No single change to the auto-enrolment regime will protect all low earners, according to the Pensions Policy Institute (PPI), with the removal of the lower earnings limit posing short-term affordability issues for many.
In a report published this week, the PPI found that for people who spend a particularly large portion of their working lives on low incomes, the lower earnings limit reduces their pension contributions to such an extent that higher minimum contribution rates are unlikely to compensate for the shortfall.
The lower earnings limit is currently set at £6,240, but there is legislation on the statute books to remove this entirely and calculate pension contributions from the first pound of earnings. However, this has yet to be enacted.
John Upton, PPI policy analyst and lead author of the research, said: “Auto-enrolment started with the assumption that low earners may not opt out by themselves and needed a degree of protection, but this assumption appears to be shifting: they are excluded from auto-enrolment to a degree, but as thresholds reduce with inflation, more people are gradually brought into scope.
“As no single policy reform may fully counter all risks, it may be necessary to make the assumptions around the capacity for saving and opting out more explicit, so that extra protections for at-risk groups may follow.”
“As the second Pensions Commission seeks to improve pensions adequacy, highlighting low earners as a high risk group, it will need to find the delicate balance between working life living standards and retirement living standards for low earners.
“As no single policy reform may fully counter all risks, it may be necessary to make the assumptions around the capacity for saving and opting out more explicit, so that extra protections for at-risk groups may follow.”
According to the 44-page document, funded by a grant from the Nuffield Foundation, at age 22, low earners are projected to have a further 16 years of low earning across their working life if they are a woman, or eight if they are a man.
Other risk factors, such as low educational qualification levels or taking time off work to have children, can raise these figures and increase the impact of any change to the lower earnings limit.
However, for other low earners who may be at risk of poverty, any contribution may be too much, and the removal of the lower earnings limit could increase their contribution significantly.
Fiscal drag affecting auto-enrolment outcomes
The research also shows how the impact of fiscal drag on auto-enrolment thresholds has made the policy’s current aims unclear.
The PPI’s analysis shows that the lower earnings limit has been eroded by inflation since it was last uprated in 2014, meaning it is now £4,300 lower in real terms. This has pushed employees and employers to pay more into workplace pensions.
As low earners and employers face a range of cost-of-living and economic pressures, the eroded limits mean a further £1,750 of employees’ earnings are now subject to a workplace pension contribution since the last uprating.
The analysis noted that the real-terms decrease in the value of auto-enrolment thresholds reflected an implicit assumption that low earners will opt out if it is in their best interests to do so, in order to address immediate cost-of-living pressures. This is despite the earnings trigger and limit having been designed to protect against low earners failing to opt out of saving when necessary.
Future reforms that explicitly outline assumptions about the capacity of low earners to opt out when necessary would help clarify the wider policy direction, the PPI argued.
The report comes as the second Pensions Commission explores changes to auto-enrolment and the wider pension system to improve the adequacy of retirement incomes.
