Government must act to avoid a generation retiring with inadequate pensions
The middle of a cost of living crisis, with an inflation rate not seen for a generation and millions worried about how to make ends meet, is a far from ideal time to be thinking about putting away money for the future.
Today’s report from the Work and Pensions Committee however lays bare the stark reality that most people are not saving enough for later life and that, without government action to prepare the ground now, it will be too late for them to build up enough for an adequate retirement.
Despite the success of auto-enrolment in boosting participation in workplace pension schemes, analysis by the Pensions Policy Institute shows that only 39 per cent of households and 37 per cent of individuals are on track for an adequate pension, according to the definition used by the Pensions Commission. Many newly auto-enrolled people are making minimum contributions, not realising that this will not be enough. People in their 40s and older are most at risk if they do not have access to a defined benefit pension, as they have had limited time to build up a pension through auto-enrolment.
There are good arguments for increasing employer contributions to 5 per cent
There are also many more people who are missing out on auto-enrolment altogether. The proportion of self-employed people saving in a pension has dropped from around 48 per cent in the late 1990s to just 16 per cent now, while the employment status of many in the gig economy denies them access to schemes.
The economic outlook for many remains uncertain and now is not the time to ask people to pay more into their pensions, but there are steps DWP could take now to ward off looming problems in the coming years.
In evidence to our inquiry, many witnesses told us that minimum contribution rates needed to increase above the current 8 per cent - made up of 3 per cent from the employer and 5 per cent from the employee, including tax relief. The former pensions minister, Guy Opperman, set out an aspiration to work towards a 12 per cent contribution rate, as in Australia.
We think there are good arguments for starting by increasing employer contributions to 5 per cent, levelling them with the contributions made by employees. It is now up to ministers to start to build consensus on the need for change. As a first step, the government should say whether it expects it to be possible to increase minimum contributions in the foreseeable future and, if not, set out its plan for addressing the challenges we have set out.
The recommendations in the 2017 review of auto-enrolment have almost universal support and it is vital that the government gets on with implementing them as soon as possible. Doing so would undoubtably improve retirement outcomes for many part-time workers and for workers in the gig economy.
The Committee also repeated its calls for the government to bring forward the Employment Bill to increase the legal protections for people in low-paid work and the gig economy. Many such workers are missing out on their right to build up a pension through auto-enrolment because the company they work for classes them as self-employed. There is more to be done to ensure employers in the sector comply with their auto-enrolment duties.
In addition, the government needs to move forward with a plan to reverse the decline in saving by self-employed people. The Treasury and DWP should work together to trial ways to default self-employed people into pension saving. They should also consult on the proposal to increase the main rate of National Insurance paid by the self-employed by 3 per cent, with the option to have the increase paid into a pension for those also contributing at 5 per cent. Alongside that, the government should consider how to promote pension saving to self-employed people.
We now have a new team of ministers at DWP. There is of course much for them to do in supporting people through the current economic storm. But they must not ignore the dark clouds gathering on the horizon for a future generation of pensioners. Without action to prepare the ground now, many people will feel the reality of this coming catastrophe in the years to come.
Stephen Timms, Labour MP for East Ham.
Get the inside track on what MPs and Peers are talking about. Sign up to The House's morning email for the latest insight and reaction from Parliamentarians, policy-makers and organisations.