automatic enrolment.

The PLSA said consideration must be given to the group of lower earners at risk of over-saving to ensure they can afford to save more before any policy is recommended.

It also suggested a number of policy approaches that could be used to reduce the risk of over-saving including

• Keeping or lowering rather than fully removing the £10k trigger for some low earners, 

• Creating other short- or longer-term savings options, such as emergency or ‘rainy day’ savings, 

• Providing family or carer top ups through the welfare regime,

• Implementing temporary opt-down, rather than only opt-out options for contributions, 

• Other measures specifically tailored to hourly-paid workers who might also benefit from wider financial resilience measures such as through automatic saving.

Further research on low earners, the needs of under-pensioned workers more generally, and the intersectionality of different characteristics are needed before a final decision could be made on whether to amend the current £10,000 earnings threshold.

The PPI's detailed analysis can be found in its technical report, ‘Every little helps: Should low earners be encouraged to save?’.

Nigel Peaple, director of policy and advocacy at the PLSA, said: “The £10,000 earnings threshold for automatic enrolment was employed to protect workers on the lowest earnings from saving for the future when they might be better off having more money in their pockets today. However, the existence of the threshold does result in certain groups, notably women and carers, having lower pensions than average.

“We wanted to understand the make-up of this under-researched group and explore whether policy interventions could safely improve their retirement outcomes without hurting their standard of living in the here and now."

“This research suggests it could be feasible to safely bring the majority of low earners into the automatic workplace pension savings system without significant detriment, provided there are also carefully designed policy measures to protect those at risk of over-saving.  However, we believe more research is needed to be certain of this and that, if this is the case, further work will be needed on designing appropriate changes to the design of automatic enrolment, or the overall regime, to support the retirement income of low earners.

“We have been consulting with industry, stakeholders, consumer groups and other representative bodies on a set of policy proposals put forward in October last year, ‘Five steps to better pensions’, and will be publishing a further set of recommendations on how to improve pension outcomes in the autumn.”

Employees, employers and auto enrolment

John Upton, policy analyst at the PPI, said: “Our modelling demonstrates that nine in 10 low earners have some mitigating circumstance that would mean that, if they were to be automatically enrolled, their living standard is unlikely to be reduced below an adequate level. These mitigating circumstances could be things like living in a household with a high overall income, expecting higher earnings after graduating university, being already enrolled anyway, or being ineligible for automatic enrolment for other reasons.

“As automatic enrolment policy is further developed, it is worth considering whether levers can be introduced which ensure greater involvement of low earners who will not be disadvantaged by saving. With low earners being such a complex group, this is no mean feat. However, automatic enrolment has been one of the greatest success stories of pensions policy in recent history, and to include more of the right people in it would be a worthwhile achievement.”

Speaking at the launch of the report Jack Jones, policy officer of the TUC said employers needed to accept that increasing the amount they contributed to an employees pension scheme was in everyone's interests and any changes to automatic enrolment needed to made to benefit as many as possible.