A picture of poverty – Mr Micawber

The PPI’s analysis

Removing the trigger earnings from automatic enrolment could bring increased retirement benefit to large sections of the low earning population, while worsening the circumstances of approximately 300,000 people during working life.

The PPI have done a great piece of work that focusses on the resilience of low earners to being auto-enrolled into pensions with an up to 5% savings tax on their earnings.

The reckon that removing the earnings trigger (currently £10,000 pa) and requiring low earners to opt-out of saving would lead to better retirements for most low earners and this is how they come to this conclusion

The PPI tells us that there are 3.17m people in the UK , around one in nine employees, equivalent  who meet the age criteria for automatic enrolment but earn less than the trigger income of £10,000 a year.

There are 29.8 million people in payrolled employment, of which 94.5% are within the age criteria for automatic enrolment.  By overlaying the rates of low earning derived from understanding society on to this population, they arrive at the 3.17 million figure.

This analysis shows that less than 10% of really low earners  would be materially impacted by  the cost of contributing to a workplace pension from £1 of their earnings.

The report also gives us a number of insights derived from the PPI’s  empirical analysis of data

• Low earning is concentrated at the beginning and ending of working lives
• 2/3rds of low earners are women
• The low earning population becomes more female with age.
• Most low earners are not on benefits
• Most low earners don’t contribute much to household income – their contribution is “pin money”.
• The pattern of contributors to household incomes isn’t however consistent
• Many women become low-earners for the first time after childbirth

The analysis works – but what about the conclusions?

Are the conclusions fair?

The title of the report “every little helps”, echoes Tesco’s strapline that every penny saved helps household incomes. But the every penny saved into a workplace pension is coming out of household budgets not contributing to them. So there’s a sleight of hand here.

The one in ten

The report calls the 300,000 people who have no mitigation from the cost being “in” a group

vulnerable to the removal of the trigger income and may need alternative protection from additional immediate financial hardship caused by making pension contributions.

Those old enough will remember UB 4o’s “one in ten” “a statistical reminder of a world that doesn’t care

The trouble is that while we can see who these people are from the data, we cannot pick them out on the street. Can you tell which of the people you walk past on the high street are using a food bank?

This is the problem that the Government has with Pension Credit, they know hundreds of thousands aren’t getting it and should be, but getting to them is hard.

And auto-enrolment depends on financial awareness and self confidence. Opting out may sound easy when discussed by financially literate , self confident people, but it’s a lot harder if you cannot make sense of your payslip and take what you are paid on trust.

So , we should be careful to say on the one hand that getting people saving from £1 is a policy success when we identify that success by opt-out rates and by voluntary  applications for “alternative protection“.

Mr. Micawber’s insight into the utility of saving v debt

Finally we need to find a way to measure the utility of “every little helps” to those who currently don’t save. Will the addition of a retirement pot outweigh the pain of suffering a cut in household income?

Taking opting – out , out of the equation, are really wanting to impose a savings tax on low-earners on the basis that it will be worth it – later on?

My conclusion is that the hardship on the 300,000 outweighs the benefit to the 2.9m because the pain of poverty is so intense. Mr Micawber was right. Spending more than you make is more destructive than a marginal improvement in retirement prosperity. For Micawber (and Dickens) the downside was debtors prison, nowadays we deal with debt differently but its impact is still “misery”.

Even the most zealous of savings organizations – the Pensions and Lifetime Savings Association – (who sponsored this work), must accept that there are other ways of dealing with social security than enforced self-sufficiency. Until I see the social security solution that can alleviate the real hardship of saving when in poverty, I take the 300,000 as the reason not to press ahead right now.

And that’s assuming  a fiscally fair savings environment, where savings incentives are evenly distributed, but we aren’t offering low earners a fiscally fair savings environment.

Small pots hurt the poorest more

It’s a minor point but worth making. Low earners are also job movers, many find themselves moved from employment to employment, pension scheme to pension scheme. They may not stay long enough to save more than a small (<£1000) pot, indeed the Government is legislating to preserve the value of <£100 pots.

Small pots don’t just carry higher charges, they represent a barrier to spending. Many get lost and low earners don’t tend to have advisers (or dashboards) to find them. Auto-enrolment benefits those who can do things for themselves but is hard work for the financially illiterate. Sadly , there’s a correlation between low earning and low financial literacy.

Until we find a way to turn small pots into proper pensions , we should not be imposing an unsuitable savings regime on those with little job security and little means to combine and spend workplace savings pots

Unfair savings incentives currently penalize low-earners.

There is an important fiscal anomaly . which the HMRC has acknowledged as a scandal, which needs sorting out before we implement the 2017 AE reforms. We cannot  expand the scope of auto-enrolment by dropping the earnings trigger until we have an implemented fix to the net pay anomaly.

1. Right now , almost everyone earning £10,000 or under doesn’t pay income tax. A very high proportion work in jobs only give contribution incentives to tax-payers.
2. Although HMRC has promised a fix which will give cash rebates to low earning savers, this is only promised to happen from 2025 and details of how it will happen have yet to be disclosed

Auto-enrolment is 25% less affordable to low-earners in “net pay” auto-enrolment schemes. These include all low earners in Public Sector schemes and a large proportion of savers into occupational schemes (Nest and People’s Pension are two notable exceptions).

The PPI do not consider the impact of low earners not getting rebates on contributions but there is a real chance that a future Government would not see through this policy promise.

The current problem relates to people who are auto-enrolled at £10,000 earnings but earn less than the lower income tax threshold. The point needs making, reducing the AE threshold to £1 can only happen when we are quite certain that net pay enrollers will get rebates in a satisfactory manner.

My conclusion

Although auto-enrolment works well for most people, it works badly for some. Low earners who find themselves in unstable employment often end up with plenty of small pots which are difficult to spend and cost a lot more than one big pot. The Government recognizes this problem but has done nothing about it (yet).

The net pay anomaly persists and until I can see a clear plan from HMRC on how it will solve it (and when), I remain in the camp that auto-enrolment is fiscally unfair to most low earners.

Thirdly, while I buy the PPI’s analysis that most low-earners can afford to save , I don’t see enough on the horizon for the 10% who can’t , to justify everyone being in. AE is too strong a nudge to avoid real financial hardship and voluntary take up of state benefits is proven to be very difficult when it relates to pensions.

The analysis of the report points towards extending auto-enrolment but the practical difficulties of small pots, inertia and hardship payments do not suggest to me that we are ready to go to enrolment form £1 any time soon.