Ethnic minority pensioners are £3,350 a year worse off

Ethnic minority pensioners are £3,350 a year worse off

In the UK, the average pensioner from an ethnic minority is £3,350 a year worse off than other people their age, according to new analysis from The People’s Pension1.

The pension provider’s new report, Measuring the Ethnicity Pension Gap2, highlights that the average ethnic minority pensioner’s income is 24.4 per cent less than their white counterpart. The divide is even greater from a gender perspective; on average, the gap in annual pension income between a female pensioner from an ethnic minority and a white male pensioner is 51.4 per cent.

The causes of the ethnicity pension gap lie in labour market factors, including lower average earnings, variable employment rates, and the greater likelihood of ethnic minority workers being self-employed. Removing barriers to membership of occupational pension schemes is crucial to closing the gap because ethnic minority3 employees are more likely to be low earners excluded from auto-enrolment.

The People’s Pension is calling for the government to make reforms to the criteria for auto-enrolment to reduce the ethnicity pensions gap over the long term, including:

  • Lowering 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 £6,136, bringing an extra 1.2 million workers into auto-enrolment – 15 per cent of whom would be from ethnic minorities.
  • Making pension contributions count from the first pound someone earns rather than counting only on earnings above the current £6,136 threshold.
  • Establishing an independent pension commission that would monitor and address ethnicity pension inequalities and advise on the best way to bring the self-employed into workplace pension saving.

Commenting, Gregg McClymont, director of policy at The People’s Pension, said:

“Our report highlights large inequalities, which will become starker as the growing ethnic minority population reaches retirement age. Understanding the size of the problem and causes is a vital first step in devising appropriate policies for closing the gap.

“The reasons for the large ethnicity pensions gap are complex because they reflect labour market factors but improvements for the long-term can be made rapidly in pensions policy.

“Lowering the minimum income needed to qualify for auto-enrolment from £10,000 a year to just over £6,000 and making pensions contributions count from the first pound earned would help the under-pensioned. We are also calling for the establishment of an independent pensions commission to highlight, analyse, and report on long-term issues of this kind and on comprehensive solutions.”

ENDS

Measuring the ethnicity pensions gap

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.

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Read more and download our full research report on measuring the ethnicity pensions gap.

Measuring the ethnicity pensions gap

The average pensioner from an ethnic minority is £3,350 a year worse off than other pensioners, representing a 24.4% gap in retirement income.

The divide is even bigger from a gender perspective. On average, our analysis – based on government surveys – shows that the gap in annual pension income between a female pensioner from an ethnic minority and a white male pensioner is 51.4%.

Measuring the ethnicity pensions gap, found the causes of the ethnicity pensions gap lie in labour market factors and pension policy.

Removing barriers to membership of occupational pension schemes is crucial to closing the gap because ethnic minority employees are more likely to be low earners excluded from auto-enrolment.

We’re calling for the government to reform the criteria for auto-enrolment to enable more people to join workplace pension schemes, and help reduce the ethnicity pensions gap over the long term, including:

  • Lowering the amount workers need to earn to be eligible for a workplace pension from £10,000 to the lower earnings limit for National Insurance (£6,136), bringing an extra 1.2 million workers into auto-enrolment – 15% of whom would be from ethnic minorities.
  • Making pension contributions count from the first pound someone earns rather than counting only on earnings above the current £6,136 threshold.
  • Establishing an independent pension commission to monitor and address ethnicity pension inequalities and advise on the best way to bring the self-employed into workplace pension saving.

Download our ‘Measuring the ethnicity pensions gap’ report