Saving for later life

Work and Pensions Select Committee inquiry

The debate follows the Work and Pensions Committee’s report Protecting pension savers – five years on from the pension freedoms: Saving for later life which was published on 30 September 2022 and the responses from the Government, Financial Conduct Authority, and the Money and Pensions Service, which were published on 23 January 2023.

The report was the third in a three-part inquiry – ‘Protecting pension savers – five years on from the pension freedoms’. The earlier parts had looked at pension scams and accessing pension savings.

Automatic enrolment

Auto-enrolment requires employers to enrol eligible employees into a workplace pension scheme. Unless those employees opt-out, they and their employer will contribute to an occupational pension.

Since the introduction of automatic enrolment the proportion of employees contributing to a workplace pension has increased significantly.

In December 2017, DWP published the review of Automatic Enrolment, Maintaining the Momentum, which set out a package which included extending automatic enrolment eligibility by the mid-2020s.

Further information is available in the Library briefing on Pensions: Automatic enrolment – current issues.

Pension adequacy

There is no consensus on a single definition of an adequate pension or measure of whether or not people are saving enough for later life. Various bodies have theorised potential measurements, which are identified by the Work and Pensions Committee:

• The Pensions Commission which ran from 2002-06 suggested target replacement rates which look at retirement income as a ratio of earnings in working life. The Commission proposed replacement rates of around 80% for low earners, 60 to 66% for median earners and 50% for higher earners would ensure people can have a similar lifestyle before and after retirement.
• The Pensions and Lifetime Savings Association, an industry body, has published a piece of research titled ‘Retirement living standards’. Their research provide three levels of pension incomes, minimum (£10,900 a year for a single person in 2021/22), moderate (£20,800) and comfortable (£33,600), designed to help savers understand retirement savings.

The Work and Pensions Committee recommended that the Government set out plans to build a consensus on what an adequate income in retirement would be. The Government agreed that current statutory contributions are “unlikely to give all individuals the retirement to which the aspire.”

Self-employment

Unlike employees, automatic enrolment does not apply to self-employed people.

A much smaller proportion of self-employed people are contributing to a pension than employees. A trial by the Nest Insight Unit, part of the master trust set up by the Government to support employers meeting their auto-enrolment duties, looked at:

• Saving nudges
• Flexible saving mechanisms
• Pension scheme messaging trials

The trials found that increased engagement did not result in higher savings.

The Work and Pensions Committee recommended trials of default saving for self-employed people and a consultation on increasing National Insurance paid by self-employed people, with the increase paid into a pension if the self-employed person also contributes 5% of their earnings.

In response the Government said that it is working with software developers to explore the opportunities to nudge and encourage self-employed people to save into a pension. It also said that it that HMRC was not actively considering auto-enrolling self-employed people through National Insurance.

Gig economy

Automatic enrolment only applies to employees and the Pensions Regulator is responsible for ensuring that employers comply with their automatic enrolment duties.

There has been a lack of clarity on how this might apply to different ‘gig economy’ workers. In a letter to the Work and Pensions Committee (PDF) the Pensions Regulator said that it does not consider the legal position of workers to be clear and that it had discussions with BEIS as part of the work to improve clarity of employment status. The Pensions Regulator said that “Employers in the gig economy should recognise and comply with their automatic enrolment (AE) responsibilities voluntarily and promptly.”

Gender Pensions gap

Since the introduction of auto-enrolment, the proportion of men and women in workplace pensions is now similar.

Although now similar, there remains a gap in what they receive. Women have lower pensions wealth than men, and estimates show the gender pensions gap to be larger than the gender pay gap.

There is no official measure of the gender pension gap, but this is generally understood to refer to the differences in retirement outcomes for men and women. The Government told the Work and Pensions Committee that it would continue to collaborate to find a suitable definition of the gender pensions gap and that any target to reduce it could only be considered once a definition has been agreed.

Further information is available in the Library briefing on The Gender Pension Gap.