Self-employed should not be auto-enrolled, says trade body

More and more workers are choosing to go it alone and work for themselves. There are now about 5m self-employed workers in the UK, according to the Office for National Statistics, up from 3.3m in 2001.

Less than a third of self-employed workers in the UK are now saving into a personal pension, according to IPSE's research. Many are clamouring for a flexible pension solution bespoke to their employment status.

The advocates for automatic enrolment currently have not made out clearly how it would work for self-employed people

Tom Purvis, IPSE

Instead of auto-enrolment, it recommends that Nest’s ‘sidecar' account initiative be rolled out to the self-employed.

The mastertrust will begin trialling the sidecar project, which would split contributions between a pension pot and a “rainy day” fund, later this year, according to a Nest spokesperson.

The sidecar is currently being designed with focus on the workplace. However, Will Sandbrook, executive director of Nest Insight, did not rule out conceiving a similar model for the self-employed.

Should we auto-enrol the self-employed?

According to IPSE, 45 per cent of self-employed workers have previously saved into a pension, compared with today’s figure of 31 per cent.

Tom Purvis, economic and policy adviser at the trade body, said that auto-enrolment would be met with apathy by the self-employed.

Thirty-six per cent of those surveyed by the trade body said that they would remain in a scheme after having been auto-enrolled.

Twenty-five per cent they would opt out, while 38 per cent said that they did not know how they would respond to auto-enrolment.

“What this shows is just a general lack of enthusiasm for automatic enrolment,” Purvis said.

“The advocates for automatic enrolment currently have not made out clearly how it would work for self-employed people,” he added.

But Stephen Lowe, group communications director at specialist financial services company Just Group, argued in favour of devising a similar default solution for the self-employed.

“History tells us that encouraging a step up in take-up among the self-employed is almost certainly going to take the introduction of a similar kind of default,” he said.

“Only a quarter of those in this research said they would opt out if auto-enrolment was introduced, but opt-out rates for the employed have been far lower than first predicted,” he added.

The sidecar could work for the self-employed

The report indicates that 31 per cent of surveyed self-employed workers want “a flexible pension solution designed specifically for the self-employed”.

IPSE thinks that Nest’s sidecar pension scheme could provide this solution. Sandbrook commented that the “illiquidity of pensions” may be a “barrier to take-up among the self-employed”.

“One avenue is to explore whether alternative savings models beyond a traditional pension can help increase overall savings in this group,” he said, adding that the sidecar model or something like it could be one version of this.

Tom McPhail, Hargreaves Lansdown’s head of retirement policy, called the sidecar initiative a “really important concept”.

This month, a Supreme Court verdict highlighted the growing fragility in the divide between employed workers and the self-employed.

The court ruled that Gary Smith, a former contractor who carried out work for Pimlico Plumbers between 2005 and 2011, had been a worker at the company and was consequently entitled to workers’ rights there.

McPhail called for efforts to bring some self-employed workers into a “quasi-employee” status that would facilitate employer contributions.

“As far as possible, bring as many of those self-employed people into a system where ideally they’re getting an employer contribution as well,” he said.

“Even if you’re genuinely self-employed, and you aren’t bought into the pension system, the fact that you don’t have an employer making a contribution for you will make quite a big difference to your pension outcome,” he added.

The self-employed need clearer advice

Help for the self-employed could come from other quarters. In April, pensions and financial inclusion minister Guy Opperman urged insurers to “get involved to try and formulate products for the self-employed”.

Carol Johnson, head of savings policy at the Association of British Insurers, agreed with the report’s observation that bad communications are deterring the self-employed from saving for retirement.

Twenty-six per cent of those surveyed by IPSE called for “clearer advice on pensions”. “Sadly, we’re not surprised by the report’s findings,” Johnson said.

She emphasised the importance of “developing plainer language to explain complex retirement concepts to consumers”.