The cost of retirement crisis is being addressed by auto-enrolment but you wouldn’t think it from the conclusions drawn from this LGIM report by one of our leading pension journals.
Corporate Adviser’s headline and analysis are factually wrong. The headline is misleading and misses the point of the report which calls for attention to be paid to the tough choices having to be made by those who have low earnings.
The majority of low earners are not saving into a workplace pension. Of those that are, 1.2m are being falsely told that they are picking up Government contributions when they aren’t. The research tells us that many low earners have worked out that opting into a workplace pension is unaffordable and could limit access to pension credit after state pension age. Legal & General are right to focus on the need for employers to know the facts. This from Stuart Murphy
“Some employers may need more support around their obligations in offering scheme membership and pension benefits and how they can be promoted. We acknowledge that providers such as Legal & General have a role to play in delivering clearer, more engaging communications that explain the benefits to members. However, we also recommend a truly collaborative approach by the government, regulators and the financial services industry to ensure that pensions are better understood.”
Employers with low- earners need facts, they need guidance on the state pension debt and benefits just as they help wealthy people with capital and contribution limits. So let’s start with facts.
What are the rules for low-earners.
If you earn more than £10,000 you are automatically enrolled into a workplace pension so long as you’re 22 or above and haven’t reached 75. If you earn more than £6240, you can get your boss to pay into your pension but you have to ask to join the scheme. If you are under 22 or earning less than £6240 you can join a scheme but you don’t get a right to an employer contribution.
For everyone earning less than £12,570 pa , whether you get the Government paying into your pension on your behalf is down to the lottery of how your employer’s pension is registered with HMRC (net pay or RAS).
What LGIM’s research (conducted by Ignition House) tells us, is that despite the availability of workplace pensions, most low-earners cannot afford to save and meet their household costs.
What LGIM’s research tells us
This is not the same as what the Corporate Adviser headline is implying. LGIM found that 73% of its survey group had a workplace pension and 94% of those who had one, were paying into it. Most of those surveyed had been auto-enrolled and as this research was on people working in the private sector, we can assume that the workplace pension offered was a DC savings plan. Nowhere does the report say that those enrolled are considering pausing or opting out.
The research highlighted that women were less likely to be able to afford paying any pension contributions right now due to the rising cost of living. This was affecting
72% of females compared with 64% of males. This is presumably where the headline came from. But this does not suggest that nearly 70% of savers are looking to pause or opt-out.
The research sampled 5,259 people in the UK private sector workforce in groups
split into three broad categories:
• Those employed aged under 22
• All those earning less than £10,000 a year
• All those earning over £10,000 a year with or without a DC pension and aged between age 22 and 65
So a number of people surveyed weren’t getting auto-enrolled and most of these seem to have been unaware that entry , an employer’s contribution and a Government payment were on the table.
We are told that what is needed is more awareness of eligibility rules. This is part of the solution, but much more help is needed on whether saving into a workplace pension is in the interests of those “just getting by”.
The report tells us that most low-earners not saving give three reasons for not being in workplace pensions;
- the first is they can’t afford it,
- the second is that the amount they’d be saving wouldn’t make much difference
- and the third is that saving might impact benefits.
Most low-earners are probably right on all three and they could do with educating us on the stark realities of budgeting on a limited income and of means tested benefits.
In case you think I am nuts, I am not the only person who thinks this way. Alan Pickering told me this when we discussed workplace pensions in 2012. He explained that people with small pension pots get deemed income from them whether they draw them down or not, and that deemed income reduces entitlement to Pension Credit. Prior to retirement, saving into pensions risks taking on much more expensive debt. If you have a choice between saving , heating and eating – which would you choose?
We have to get away from vilifying decisions not to save into workplace pensions. The idea that automatic enrolment should be extended to everyone and that we should be “educated” into saving whether we can afford it or not , is not a good idea.
And journalists have got to be responsible and not print sensationalist headlines that undermine the greater good that auto-enrolment.
Thanks to LGIM and Ignition House for looking at the needs of the lower earners. The research suggests that this section of society needs support in a different way from the more affluent. It also suggests that we need a more nuanced approach to informing low-earners of their options than “education” about the advantages of saving.
I am taking a particular interest on this as I will be speaking on it at the PLSA conference in October. The CIPP are running a quick poll asking employers whether they are seeing an increase in opt-outs and pausing, if you have access to your payroll data, please vote here.