The PPI’s John Upton explains that low earners cannot be treated as one homogenous group, as the Pensions Commission and others seek to improve retirement savings adequacy.
The last time we had a Pensions Commission, it identified a downward trend in the amount of personal savings and suggested reforms in order to reverse this trend. It succeeded, and now automatic enrolment means the majority of UK workers have some kind of pension.
This time, the Pensions Commission is tasked with building on this success and ensuring that the pensions we have will be suitable for the retirements we want. This is a daunting task because policymakers must account for the huge range of circumstances among savers, with relatively few ways to distinguish people.
“Two low-earning individuals who appear the same in many ways may have vastly different needs, and poorly applied policy could guide them into harmful choices.”
John Upton, PPI
Among the working population, perhaps no other group is as tricky as low earners. Many people may spend a significant amount of their career earning small amounts: recent PPI research found that 10% of women spend 28 years or more as a low earner. Two low-earning individuals who appear the same in many ways may have vastly different needs, and poorly applied policy could guide them into harmful choices.
Understanding saving capacity
Policymakers cannot assume that all low earners can save. Some low earners earn a large part, if not all, of the household earnings. They may have children or be at risk of poverty. If these people are automatically enrolled into a pension, just like higher earners, they may fail to engage with their pension and understand their options. This could mean staying enrolled when the right choice may actually be opting out to preserve as much working life income as possible.
However, policymakers cannot then go to the opposite extreme and exclude all low earners from auto-enrolment. For some low earners, saving should be encouraged for the same reasons it should be encouraged among higher earners. Ultimately, people generally expect their pension to allow them to enjoy a similar standard of living in retirement as they did in working life.
If a low earner can afford to save, but doesn’t, they may experience a shock when they retire. For example, this could happen in a couple where one partner is a lifelong high earner, and the other is a lifelong low earner. In working life, the low earner is protected from poverty by their partner’s income, so they can contribute to a pension safely.
However, if only the high earner is encouraged to save, then essentially the household has two working life incomes and one retirement income, and they may face difficulties in maintaining their lifestyle when they retire.
Despite this, these two extremes are still only half of the challenge. Low earning is most common at the youngest working ages, and these young low earners may have very different outlooks and financial priorities. Some may be a year away from high earnings, some may be on the same salary for the next decade, and some may have such precarious employment that they can’t even predict their disposable income in the next month.
The Pensions Commission’s challenge
Even for young low earners, with uncertainty about future housing, relationships, and income, it may be difficult to determine the ideal pension saving behaviour. The Pensions Commission must consider how to do it on a national scale with limited information.
Policymakers may need to think outside the box and consider, for example, that building a savings habit may actually be more important than the amount that a young person saves.
Currently, auto-enrolment compromises by excluding the very lowest earners, and then for low earners that are enrolled, reducing the proportion of their salary that is contributed, using a feature called the lower earnings limit. This protects the most at-risk low earners from at least some working life hardship, and lets low-risk low earners save something, which is better than nothing.
However, the PPI has produced new evidence that demonstrates what is already suspected: the current parameters of auto-enrolment still leave inadequacies for low earners. Some common low earner profiles may earn enough to be enrolled, while being dangerously close to being in working life poverty.
“It is only now, with over a decade of evidence, that it is possible to see where our pensions system could be better supporting those people for whom working life finances and retirement finances are an especially sensitive balancing act.”
John Upton, PPI
A proportion of low earners who have comfortable living standards may be able to contribute more, without leaving so much of the pension saving to their partner. Other young low earners will have high earnings in their future, but in their early twenties are in low-paid and insecure work, which makes it tempting to defer pension saving altogether.
None of this is to say that it is impossible to create an adequate pension system for low earners.
From the start, auto-enrolment acknowledged this wide range of circumstances, and it successfully avoided the worst outcomes. It is only now, with over a decade of evidence, that it is possible to see where our pensions system could be better supporting those people for whom working life finances and retirement finances are an especially sensitive balancing act.
John Upton is a policy analyst at the Pensions Policy Institute.
