The final report in the research series, ‘From Payslip to Pension: Life Course Impacts on Retirement Saving Among Low Earners’, funded by a grant from the Nuffield Foundation, identifies that, due to the diversity of financial security and pensions adequacy risks different low earners face in working life and retirement, no single AE policy can account for all scenarios.(1)(2)
For low earners who spend a particularly large portion of their working life as low earners, the study states the Lower Earnings Limit (LEL) reduces their contributions to such a degree that increased minimum contribution rates are unlikely to compensate for it. For example, at age 22, low earners are projected to have a further 16 years of low earning across their working life if they are a woman, or 8 if they are a man. Other risk factors, such as low educational qualification levels or motherhood, may increase these figures further, increasing the impact of any change to the LEL. However, for other low earners who may be at risk of poverty, any contribution may be too much, and the removal of the LEL could increase their contribution significantly.
The research also shows how the impact of fiscal drag on AE thresholds has made its current aims unclear. Eroded by inflation since the last uprating in 2014, PPI analysis shows the Earnings Trigger is now £4,300 (43%) lower in real terms, pushing employees and employers to make a greater contribution to a workplace pension. As low earners and employers face a range of cost of living and global economic pressures, the LEL is also 28% lower in real-terms, meaning a further £1,750 of employees’ earnings are now subject to a workplace pension contribution since the last 2020 uprating.(3)(4)
The analysis notes that the real-terms decrease of AE thresholds reflects an implicit assumption that low earners will opt out if it is in their best interests to do so, in order to address immediate cost of living pressures, or other factors. This is despite the AE policy mechanisms of the Earnings Trigger and the LEL being originally designed to protect against low earners failing to opt-out of saving when potentially needed, the report states. Future AE reforms that explicitly outline assumptions about the capacity of low earners to opt-out when necessary, the assessment elaborates, would help clarify the wider policy direction.
The report comes as the Second Pensions Commission considers how AE might be reformed to increase pensions adequacy, with low earners highlighted as facing particularly high adequacy risks.
Further key findings of the research series summarised in the report include:
Saving may present immediate risks to low earners who are at risk of poverty, in debt, or in precarious or unstable employment. Even relatively small contributions under current AE policy may exacerbate hardships, and some AE reforms may increase these contributions.
Many individuals will spend a significant portion of their career as low earners, so any periods of higher earnings are unlikely to provide sufficient savings for their retirement. For example, in the case of an 18 year old low earning woman who does not achieve qualifications higher than a GCSE, she is projected to spend 22 years as a low earner across her working life.(5)(6)
Some potential new policies may benefit persistent low earners, such as non-contingent employer contributions, or sidecar savings. Non-contingent employer contributions would see an employee enrolled in a pension scheme, receiving employer contributions, without having to reduce their own take home pay. Sidecar savings create a mechanism by which pension contributions would be paid in to a separate, accessible savings account first, and only when this account reached a certain size, would they be paid into a conventional, harder-to-access pension pot.
John Upton, PPI Policy Analyst and lead author of the research series, commented: “Automatic enrolment started with the assumption that low earners may not opt out by themselves and needed a degree of protection, but this assumption appears to be shifting: they are excluded from Automatic Enrolment to a degree, but as thresholds reduce with inflation, more people are gradually brought into scope. As the Second Pensions Commission seeks to improve pensions adequacy, highlighting low earners as a high risk group, it will need to find the delicate balance between working life living standards and retirement living standards for low earners. As no single policy reform may fully counter all risks, it may be necessary to make the assumptions around the capacity for saving and opting out more explicit, so that extra protections for at-risk groups may follow.”
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