Five Steps update: helping low earners

Solving the issue that current policy settings do not promote people saving what they need to enjoy a decent retirement is the priority challenge for the PLSA, and indeed the pensions industry, today.

The PLSA has dedicated a large amount of effort and attention both to raising the profile of the problem, and pushing for reform. The PLSA has published two consultations on this topic: first was the Hitting the Target report in 2018, and the second was the Five Steps to Better Pensions report in 2022.

Our next stride forward in campaigning for reform is a report, to be published at our Annual Conference in October, that builds upon and solidifies the consensus established so far. It will contain updated recommendations, including those based on research carried out by the PPI on behalf of the PLSA. This research on low earners was launched at an event in August which was attended by industry experts, including Chair of the Work and Pensions Select Committee, Sir Stephen Timms MP.

Low earners research findings

Automatic enrolment only applies if you’re earning above £10,000 annually – referred to as trigger earnings – from a single job (or each job you have). Trigger earnings are intended to protect those who are at risk of poverty as, for the most vulnerable low-earning individuals, every penny of earnings counts. Their standard of living is either already inadequate by most definitions, or at risk of becoming inadequate. Traditionally it has been thought that diverting some of their income towards pensions could worsen their current circumstances, and that future retirement income inadequacy may be better addressed in other ways, such as through employer contributions, or state support and the state pension.

However, not all current low earners are at risk of poverty either now or in the future. PPI modelling has identified profiles within the low earning population which demonstrate that earning a small salary doesn’t always mean you’re experiencing lower than adequate living standards. Many low earners, for example, are young people working part-time, who rely on their parents for money or housing. Others are parents, particularly mothers, who juggle caring and working, but whose partners bring much higher earnings into the household. Others are people nearing retirement, who have built up significant savings, and are gradually reducing their working hours before retiring fully.

These differences between low earners highlight the problem with blanket policies, such as the earnings threshold, which intend to protect a whole group of people from poverty. Blanket policies may not be sufficiently nuanced, but those at risk of poverty need some mechanism to protect them. Just as higher earners tend not to opt out or make any other change to their default arrangements after being automatically enrolled, neither should we assume that people who should not be pension saving would proactively opt out.

On the other hand, those low earners who do not need protecting are being given less access to a system that could bring a real increase to their standard of living in retirement. Even if their contributions are small, and even after factoring in the retirement income of higher-earning partners, PPI modelling shows that extra contributions could still give a significant boost to their retirement income. Higher earners are currently benefiting from automatic enrolment, through increased pension savings, and it could be a missed opportunity to exclude other people who would also benefit from it because they earn less.

PPI analysis demonstrates that a large majority (90.5%) of low earners have some mitigating circumstance that would mean that, if they were to be automatically enrolled by eliminating the £10k trigger, their in-work income is unlikely to be reduced below an adequate level. Mitigating circumstances considered include, for example, living in a household with a high overall income, expecting higher earnings after graduating university, already pension saving (and therefore presumably budgeting for this), or being ineligible for automatic enrolment for other reasons.

The most recent PPI research has also found that those low earners that have no identified mitigating circumstance are a highly diverse group which fit into no neat single profile. There are only a few things that are common across the group, such as tending to be paid by the hour. This group, however, is most likely to need some kind of protection; this could be trigger earnings, state support, or ensuring the right to opt out – and when to exercise that right – is well understood by everyone.

As automatic enrolment policy is further developed, it’s worth considering whether levers can be introduced which ensure greater involvement of low earners who will not be disadvantaged by saving. With low earners being such a complex group, this is a challenge. However, automatic enrolment has been one of the greatest success stories of pensions policy in recent history, and to include more of the right people would be worthwhile.

2023 Report

Significant progress has been made on building consensus so far. Our upcoming Five Steps to Better Pensions: the Final Report will continue to recognise the impacts of the ongoing cost-of-living crisis and will recommend an appropriate roadmap for change. The need for this work remains, demonstrated by our research finding that despite the successes of automatic enrolment, without further reform more than 50% of savers will fail to meet the retirement income targets set by the 2005 Pensions Commission. 

GOOD NEWS FOR LOW EARNERS

On Monday 18 September, the Pensions (Extension of Automatic Enrolment) (No.2) Bill completed its path through parliament and received Royal Assent. The Bill, which began as a Private Members Bill in the Commons by Jonathan Gullis MP, seeks to amend the Pensions Act 2008 to enable the Secretary of State to:

• Make regulations to reduce the lower age limit for automatic enrolment from 22 to 18
• Make regulations to remove the Lower Earnings Limit for qualifying earnings. This would mean auto-enrolment contributions are made from the first pound of earnings.

The Bill supports some of the key recommendations from our Five Steps to Better Pensions report.