Majority of low earners cannot afford auto-enrolment contributions

Although auto-enrolment is widely hailed as a success for getting more than 10mn people saving into pension schemes since its launch a decade ago, and despite calls to raise the minimum rate while expanding it to cover younger people and low earners, LGIM’s research suggests that these groups are already struggling to meet the minimum contribution requirements of the existing system.

The LGIM research, which surveyed more than 5,000 people, showed that the effects of the cost of living crisis are particularly acute on the young, low-wage and female workers, who are the groups it is often claimed would benefit most from auto-enrolment expansion.

The findings are similar to those in a report by Hargreaves Lansdown in July, which suggested that auto-enrolment expansion during the cost of living crisis could negatively impact household income in the immediate, and retirement resilience in the future.

Millions of Britons are facing tough spending choices as the cost of living crisis continues to bite and many could understandably feel forced to take decisions about whether they contribute to a workplace pension

Rita Butler-Jones, LGIM

Educational issues and cost of living

The LGIM survey, published on September 21, also found a lack of education and understanding of auto-enrolment among the groups it surveyed. Sixty-two per cent of younger workers did not know they could ask to be enrolled, and more than half (59 per cent) were unaware that their employer would make contributions on the first £6,240 of their income. 

Among those low-wage workers who could afford to contribute, more than a third (38 per cent) who are not in a workplace pension said they would have joined had they known they had a right to ask, while the same number said their employer had not explained eligibility rules to them.

The cost of living crisis was perhaps the most pressing concern, however. The research highlighted that workers earning less than £10,000 a year tend to be disproportionately the young, those on part-time or zero-hours contracts, and women. Of the latter group, more than half (55 per cent) of those earning less than £10,000 had children under the age of 17.

Besides the 69 per cent of low earners who said they could not afford to make pension contributions at present, 32 per cent of individuals not saving into a workplace pension had chosen to opt out — though LGIM noted that, across its 4.7mn defined contribution scheme members, opt-out rates had remained steady at between 6 per cent and 7 per cent, broadly of accord with the long-term average since the introduction of auto-enrolment.

“We do recognise the cost of living is bearing down hard on low-paid workers’ and that many are struggling to meet their financial obligations. This in turn means many may be forced into making tough spending choices and take short-term decisions about their pensions that could mean they miss out on the long-term benefits,” LGIM said.

“We also know that for some people, paying in anything at all is out of the question right now. We need to be sensitive about this while doing whatever we can to make it as easy as possible for those who can contribute to get into the habit of saving even small amounts, as early and regularly as they can.”

Young people and women most affected

For younger workers, the research also found that, notwithstanding the fact that the auto-enrolment age threshold is set at 22, 62 per cent did not know they could ask to be enrolled despite having low earnings, and 56 per cent were unaware that their employer would pay contributions on their earnings.

Female workers, meanwhile, have earnings and pensions that generally lag behind those of men, even at a young age. Of those aged under 22 who are paying into a pension scheme, 67 per cent are men and 30 per cent are women, reflecting in part a higher proportion of women who earn below the auto-enrolment threshold, and the fact that women are concentrated more heavily in part-time work or multiple, low-paying jobs.

However, LGIM’s research also suggested that a lack of information was a problem for women in particular. Of young women without a pension, 50 per cent said they had never been offered one, compared with just 28 per cent of young men who cited the same reason.

Despite the cost of living crisis, almost three-quarters (72 per cent) of young people surveyed said they thought employees under age 22 should be auto-enrolled, and the same proportion wanted a more “progressive” system that offered greater support to low- earners.

Asked what more could be done to educate prospective scheme members, 84 per cent of low-wage workers and 80 per cent of young workers said the government should provide more reassurance that other state benefits would not be affected by pension enrolment, while 87 per cent of female workers suggested a tax break amounting to the government matching contributions up to a certain limit.

LGIM’s co-head of DC, Rita Butler-Jones, said: “There’s no doubt that auto-enrolment has been a huge success as more people than ever are saving for their retirement. However, far too many workers, particularly the lower paid, are still likely to face pension poverty in their later years if they remain excluded from the system. 

“Millions of Britons are facing tough spending choices as the cost of living crisis continues to bite and many could understandably feel forced to take decisions about whether they contribute to a workplace pension. 

"That’s why it’s essential to ensure that as many people as possible understand pensions, such as the value of employer contributions and how those multiply over time, so they can make their spending choices on an informed basis.”

Stuart Murphy, also co-head of DC at LGIM, added: “Some employers may need more support around their obligations in offering scheme membership and pension benefits and how they can be promoted. 

“We acknowledge that providers such as Legal & General have a role to play in delivering clearer, more engaging communications that explain the benefits to members. However, we also recommend a truly collaborative approach by the government, regulators and the financial services industry to ensure that pensions are better understood.”