60.Once implementation is completed, the DWP predicts that approximately 9 million people will be newly saving, or saving more, in a pension due to AE. The programme has undoubtedly been a success so far. We heard, however, that “success is limited as inclusion is limited”. Many people are excluded from AE and others who are included will still be under-saving for retirement. In this final chapter we consider steps that could be taken to encourage even greater and wider saving in workplace pensions.
61.Small business representatives and experts from the pension industry agreed it would be unwise to make any major changes to AE until the programme has completed. The FSB told us that changes now would “distract from the task at hand: namely supporting small firms to implement their auto-enrolment duties”. The PLSA said that the Government should “focus on making sure the programme for implementation is rolled out as smoothly as possible and high coverage levels are maintained.” The AE project will be reviewed by Government in 2017. The Minister told us
It will be a wide-ranging review and an opportunity for us all to engage in looking at how best we should steer auto-enrolment forward. I hope that the Committee will engage with us.
62.Any further changes to AE should be implemented after the critical phase, due to complete in 2018, when small and micro employers must comply with their duties. The 2017 review will be an ideal opportunity to consider the future of AE and we welcome the Minister’s invitation to engage with it.
63.The Pensions Policy Institute (PPI) said that just under a quarter of those in work are ineligible for AE. Discounting those employees already saving into a pension, this leaves around 4.8 million employed people who are both ineligible for AE and not saving in a pension scheme. The main reason for workers not qualifying for AE is low pay: 3.5 million of those people not eligible, 13% of the UK employed population, earn below the £10,000 earnings threshold. They are disproportionately likely to be female, BME and disabled. These disparities are reflected in levels of pension saving, which are also relatively low in those groups.
64.The gender disparity was of particular concern to the Department. The Minister told us:
I am conscious that there is a gender issue here; there are a lot of women who are earning less than £10,000 who will not be getting the benefit of auto-enrolment. They can opt in, but of course they don’t get the behavioural nudge
65.The earnings trigger threshold for AE was frozen in 2016–17. The DWP told us this would bring nearly 100,000 people into AE. This will still, however, leave just under four million working women ineligible. The Minister told us that a “major aim is to bring in as many low earners as possible”.
66.An obvious option would be to reduce the earnings trigger threshold. David Fairs, Chairman of the Association of Consulting Actuaries (ACA), argued that removing the lower threshold for qualifying earnings (currently £5,824 per year) would enable the earnings trigger to be reduced to “£5,000 or £6,000”. He continued:
That simplifies the administration and helps the lowest paid, but also brings in much more part-time employees and particularly women into auto-enrolment.
67.The number of self-employed people in the UK is at an all-time high. In February 2016, there were 4.6 million, 120,000 more than a year earlier and almost one million more than a decade ago. Figure 3 shows that the self-employed make up a growing share of the working population. As Thomas Brooks, Senior Policy Researcher at Citizens Advice noted, “self-employment is no longer a niche enterprise”. People approaching aged 50–64 were contributing to this rise as traditional “cliff-edge retirement”, in which a person moves immediately from long-term employment into full retirement, becomes rarer. People are increasingly likely to have a period of self-employment before retirement.
Figure 3: People in self-employment as a % of total employment, UK
Source: ONS,, April 2016
68.While the number of self-employed people has risen, the number of self-employed people saving into a pension has fallen. The propensity of self-employed people to save in a pension has therefore fallen markedly. The Resolution Foundation found that between 2001–02 and 2012–13 “the number of self-employed individuals actively making pension contributions fell from 1.1 million to 0.5 million”. While self-employed people were more likely to save through other vehicles and may be able to derive retirement income from housing or selling their business, the Resolution Foundation concluded that:
given most will not benefit from auto-enrolment, this suggests more needs to be done to convince the self-employed of the value of pensions and the need to start saving now.
Stakeholders agreed that self-employed workers’ pensions needed to be addressed.
69.The problem of how to defuse the “ticking time bomb” of self-employed people’s pensions is not new. Successive Governments have struggled to find a way of bringing the self-employed into AE. In response to a Work and Pensions Committee report in 2007, which recommended consideration of AE for the self-employed, the then Government said they “had not been able to find any levers to put the self-employed on a par with employed workers”. The current Pensions Minister told us “it is very difficult to see how you would automatically put some of the self-employed money into a pension scheme”.
70.A potential solution may be to auto-enrol self-employed workers through the tax system. Tim Sharp, Pensions Policy Officer at the TUC, suggested that the Government could “harness the lessons from auto-enrolment, such as inertia”, to enrol self-employed people into a pension through the income tax self-assessment process. Charlotte Clark told us that DWP had held discussions with HMRC about “some sort of way we could encourage the self-employed through their tax-returns” but added that they were “a few years away from having an option”. Another option, which may be worthy of investigation, is for the Treasury to give-up a portion of Class 4 National Insurance Contributions (currently paid by the self-employed) to go towards a pension. This could be matched by a payment by the self-employed worker.
71.Thomas Brooks added that the self-employed also needed better information and guidance about pensions. Self-employed people may not understand that they can benefit from tax relief on their pension contributions and can usually take up to 25% of their pension pot tax free. Yvonne Braun, Director of Long Term Savings Policy at the ABI said that “the tax incentive must be much, much clearer”.
72.We heard that the statutory combined contribution rates of 8% of qualifying earnings, due to be introduced in April 2019, will not be enough to provide most people with an adequate pension. A 2014 scenario analysis by DWP predicted that with those contributions, 11.9 million people would be under-saving for their retirement.
73.One option for reform would be to extend qualifying earnings. Contributions are currently only paid on earnings between £5,824 and £43,000 per year. Some stakeholders suggested that the thresholds should be removed altogether. The FSB, however, cautioned that “enrolling all staff from their first £1 of earnings would be unfeasible and add to the costs facing small employers.” Even with changes to thresholds for qualifying earnings, however, the statutory minimum will not be enough. Mike Cherry told us that “we all know that that is very unlikely to be enough or sufficient for anybody on low earnings to have something sensible for their retirement.”
74.The contribution levels required to achieve sufficient income in retirement depend on a number of factors, including lifestyle in retirement, earnings whilst in work, number of years spent contributing and the indexation mechanism for the state pension. The PPI found that individuals would need 11–14% contribution rates (depending on whether they were a low, median or high earner) in order to have a 75% chance of achieving their target replacement income, which would typically be two-thirds of pre-retirement income. The ACA recommend the DWP increase the statutory contribution rate by 1% every two years from 2020 until there was a combined rate of 1416%.
75.The Department said it is “keen to encourage saving beyond the 8 per cent minimum”, which it acknowledges is unlikely to be enough in the longer-term. The Minister warned, however, that further statutory increases could cause employees to opt out and that she was reluctant to force employers to contribute more. She suggested instead that pension providers should actively engage with savers and encourage them to contribute more when possible. We also heard that “automatic escalation”, whereby an individual’s contribution rate automatically increases in the event of a pay rise, could be effective. The ABI told us:
Like automatic enrolment, this could be done on an ‘opt-out’ basis to ensure financially engaged individuals retain the flexibility to prioritise other possible financial pressures.
76.DWP estimate that people will work for an average of 11 employers during their working life. If no reforms are implemented they predict this could lead to the creation of 12 million small pension pots by 2050. Our predecessor committee noted that multiple small pots could cause problems, both to employees trying to track their pension savings and to pension providers bearing high administration costs.
77.The Coalition Government began work on the automatic transfer of pension pots, which would allow a pension pot to follow the member as they moved through employment. The Minister told us that the current Government had put that work on hold because it was “important to see how the market develops”. Charlotte Clark explained that the Department was focussing instead on pensions dashboards, which would enable people to view all their pension savings in one place. This she claimed, would assist people in making decisions on whether to consolidate their savings. We have advocated the creation of a pensions dashboard in successive reports on pension freedoms and the state pension.
78.In the March 2016 Budget, the Government announced that it would “ensure the industry designs, funds and launches a pensions dashboard by 2019”. Stakeholders welcomed this announcement but said that the Government will need to play a strong leadership role for the dashboard to be a success. The People’s Pension, a master trust provider, said that the dashboard should be “run and or owned by Government … but built by joint elements of the whole of the pensions industry”. They added that it would justifiable to levy the pension industry to pay for the dashboard because it could remove millions of pounds in costs from the system.
79.Michael Johnson told us that some within the financial services industry were only paying lip service to the dashboard and it was not in their interests to see it come to fruition. He told us
the Government has to exercise real leadership here. If it wants that dashboard to happen by 2019, it has to be very assertive because there are certainly a number of participants who currently are doing the nodding donkey act that have no interest in seeing it happen at all.
80.Joanne Segars said that there needed to be a single dashboard with clear and consistent objectives, and she was concerned that there were a number of dashboards under development. She told us
It would be unfortunate if we end up a bit like food monitoring where you go into one supermarket and you have one set of metrics, you go into another and you have something different, and then you give up and just go for the cream doughnut option if you are me. We do need to make sure that there is some consistency and some singularity.
116 Department for Work and Pensions ()
117 GMB ()
118 The Federation of Small Businesses ()
119 Pensions and Lifetime Savings Association ()
120 (Baroness Altmann)
121 Pensions Policy Institute,
122 Ibid. The other reasons why employees not already saving into a pension scheme may be ineligible for AE are that they are under 22 or over the state pension age.
123 Scottish Widows () and DWP, , 2014
124 (Baroness Altmann)
125 Department for Work and Pensions ()
126 (Baroness Altmann)
127 (David Fairs)
128 ONS, , April 2016
129 (Thomas Brooks)
130 (Yvonne Braun)
131 Resolution Foundation, , May 2015
133 (Thomas Brooks)
135 Report on Personal Accounts, , Session 2006–07
136 (Baroness Altmann)
137 (Tim Sharp)
138 (Charlotte Clark)
139 (Thomas Brooks)
141 (Yvonne Braun)
142 (Yvonne Braun)
143 DWP, , August 2014
144 Thresholds for 2016–17
145 GMB ()
146 The Federation of Small Businesses ()
147 The PPI use replacement rates to assess the adequacy of retirement income and so define pension adequacy as the extent retirement income allows individuals to replicate the standards of living they had while in working life, see
148 (Mike Cherry)
149 Association of Consulting Actuaries ()
150 Department for Work and Pensions ()
151 (Baroness Altmann)
152 Association of British Insurers ()
154 National Audit Office, , November 2015
156 House of Commons Work and Pensions Select Committee, HC 668
157 (Baroness Altmann)
158 (Charlotte Clark)
159 House of Commons Work and Pensions Committee, , HC 371 and House of Commons Work and Pensions Committee, , HC 926
160 HM Treasury, , 16 March 2016
161 (Huw Evans)
162 The People’s Pension ()
164 (Michael Johnson)
165 Q43 (Joanne Segars)
Prepared 13 May 2016