No one change to auto-enrolment thresholds can completely protect low earners from pensions inadequacy or financial vulnerability during their working lives, a report by the Pensions Policy Institute suggests but says there are policy options that could help persistent low earners. 

The diversity of financial security and pensions adequacy risks different low earners face in working life and retirement means no single auto-enrolment policy can account for all scenarios, the report published on Wednesday and funded by the Nuffield Foundation says.  

 

Low earners are excluded from automatic enrolment to a degree, but as thresholds reduce with inflation, more people are gradually brought into scope, said PPI policy analyst John Upton. 

 

"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," he said. "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.” 

 

The study found that people who are low earners for a large part of their lives, the lower earnings limit reduces their contributions to such a degree that increased minimum contribution rates are unlikely to compensate for it, noting that low-earning women aged 22 have 16 years of further low earning ahead of them; for low-earning men, it is eight years. 

 

The report also says the impact of fiscal drag on auto-enrolment thresholds has made the current aims unclear. The £10,000 earnings trigger is now £4,300 lower in real terms than it was at the last uprating in 2014, while the lower earnings limit is also 28% lower in real-terms; this means a further £1,750 of employees’ earnings are now subject to a workplace pension contribution since the last 2020 uprating, according to the PPI. 

 

The real-terms decrease in thresholds suggests an assumption that low earners will opt out if it is in their financial interest. However, the thresholds were originally designed for fear that low earners might fail to opt out when other financial pressures arise, the PPI argued. 

 

Reforms that explicitly outline assumptions about the capacity of low earners to opt out when necessary "would help clarify the wider policy direction", according to the research. 

 

The analysis found that saving can present risks to low earners who are in debt or in precarious or unstable employment and that many people "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”. 

 

The PPI cites non-contingent employer contributions, or sidecar savings, as policies that could help persistent low earners.   

 

The research comes ahead of the Pensions Commission making recommendations to government on improving pensions adequacy next year, as it also shows how raising auto-enrolment contributions in different ways would impact lower and higher earners. 

 

On Tuesday this week, the Institute for Fiscal Studies also published a report that models the effect of raising auto-enrolment contributions by removing thresholds or increasing contributions, for example, showing how each would affect different income groups. 

 

   

   
How should auto-enrolment be reformed to improve outcomes without harming low earners?