John Upton of the Pensions Policy Institute explains the organisation’s latest research, which sheds light on how auto-enrolment limits affect low earners.
Dear Pensions Commission…
As the new Pensions Commission sets out to address pensions inadequacy in the UK, it highlights at the outset that “there are significant inequalities in retirement outcomes, with lower earners, women, carers, and the self-employed all at greater risk of low living standards in retirement”.
While there may be different factors that are unique to each of these groups, something they have in common is that they do not have a neat, well-recognised career trajectory.
“For someone with a less conventional career trajectory, knowing how much to save – and when – is a far more complicated question, making policy harder to design and more likely to create inequalities in retirement.”
John Upton, PPI
Inadequacy is not just a problem for these groups. People with high earnings and conventional career trajectories may also have inadequate pensions; however, these people have relatively straightforward future career trajectories, and it is safer to assume they can save.
For someone with a less conventional career trajectory, knowing how much to save – and when – is a far more complicated question, making policy harder to design and more likely to create inequalities in retirement.
Before the Pensions Commission can suggest improvements to better reflect the wide variety of career trajectories undertaken within these groups, it must identify what these trajectories are. Just as there are recognised groups that are vulnerable to undersaving, there are recognised blind spots where there is not enough information about each group to accurately assess how reforms may impact them.
Checking for blind spots
One of the most widely recognised blind spots is the persistence of low earning, explored within the PPI’s report ‘From Payslip to Pension’. A person is a persistent low earner if they spend a significant proportion of their working life as a low earner.
Not all low earners are persistent – in fact, one of the most significant low-earning demographics is young people, who may work part-time or low-paid jobs, perhaps while still in education. However, after gaining qualifications or experience, many will soon transition into a higher-paid, stable career trajectory. For a person like this, it may be safe to exclude them from saving in this first job, since the savings they could make in that brief period of low earning are likely insignificant when compared to their lifetime saving capacity.
However, it has long been suspected that many low earners are much more persistent than this, and this has now been confirmed by the PPI’s research.
An 18-year-old woman who is currently low-earning and who left school with nothing higher than GCSE qualifications can expect to spend an average of 21.5 years as a low earner – that is, earning something, but less than the equivalent of a full-time living wage (£24,570).
Currently she will save little, if anything, during these two decades, because of the features of the automatic enrolment known as the “trigger income” and “lower earnings limit”. These exclude workers altogether if they have an annual salary of less than £10,000, and disregard the first £6,240 of any saver’s salary when calculating contributions, which disproportionately affects low earners.
Putting new findings to work
The fact that it is normal for some low earners to spend two decades earning small amounts is vital information. We are now better equipped to estimate how much different groups might save across their whole life, and how a policy that targets low earners will affect their lifetime pot.
For example, it is now easier to assess the potential impact of removing the lower earnings limit. For someone earning £24,570 annually, the lower earnings limit is the difference between contributing £1,466 a year and £1,966 a year, assuming auto-enrolment minimum contributions. For someone on £50,000, it is the difference between contributing £3,501 and £4,000.
In other words, the lower earnings limit means that low earners miss out on a bigger fraction of their potential savings. This may be appropriate if you are financially vulnerable, or will have many years of high earnings to make up for lost time, but if low earning is part of a long-term, financially stable lifestyle, it may mean that you are more likely to undersave.
Next steps for low-earner research
Of course, it is not straightforward to determine if saving is affordable. A low earner may be in danger of entering poverty, which is especially likely if they do not have a high household income. If they spend most of their life with low living standards, it may make more sense for them to spend everything they earn in working life and rely more heavily on the state pension or benefits in retirement.
This is another blind spot that hampers pension equality: it is not yet clear which points in a person’s career trajectory are ideal for saving for different low earners. It is also not clear whether the very lowest earners should save at all, and whether the benefits system is incentivising the right saving behaviour.
This will be the focus of upcoming PPI research. With this information, policymakers will have more evidence to make sure that any reform that improves pension adequacy, improves pension adequacy for all.
John Upton is a policy analyst at the Pensions Policy Institute.
