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LEVELLING UP

Levelling Up Pensions To Boost Savings By £2.8 Trillion

How pension reform can boost opportunity for poorer workers and regions.
James Blagden
January 5, 2022
Levelling Up Pensions To Boost Savings By £2.8 Trillion

Auto-enrolment has been one of the massive hidden triumphs of the last decade in the UK but sadly millions of hard-working British people aren’t benefitting because they’re under 22 or simply not working enough hours. Nothing could show clearer intent towards long-term levelling up than ensuring that everyone who works hard will see a safer and more secure retirement.

Richard Holden MP

It is time to level up pensions for everyone, regardless of their age or income.

Since it was introduced in 2012, automatic enrolment has proved incredibly successful at increasing the number of people saving for retirement. By simply opting workers into saving, the proportion of employees in a workplace pension scheme has risen from 46.5% in 2012 to 77.6% in 2020.

But younger workers, part-time workers, and those on low pay still miss out – because auto-enrolment does not kick in until people are earning over £10,000 a year and over the age of 22 years old. This results in a workplace pension participation rate of just 20% for 16-21 year-olds, 41% for those earning £100-£199 per week, and 58% for part-time employees. The youngest employees – those aged 16-21 years old – are currently five times less likely to have a workplace pension as middle-aged employees.

And because lower paid and part-time workers are disproportionately concentrated in less prosperous regions, this contributes to Britain’s regional divides as well.

The Government should abolish the earnings trigger and reduce the age at which people benefit from auto-enrolment to 18 years old.

Doing so would help individuals and their families to save for the future, and generate trillions in capital for pension funds to deploy towards infrastructure, housing and other investments central to the Government’s economic ambitions.

As this paper demonstrates the potential gains are considerable. We estimate that abolishing the £10,000 earnings trigger for auto-enrolment and the £6,240 lower earnings limit for pension contributions, alongside reducing the age threshold from 22 to 18 years old, would lead to the following benefits:

  • A full-time worker on the National Living Wage would gain an extra £93,989 over a working lifetime, which would be a 60% increase in their workplace pension savings.
  • Younger workers would save an extra £20,267 upon retirement, on average, from being enrolled at age 18 rather than age 22.
  • A worker with two part-time jobs, each paying £190 a week, could see their pension savings triple to £297,600.
  • Over the whole working lifetime of the current workforce, the total additional savings could be as high as £2.77 trillion, creating significant additional resources that could be deployed in the Government’s levelling up agenda.

Millions of workers still do not have a workplace pension

Recommendations

In April 2020 nearly eight out of ten UK employees (78%) had a workplace pension, compared with less than five out of ten in 2012 when automatic enrolment was introduced. But this varies significantly according to both age and income.

Age

The youngest employees, who are outside the automatic enrolment age eligibility, are five times less likely to have a workplace pension as middle-aged employees. Participation in a workplace pension was just 20% for 16-21 year-olds.

Income

In the private sector, just 41% of employees earning between £100-£199 a week participate in a pension, compared to 90% for those on the highest incomes.

Part-time work

Part-time employment has a significant impact both on pension participation and savings rates. Full-time employees are 1.5 times more likely to have a workplace pension (86.4%) than those working part-time (just 57.8%).

In 2017, the Government’s Automatic Enrollment Review recommended “lowering the age threshold for automatic enrolment from 22 to 18” and “removing the lower earnings limit so that contributions are calculated from the first pound earned.” The review also stated that the Government’s ambition was to implement these changes by the mid-2020s. This timescale is right, but businesses will need a more concrete roadmap in order to properly prepare. We propose the following timeline for implementation:

  • 2022: Freeze the auto-enrollment trigger at £10,000 and the qualifying earnings limit at £6,240 (£120 a week).
  • 2023: Abolish the auto-enrollment earnings trigger and age limit so that every employee over the age of 18 is eligible for automatic enrollment in a workplace pension. But pension contributions are still only paid on earnings above £6,240 (£120 a week).
  • 2024: Lower the qualifying earnings limit from £120 a week to £100.
  • 2025: Lower the qualifying earnings limit to £60 a week.
  • 2026: Remove the qualifying earnings limit completely.

The phased approach does, of course, mean that those who are currently younger than 22, or earn less than the threshold, would not benefit from auto-enrollment for several years. For instance, if the abolition of the Lower Earnings Threshold happens in 4 years’ time, a 22-year-old now will be 26 and might see a £75,800 uplift rather than a £94,000 uplift had the change taken place this year. In other words, the delay will cost them £18,200 from their pension pot at age 68.

The roadmap that we propose above strikes the right balance between giving employers advance notice and ample time to plan on the one hand, and minimising the costs of delay for younger and lower-income workers on the other hand.

Millions of workers still do not have a workplace pension

In April 2020 nearly eight out of ten UK employees (78%) had a workplace pension, compared with less than five out of ten in 2012 when automatic enrolment was introduced. But this varies significantly according to both age and income.

Age

The youngest employees, who are outside the automatic enrolment age eligibility, are five times less likely to have a workplace pension as middle-aged employees. Participation in a workplace pension was just 20% for 16-21 year-olds.

Income

In the private sector, just 41% of employees earning between £100-£199 a week participate in a pension, compared to 90% for those on the highest incomes.

Part-time work

Part-time employment has a significant impact both on pension participation and savings rates. Full-time employees are 1.5 times more likely to have a workplace pension (86.4%) than those working part-time (just 57.8%).

Recommendations

In 2017, the Government’s Automatic Enrollment Review recommended “lowering the age threshold for automatic enrolment from 22 to 18” and “removing the lower earnings limit so that contributions are calculated from the first pound earned.” The review also stated that the Government’s ambition was to implement these changes by the mid-2020s. This timescale is right, but businesses will need a more concrete roadmap in order to properly prepare. We propose the following timeline for implementation:

  • 2022: Freeze the auto-enrollment trigger at £10,000 and the qualifying earnings limit at £6,240 (£120 a week).
  • 2023: Abolish the auto-enrollment earnings trigger and age limit so that every employee over the age of 18 is eligible for automatic enrollment in a workplace pension. But pension contributions are still only paid on earnings above £6,240 (£120 a week).
  • 2024: Lower the qualifying earnings limit from £120 a week to £100.
  • 2025: Lower the qualifying earnings limit to £60 a week.
  • 2026: Remove the qualifying earnings limit completely.

The phased approach does, of course, mean that those who are currently younger than 22, or earn less than the threshold, would not benefit from auto-enrollment for several years. For instance, if the abolition of the Lower Earnings Threshold happens in 4 years’ time, a 22-year-old now will be 26 and might see a £75,800 uplift rather than a £94,000 uplift had the change taken place this year. In other words, the delay will cost them £18,200 from their pension pot at age 68.

The roadmap that we propose above strikes the right balance between giving employers advance notice and ample time to plan on the one hand, and minimising the costs of delay for younger and lower-income workers on the other hand.

Extending automatic enrollment to all employees over the age of 18, regardless of how much they earn would benefit up to 7 million people in the UK.

  • A part-time employee earning £190 would save £24.27 a month, or £291.20 a year, from their workplace pension. After 46 years, they would have saved £54,800. But under our proposal of abolishing the lower earnings limit, this would almost triple their pension pot to £148,800 on retirement.
  • An 18-year-old starting their first job, earning £340 a week (£17,680 a year), would not be auto-enrolled in a workplace pension under the current system. But with our proposed changes, they would save £1,414 each year. Across the next four years, from the age of 18 to 21, their pension savings would amount to £6,326. At retirement, the projected value of this initial £6,326 would be £33,931.

Abolishing the lower earnings threshold would add £6,240 to each full-time employee’s pensionable pay. The additional contributions of £499.20 per year would result in an extra £93,989 in each person’s pension pot over their lifetime.

For those on low pay, this represents a massive increase in their retirement funds. A person earning £12,570 a year (the equivalent of the personal allowance for income tax) would see their pension pot double from £95,344 to £189,333.

A full-time worker on the national living wage (around £16,625 a year) would see a 60% increase in their pension pot upon retirement.

While workers across the United Kingdom would benefit from these changes, constituencies outside London would gain the most, with: Mansfield (Nottinghamshire), Workington (Cumbria), Hyndburn (Lancashire) as well large parts of the South West, the Midlands, and North of England set to benefit the most.

 

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