The term ‘under-pensioned’, although not fully embedded in the nation’s vocabulary just yet, is a term I expect to be more widely used with the passing of time.
Simply put, the term applies to millions of UK people who are facing, if not already experiencing, a difficult retirement, due to a lack of adequate pension provision. While much has, quite rightly, been said and written about the yawning gender pensions gap, which leaves women worse off than men in retirement, there remains little emphasis placed on the very real issue of the ethnicity pensions gap.
Since the dawn of automatic enrolment in 2012, the narrative from some in the higher echelons of government is that we have a pensions system which works for everybody. Sadly, that simply isn’t the case. While a whopping 10.3 million more workers have started saving via automatic enrolment over the past 8 years, there’s still a long way to go until we can honestly say we’ve got it right.
Our analysis found that the average pensioner from an ethnic minority is £3,350 a year worse off than other pensioners. Our report, Measuring the Ethnicity Pensions Gap, revealed that income divide amounts to 24.4% per annum and widens further for a female pensioner from an ethnic minority who is 51.4% worse off than a male white pensioner on average.
The causes of the ethnicity pension gap are complex, but largely lie in labour market factors, such as lower average earnings, variable employment rates, and the greater likelihood of ethnic minority workers being self-employed. However, pension policy also plays a part, specifically the rules which govern contributory workplace and state pension systems. The state pension income gap is £600 per year with differences in workplace and individual pension savings and entitlements making up the rest of the £3,350 difference.
Action to narrow this alarming gap needs to be taken as soon as is humanly possible, especially when you consider that the proportion of the UK population identifying as Black and Minority Ethnic is projected to grow by about 50% between 2011 and 2051 (from 14% to 21%)1 as well as age significantly over the same period.
While there are myriad reasons for this gap, some of the potential fixes are relatively straightforward. The good news is that the new flat rate state pension helps. But, removing barriers to membership of occupational pension schemes is crucial, because ethnic minority employees are, on average, more likely to be low earners excluded from auto-enrolment.
An easy way to solve this would be to reduce the amount workers need to earn to be eligible for a workplace pension from £10,000 to the lower earnings limit for National Insurance to £6,240, which would bring in an extra 1.3 million workers into auto-enrolment – 15% of whom would be from ethnic minorities.2 That’s huge, especially when you consider the fact this group makes up 10% of those eligible for auto-enrolment.
Policy makers also need to act to make pension contributions count from the first pound someone earns, rather than counting only on earnings above the current £6,240 threshold. This would boost the savings of the lowest earning auto-enrolment savers the most, and ethnic minority workers tend to be lower paid on average than the workforce as a whole.
Bringing in more low paid workers to auto-enrolment wouldn’t just increase pensions coverage among ethnic minorities; it would help tackle the gender pensions gap. Low paid women often don’t remain among the low paid; so starting saving early to benefit from compounding of returns makes sense. Likewise, low paid women are often in households where the overall income is not low and as such the household will need more than just the state pension if its standard of living is to be maintained in retirement. For both these reasons increased auto-enrolment of low paid women workers makes sense.
Beyond the immediate policy tweaks, a new independent pension commission, an idea which received the backing of Pensions Minister Guy Opperman in January, should consider the wider structural labour market issues which contribute to the existence of the under-pensioned. A future commission could establish the appropriate level of contributions under automatic enrolment, suggest the right way to improve pension provision for the self-employed and in the gig economy, and consider the case for making the state pension to those outside the workforce.
If we are serious about helping the under pensioned, we must make it easier for low-paid workers to enrol in a workplace pension scheme as this could have significant long-term effects in reducing the ethnicity pension income gap.
Read more and download our full research report on measuring the ethnicity pensions gap.
- Projected growth of UK’s BAME population included in: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/594336/race-in-workplace-mcgregor-smith-review.pdf
- DWP Automatic Enrolment Review 2017: Analytical Report https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/668657/automatic-enrolment-review-2017-analytical-report.pdf