Extend auto enrolment to help close 'pension gap', says think-tank

A new report calls for younger and lower-paid employees to be automatically included in workplace pension schemes.

Under the current rules for auto enrolment, workers aged 22 and above must be enrolled into a pension scheme, and receive contributions from their employer, when they earn more than £10,000 a year.

The Social Market Foundation (SMF) warns that excluding younger workers and those on lower earnings is creating a 'pension gap' that could leave millions of people at risk of financial hardship in later life -- and those from minority ethnic backgrounds are disproportionately affected.

Currently, just 25% of people from ethnic minorities in the UK have a workplace pension, well below the national rate of 38%.

In research supported by consumer group Which?, the SMF found that ethnic minorities are more sceptical than others about the value of private pension savings.

At the same time, ethnic minorities are more likely than others to believe that the state pension will be enough to provide a decent retirement.

According to the SMF, this combination of scepticism about private pensions and faith in public provision may put many people from ethnic minorities at "greater risk of hardship in old age as the state pension and their savings may turn out to be insufficient for their needs".

The report is another reason for the UK government to deliver a long-promised reduction in the age of eligibility for auto-enrolled pensions from 22 to 18, the think-tank said.

"Sensible changes to pensions auto-enrolment rules would bring more ethnic minorities into pension saving, increasing their chances of enjoying the comfortable retirement that everyone deserves," said Aveek Bhattacharya, SMF research director.

Pensions Minister Laura Trott recently confirmed that the earnings "trigger" at which employees are automatically placed into a workplace pension will remain at £10,000 in 2023-24.

The lower earnings limit will also remain at £6,240. Employees earning between £6,240 and £10,000 are not automatically enrolled in a pension but they can choose to opt in.

Trott said that the main focus of this year's annual review of the auto enrolment thresholds was "to ensure the continued stability of the policy in light of the impact of Covid-19 and prevailing economic factors".

She added: "We want to ensure that our approach continues to enable individuals, for whom it makes economic sense, to save towards their pensions whilst also ensuring affordability for employers and taxpayers."

In the first 10 years of auto enrolment, 10.7 million people started saving for a pension with the scheme and the proportion of those aged 22 to 29 saving into a workplace pension more than doubled.