BLOG: Why the earnings threshold could get in the way of pensions auto-enrolment

August 10, 2016

Automatic enrolment has been very successful so far. 6.4 million people were newly enrolled into pension savings as of July 2016, almost doubling the number of savers in private sector workplace pension schemes. More people saving in private pensions should, ideally, presage future generations experiencing higher level of income adequacy in retirement; particularly if the level of minimum contributions required under automatic enrolment is increased from 8% of band earnings in future.

However, not all people are equally likely to be eligible for automatic enrolment. Unfortunately, people from groups whom are more likely to suffer economic disadvantage are less likely to be automatically enrolled by their employer.

The key levers used for assessing automatic enrolment eligibility are age (people must be aged between 22 and their State Pension age) and earnings (those earning below £10,000 per year are not eligible).  PPI research found that women, disabled people, carers, and ethnic minorities are less likely to be eligible for automatic enrolment because of labour market patterns affecting these groups. People from these groups are less likely to be in work, and more likely to work part time and/or for low pay if they are in work. Those working part time, especially if they are paid at lower levels are less likely to be able to meet the minimum income threshold for automatic enrolment.

For many people such as carers, women or those with disabilities, working part time may be necessary in order to cope with outside responsibilities or personal limitations arising from health conditions. For women in particular, working in multiple jobs is an issue, as each job is assessed individually, and though someone may earn over £10,000 pa through all their jobs combined, if they do not make above £10,000 pa in any individual job they will not be automatically enrolled. If automatic enrolment was assessed on total earnings from all jobs a further 80,000 people would be eligible for automatic enrolment, 60,000 of them women.

There is a simple way of ensuring that more workers are eligible for automatic enrolment; lowering or removing the earnings threshold. However, the Government is concerned that lowering the automatic enrolment earnings threshold could result in people on low incomes accruing very small pots which may be eroded in value by limiting eligibility for means-tested benefits in retirement.

There is a Government review of automatic enrolment in 2017.  As automatic enrolment was specifically designed to target people from disadvantaged groups, the question that needs to be answered is “is it possible to give everyone an equal opportunity to increase their chances of adequacy in retirement without automatically enrolling people who might lose out in the future as a result of pension saving?”.

Daniela Silcock is Head of Policy Research at the Pensions Policy Institute

The Pensions Policy Institute presented their recent report to the Financial Inclusion Commission at our last meeting. If you or your organsation would be interested in presenting to the Commission please contact commission@ukfinclusion.org.uk