PPI: Consider different policy options for self-employed pensions

The self-employed have become a focal point for policymakers seeking ways to improve pension provision. In December 2016, the Work and Pensions Committee launched an inquiry into self-employment and the so-called gig economy.

More recently, in July this year the Matthew Taylor Review of Modern Working Practices suggested auto-enrolling self-employed people into a pension and administering this through self-assessment tax returns.

There are 1m more self-employed people in the UK since the 2008 financial crisis, bringing the total to 4.8m, according to research published on Monday by thinktank the Pensions Policy Institute and pensions company Old Mutual Wealth.

Self-employed people would have to be effectively warmed up to the idea that they’d be saving 

Nathan Long, Hargreaves Lansdown

The report highlights how only 12 per cent of self-employed are saving into a private pension, while only 28 per cent of the self-employed believe pensions are the safest way to save.

This lack of retirement saving among people who work for themselves has certainly not gone unnoticed, and forms part of the government’s 2017 auto-enrolment review.

However, out of the 4.8m who are self-employed, the research has found that only around 2m meet the current eligibility thresholds for an auto-enrolment-type approach, and of this 2m, 77 per cent are male.

The report emphasises that the self-employed are not a homogeneous group, and are comprised of various groups with different attitudes, characteristics and needs.

It explores how policy alternatives could meet the different needs of various groups within the self-employed labour market.

For example, while 2m meet the eligibility thresholds for an auto-enrolment-type approach, 500,000 could potentially maintain workplace pensions and 1m could be encouraged to save for the longer term with alternative products. The report adds that these options are not mutually exclusive.

Flexible saving products needed for volatile incomes

According to the PPI report, self-employed people’s main concerns are the volatility of their income stream and the inflexibility of current pension products. It argues that, to support self-employed people saving into a pension, these issues need to be addressed.

Jon Greer, head of retirement policy at Old Mutual Wealth, said there is a “need to nudge them into long-term saving, but you need to deal with the volatility element of it”.

He said that in order to get these people to save, “something like the sidecar” idea could help.

This concept, developed by mastertrust Nest and due to be trialled next year, is an add-on to a conventional pension which would split contributions between a pension pot and an external bank account or “rainy day” liquid fund.

Large proportion of self-employed are millennials

Kate Smith, head of pensions at provider Aegon, agreed that “self-employment is not just one group with one characteristic”, stressing the differences between so-called gig economy workers at companies such as Uber and Deliveroo, and traditionally self-employed people running their own business, or contract workers at big companies, for example.

The report highlights how the largest number of people entering self-employment come from the millennial group, something “that should be a worry for social policy”, said Smith.

“What you don’t want is these missing years,” in people’s 20s, where they have missed out on saving into a pension, she said, stressing that it is “best to start saving as early as you possibly can”.

Source: Drewberry

An auto-enrolment-type approach could work, “but then you’ve got the age-old problem of where are you actually going to put that pension contribution”, she said, noting the various possibilities, including Nest. 

AE-style system would need phasing in

When it comes to maintaining workplace pensions, the report explains how self-employed people who have previously been employed and had access to a workplace pension could transition to a personal pension.

Nathan Long, senior pension analyst at platform provider Hargreaves Lansdown, said that a combination of this and an auto-enrolment-style system for the self-employed “would be the desired outcome”.

“Automatically enrolling people into a pension when they do their tax return, I believe, is the best way to solve this issue,” he said.

However, “it would have to come in over a period of time” because “self-employed people would have to be effectively warmed up to the idea that they’d be saving, in the same way that employees are sort of being warmed up to that”, Long added.

He said that there needs to be a default pension, if that is going to be the case, and"the obvious place" for people to be defaulted into is mastertrust Nest.