31st July 2013
A staggering 1.7 million workers employed by UK companies have not been included in the new workplace pension reforms. Although one million new pension investors have been enrolled, analysis of Office for National Statistics figures by pension firm Hargreaves Landown shows that large parts of the population are not going to feel the benefit of the auto-enrolment programme.
To an extent, the reform relies on inertia in so far as qualifying workers are enrolled unless they specifically state they do not want to join. But many categories of worker particularly some part-timers can join, but most do so voluntarily.
Laith Khalaf, head of corporate research at Hargreaves Lansdown says: “Automatic enrolment is a vitally important project, but it is not a silver bullet. Millions of part-time workers are going to be overlooked because they don’t earn enough, likewise the self-employed are excluded. There is still therefore a pressing need to foster a savings culture alongside auto-enrolment, and to provide a decent level of state pension.”
The firm says that there are three main reasons why people are not automatically enrolled. These are because
– they earn under £9,440 (the minimum threshold to be auto-enrolled)
– they are under 22 (the minimum age for auto-enrolment)
– they are over state pension age (the maximum age for auto-enrolment)
Khalaf says: “Workers under 22 are less of a worry because auto-enrolment will catch up with them in due course. Workers over state pension age may not have sufficient retirement savings, and so are a worry in that respect, but there is little auto-enrolment can do to help them at this late stage.”
“However, part-time workers earning £9,440 or less are a definite concern, as they may get left behind in the retirement race. Women are particularly at risk here: three quarters of part-time workers are female.”
The firm adds that there are 6.7 million part-time workers in the labour force. Approximately 3.8 million of them earn under £9,440 and consequently won’t get automatically enrolled into a pension, though they can opt in.
An estimated 1.8 million of these workers could benefit from an employer contribution if they were to opt in: any worker earning over £5,668 can opt into a pension and their employer is obliged to pay in too.
Hargreaves has also posed – and answered – three questions included below
What can employers do?
Employers are legally obliged to inform eligible staff of the right to opt in to the company pension scheme and get an employer contribution. Pro-active employers may wish to highlight the benefit of doing so, in particular the difference it could make to retirement incomes.
What can individuals do?
An estimated 1.8 million part-time workers will be eligible for an employer pension contribution under auto-enrolment, but only if they opt in to their company pension scheme. They should consider doing this, subject to affordability. An employer contribution is an extremely valuable savings boost and should not be given up lightly.
For each £100 a worker pays in under auto-enrolment, the government adds £25 and their employer would add £75. For a £100 outlay, £200 is therefore paid into a pension – doubling your money instantly.
Some part-time workers may not be able to afford this, which is why they have largely been excluded from auto-enrolment. However some part-time workers will have more than one part-time job, or indeed may have a spouse or partner who works full time. In both of these cases they may be able to afford to save into a pension, and should consider doing so.
What’s the alternative?
The alternative to saving for retirement is ending up on the state pension, which under the new single tier looks likely to be in the region of £7,500 a year. This is not a desirable result because:
– £7,500 a year is about £145 a week, not a lot to live on
– State pension age is going up, and could hit 70 in the not too distant future
– Future governments can move the goalposts, and almost certainly will
– The inflation-linking on the state pension may be scaled back after the end of this parliament