The success of the first phase of pensions auto-enrolment has been tarnished by the failure to find a means of including the 4.8 million self-employed in the system.
Department for Work and Pensions statistics show that around only one in seven of that group contributed to a pension arrangement in 2016. A key challenge to overcome is that the auto-enrolment system’s use of inertia, which has been credited with driving its success to date, will not work where there is no employer involved in the relationship.
The Taylor Review of Modern Working Practices may hold the key. If its proposals for “employee” benefits for self-employed workers in the gig economy, whose work status looks more like an employer/employee relationship, are adopted, a substantial number of the self-employed could be drawn into the existing auto-enrolment system.
But what of those who are truly self-employed, with no organisation to look to for employer benefits?
Taylor has a proposal for those too: Step forward the state. The tax and national insurance systems could be utilised as a surrogate employer. Collecting higher national insurance contributions and diverting them to a pension arrangement would replicate the auto-enrolment process. Employer contributions (with their incentive effect) could also be replicated, by a modest state top-up to the arrangement, replacing a potential future state welfare cost with a lower one today.
This offers a sensible solution for the self-employed and moves auto-enrolment one step further towards fulfilling its creators’ dream of universal pension savings.