No single reform to automatic enrolment (AE) thresholds can protect every low earner from both retirement inadequacy and financial vulnerability during their working lives, the Pensions Policy Institute (PPI) has warned.

The PPI’s final report in its From Payslip to Pension: Life Course Impacts on Retirement Saving Among Low Earners series found that the financial circumstances and retirement risks facing low earners were too diverse to be addressed through one blanket policy change.

It also warned that fiscal drag had gradually expanded the scope of AE and increased contributions without a clear statement of how the policy’s original protections for low earners had changed.

The report found that the £10,000 AE earnings trigger was now 43 per cent, or £4,300, lower in real terms than when it was last increased in 2014.

The lower earnings limit (LEL), which determines the portion of earnings on which minimum contributions are calculated, was also 28 per cent lower in real terms after being frozen at £6,240 since 2020/21.

As a result, an additional £1,750 of an employee’s earnings was now subject to workplace pension contributions compared with when the LEL was last increased.

The PPI warned that this fiscal drag reflected an implicit assumption that low earners could be enrolled into pension saving and trusted to opt out when contributions were unaffordable.

However, the earnings trigger and LEL were originally designed on the basis that some financially vulnerable workers might not opt out even when doing so was in their interests.

“Currently, assumptions around low earners appear to be shifting: they are excluded from automatic enrolment to a degree, but as thresholds reduce with inflation, more people are gradually brought into scope,” the report stated.

“While this may be a sensible way to gradually test whether low earners can contribute, it also creates a need for clarity.”

The research comes as the Second Pensions Commission considers reforms intended to improve retirement adequacy, with persistent low earners identified as a group facing particularly significant risks.

The PPI said some low earners could afford to save more and were at risk of failing to maintain their working-life living standards in retirement.

Others faced poverty, debt, unstable employment or limited liquid savings, meaning that even relatively small pension deductions could worsen immediate hardship.

It argued that reforms increasing minimum contribution rates, removing the earnings trigger or abolishing the LEL would therefore create different winners and losers.

For people who spent much of their careers on low earnings, the LEL could suppress pension saving to such an extent that even substantially higher contribution rates would be unlikely to compensate fully.

However, removing the LEL could result in sharp contribution increases for workers already struggling to meet essential costs.

Indeed, for someone at risk of poverty or problem debt, the additional contribution could represent income needed immediately and might produce only a limited improvement in their retirement living standard.

Small private pension savings could also interact with means-tested support, potentially reducing eligibility for Pension Credit and linked benefits such as Housing Benefit and Council Tax Support, the PPI noted.

By contrast, removing the LEL could significantly improve outcomes for financially secure persistent low earners, including some part-time workers living with higher-earning partners.

Notably, women were more likely than men to be low earners at every age, while mothers accounted for around a third of low earners aged between 30 and 49.

The report also identified young people, people with low educational qualifications and the self-employed as groups facing elevated low-earning risks.

It suggested that non-contingent employer contributions could help some persistent low earners by allowing them to receive pension contributions without reducing their own take-home pay.

Sidecar savings could offer another potential mitigation by initially directing contributions into an accessible emergency savings account, before redirecting them into a conventional pension once the account reached a specified level.

The PPI added that other measures, including small-pot consolidation, pensions dashboards and reforms to the treatment of pensions on divorce, could also improve outcomes for some low earners without resolving the central AE policy dilemma.

PPI policy analyst and lead author, John Upton, stressed the Pensions Commission would need to balance low earners’ living standards against their financial position in retirement.

“AE started with the assumption that low earners may not opt out by themselves and needed a degree of protection, but this assumption appears to be shifting: they are excluded from automatic enrolment to a degree, but as thresholds reduce with inflation, more people are gradually brought into scope,” he continued.

“As the Second Pensions Commission seeks to improve pensions adequacy, highlighting low earners as a high-risk group, it will need to find the delicate balance between working-life living standards and retirement living standards for low earners.

“As no single policy reform may fully counter all risks, it may be necessary to make the assumptions around the capacity for saving and opting out more explicit, so that extra protections for at-risk groups may follow.”

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