Financial advisers have long emphasized the importance of early pension planning, and recent data highlights the urgency of heeding this advice. A mere decade ago, less than half of all UK employees were actively saving into a workplace pension, exposing them to the perils of financial instability in their retirement years.
However, in 2012, a significant change took place with the introduction of automatic enrollment. This policy mandated employers to enroll eligible employees, aged 22 and above, and earning an annual income of over £10,000, into a pension scheme that involved contributions from both parties.
Since then, pension savings have witnessed a remarkable surge, with a staggering 78% of employees (approximately 19.4 million people) actively saving in 2020, up from a mere 47% in 2012.
Nevertheless, the majority of these new savers are still contributing amounts that are unlikely to provide sufficient income during their retirement. While individual income requirements differ, evidence suggests that as many as 12 million people are currently not saving adequately for their golden years.
Compounding the issue is the fact that pension entitlements tend to mirror the prevailing inequalities within the labor market. Here, we highlight four key ways in which workplace pensions fall short of achieving fairness.
- Earnings and Status A significant number of individuals are excluded from workplace pension schemes due to their failure to meet the automatic enrollment criteria. Recent data indicates that in 2020, only 41% of full-time employees earning between £100 and £199 per week had pension coverage, compared to 65% of those earning between £200 and £299 per week.
Moreover, certain groups, such as women, ethnic minorities, individuals with disabilities, carers, and service workers, face diminished access to workplace pensions due to factors like underemployment and low wages.
Part-time employees also experience a disadvantage compared to their full-time counterparts, as the latter are 1.5 times more likely to be part of a pension scheme. Those with multiple part-time, low-paid jobs often miss out on workplace pension access, even if their combined earnings surpass the £10,000 threshold.
- Costly Interruptions For the majority of individuals saving for retirement through workplace pensions, the ultimate income depends on the level of contributions made and the resulting investment returns over the pension’s duration. Failing to make regular contributions not only reduces the overall amount in the pension pot but also negates the cumulative investment gains.
Consequently, any breaks from employment, such as career pauses or sabbaticals, significantly impact the size of one’s pension pot upon retirement. Research suggests that abstaining from pension contributions between the ages of 30 and 40 can result in a pot reduction of up to 32%.
This issue disproportionately affects women, who often take career breaks to raise children. Additionally, the lack of affordable childcare limits their ability to rejoin the workforce, further diminishing their eligibility for automatic enrollment. In 2019, nearly 30% of mothers reported reducing their working hours due to childcare responsibilities, in stark contrast to just 5% of fathers.
Even in cases where women qualify for automatic enrollment, many choose to opt out due to the exorbitant costs associated with childcare. Addressing this challenge requires implementing improved financial solutions that account for the diverse range of employment experiences and caregiving responsibilities.
- Regressive Tax Relief Workplace pension savers currently enjoy tax relief on their own and their employer’s contributions, as well as a tax-free lump sum of up to 25% of their pension pot. These tax breaks are ostensibly intended to incentivize pension savings.
However, this form of tax relief disproportionately favors higher earners. Roughly half of all tax relief on workplace pensions is claimed by the top 10% of earners, while a mere 10% goes to the bottom 50% of earners.
In essence, the tax regime for workplace pensions indirectly subsidizes retirement security for the already affluent. Given that the foregone tax revenue on workplace pensions is estimated at over £20 billion, redirecting these funds to those who truly need them would be a more targeted and equitable approach.
- Challenges Faced by Young People Since automatic enrollment only applies to individuals aged 22 and above, a significant number of young people find themselves excluded from workplace pension schemes. In 2020, a mere 20% of those aged 16 to 21 had a workplace pension, in stark contrast to 80% among those aged 22 to 29.
Despite the positive impact of automatic enrollment on participation rates among the 22 to 29 age group, younger individuals lacking access to defined benefit plans must save more or for a longer duration than their older counterparts to secure a sufficient retirement income. Consequently, it is estimated that up to 36% of younger age groups are currently under-saving for their retirement needs.
Research highlights that many young people opt out of pension savings or contribute only minimally in order to prioritize essential financial goals such as debt repayment, bill settlement, or saving for homeownership.
Only after accomplishing these milestones do they feel prepared to allocate resources to pensions. However, specific groups are more likely to reach this point, often relying on familial support, both financial and otherwise. As a result, these individuals have the opportunity to consider pensions at an earlier stage and are consequently more likely to achieve an adequate income during retirement, perpetuating existing inequalities into the future.
It is evident that despite the significant progress made with automatic enrollment, the issue of pension inequality remains deeply rooted within the UK’s workplace pension landscape. Addressing these challenges demands a comprehensive and inclusive approach that accounts for the diverse needs and circumstances of individuals throughout their careers, ultimately ensuring a fair and secure retirement for all.