Government urged to expand auto-enrolment to prevent pension poverty
The UK’s auto-enrolment contribution scheme should be reformed to prevent more workers slipping into retirement poverty, the Society of Pension Professionals (SPP) has said.
In its latest paper, the SPP has called on the Pension Commission, which was revived in July, to consider changing auto-enrolment rates and look at factors causing weak levels of pension saving.
While the 2012 introduction of auto-enrolment played a significant part in closing the savings gap and helping poorer households, it is only available to those who earn over £10,000 a year, shutting out the lowest earners.
The SPP proposed the removal of the threshold to improve the retirement outcome of nearly 3m people, citing figures from the Pensions Policy Institute.
The paper said: “The proposals to start AE contributions from the first pound would potentially help improve the gaps and better support the under-pensioned.”
The regulatory body added that slashing the threshold would also be more useful for higher earners, increasing the minimum contribution rate of eight per cent.
It considered that those who work multiple low paying jobs would be able to reap more benefits from a low threshold as it would make them eligible for the scheme across each job.
The SPP also acknowledged those who are on employment breaks, including for health issues and caring responsibilities, who would also be better off as the change would ensure a steady retirement income.
It also recommended the need for a “long-term plan” to increase auto-enrolment contribution rates, including a “clear framework” that would give savers certainty they are on track to reach the appropriate contribution needed for retirement.
Helping under represented groups
The paper also voiced the need for action to reverse the “patchy pension contributions” of self-employed workers.
The UK has seen a steep decline of the self-employed opting to save into a pension, with just 20 per cent doing so today, in comparison to nearly half of the group doing so in the late 1990s, causing many to run into the risk of having no retirement fund.
The SSP recommended extending auto-enrolment or a similar model to the self-employed, allowing them to save effectively, and bring to an end the UK’s retirement savings model which is predominantly built around those in employed work.
The paper outlined a need to address wider pension inequality, and investigate the factors driving lower participation rates in certain groups, including women.
The gender pension gap stands at 35 per cent, rising to 60 per cent when considering defined contribution pensions alone. On average, a woman will have a pension pot of £51,780, compared to a man’s £82,760.
Soaring rent and long-term sickness
In addition to disparities in overall wealth and wages affecting access to auto-enrolment, increasing health inequalities and housing costs are also preventing people from saving for retirement.
Those with poor health find themselves taking long periods of time away from work, with the number of people off due to long term-sickness reaching a record high of 2.8m in late 2023 and early 2024, leaving them with little or no income to place into a pension pot.
Meanwhile, soaring rent costs have made people shift focus to paying for a roof over their head now rather than in retirement.
Over 19 per cent of homes in the UK are privately rented and the proportion of home ownership has dropped significantly, with the paper suggesting this makes a future where workers can retire rent free much less likely.
Sophia Singleton, SPP president, said: “The SPP hopes that this wide ranging paper proves useful in stimulating debate, thought and most importantly, action, on what is arguably the biggest pensions challenge faced to date.
“As the paper makes clear, government, industry and savers can all do more, and we all need to if we are to achieve the shared goal of an adequate retirement income for all.”