The Missing Millions
With self-employment continuing to rise, the RSA looks at how we can increase retirement security for those with precarious pension substitutes
By Benedict Dellot, Associate Director, and Fabian Wallace-Stephens, Data Researcher for Economy, Enterprise and Manufacturing at the RSA
The new normal
The rise in self-employment is one of the most striking trends in recent labour market history. Since the turn of the century, the number of people who work for themselves has grown by 40 percent, whereas the number of employees has risen a mere 15 percent. While employee numbers have edged up more rapidly in recent years, self-employment still accounts for almost a third of the jobs created since the economic crash in 2008. The result is that 4.8 million people — or one in seven of the workforce — now answer to themselves. From IT consultants to graphic designers and from hairdressers to taxi drivers, self-employment has moved centre-stage in our economy.
Not everyone has welcomed this upsurge in self-starters. The newly self-employed have been depicted by some as unemployed by another name — just one more legion in a growing army of precariat workers. “Being self-employed means freedom: freedom to be abused and underpaid”, reads one headline. Yet the evidence shows such claims are overstated. According to a survey undertaken in 2016 by the Department for Business, Energy and Industrial Strategy, 84 percent of the self-employed say they are happier working for themselves. Less than a fifth say they want to leave self-employment, and for half of these the reason is to retire. Repeated surveys show only a fraction of the self-employed move into business to escape unemployment.
However, while not all of the self-employed are precariats — in the sense of being forced to work for themselves — most do operate precariously. People who go it alone forgo several important protections that employees take for granted. They have no recourse to Statutory Sick Pay should they fall ill, nor are they entitled to Statutory Maternity Pay or any form of Paternity Pay should they have children. The introduction of the National Living Wage has passed them by, while those on low incomes will soon face more stringent rules as they seek to claim means-tested benefits under Universal Credit (UC). They have no entitlement to holiday pay, and many have scant access to opportunities for training and upskilling.
The missing millions
One challenge stands out as particularly concerning: their lack of preparation for retirement. The Family Resources Survey shows that only 17 percent of the self-employed are currently contributing to a personal pension, down from 23 percent in the last five years. In contrast, the proportion of employees signed up to a personal pension jumped from 51 percent in 2010/11 to 62 percent in 2015/16, owing largely to the introduction of auto enrolment. Moreover, of the self-employed who do save, there is a tendency to put away too little and at too late an age. All in all, 40 percent of the self-employed say they are not confident their retirement income will provide the living standard they hope for (an issue we explore further in the next chapter).
Left unchecked, this level of under saving — which appears to be steadily worsening — could expose thousands to hardship in retirement. Indeed, the pensions shortfall among the self-employed is a neat example of modern day economic insecurity, which the RSA defines as “the degree of confidence that a person has in maintaining a decent quality of life, now and in the future, given their economic circumstances”. Viewed in this way, economic insecurity manifests itself in both objective and subjective ways. Many of the self-employed will feel the stress of impending hardship long before the actual financial blows fall in retirement. A broader conception of insecurity also reveals how middle income families may experience the struggle of pension under-saving as much as low income families.
The decision in 2014 to create a Single Tier state pension will help to soften the impact of inadequate personal provision, particularly for low earners. The additional entitlement is estimated to be worth an average £35,000 per person over a lifetime. Still, this will not be enough to sustain the standard of living that most of the self-employed will have become accustomed to during their years at work. Nor, as we argue in this report, can the self-employed safely rely on a spouse’s income, the sale of their business assets, or their ability to work indefinitely during old age. Only so much can be left to chance.
It is no exaggeration to say, as the media often does, that the dearth of retirement savings among the self-employed is akin to a ‘pensions time bomb’. What is less well acknowledged is that this is a burden we must all shoulder. If the self-employed do not save enough for their retirement, they will turn to the state and government services to lift them out of poverty. Many already rely on Pension Credit — which tops up the income of the poorest pensioners — as well as Council Tax Reduction and Housing Benefit. Moreover, most people will experience at least one brush with self-employment during their careers, meaning that the problem extends well beyond the 4.8 million people who are self-employed at any one time.
Ideas aplenty
The government, pension industry and business groups are in agreement that this problem requires urgent attention. In 2016, the government launched the Automatic Enrolment Review, one aim of which was to generate ideas to foster a long-term savings culture among the self-employed. The Work and Pensions Select Committee likewise treated retirement security as a priority issue in its 2017 inquiry into self-employment and the gig economy. Outside of government, think-tanks, pension companies and business groups have all published reports spelling out potential interventions. At least seven UK studies were published in the last two years exploring the topic of pensions for the self-employed.
Despite the flurry of commentary, however, the savings shortfall is no closer to being resolved than it was a decade ago. The range of ideas still in circulation shows little consensus has been reached on the best way forward. While some see the extension of automatic enrolment as the answer, others believe the self-employed will only begin to ratchet up savings if they receive matched contributions. Yet another group want to increase National Insurance contributions for the self-employed, and divert the extra amount raised into a pension pot of their choice. A more radical contingent believe pensions are fundamentally ill-suited to the lifestyle of freelancers and sole traders, and should be replaced with products offering greater liquidity such as an expanded version of the Lifetime ISA.
The good news is that a combination of forces are converging to make once implausible ideas more feasible — if not today than in the near future. Advances in technology mean it has never been easier or cheaper to organise people’s finances, including via AI-powered fintech applications. Digit, for example, is a new platform that moves people’s money from checking to saving accounts automatically by ‘learning’ how much they can afford to save. The government’s Making Tax Digital programme, meanwhile, will make it easier for the self-employed to stay on top of their tax obligations, which in turn could encourage more saving. Looking further ahead, the shift to a cashless society may open up pathways for more radical policies such as obligatory pension contributions.
Alongside new technologies, there are political forces pushing the government into action. At nearly five million strong, the self-employed are an electorate to be reckoned with. They are also underpinned by an increasingly vocal network of advocacy groups, from longstanding institutions (such as the Federation of Small Businesses) to upstart networks (among them Enterprise Nation). More broadly, there is growing acknowledgement that our social contract — forged for an era of mass employment and steady jobs — is buckling under the weight of a fractured workforce and needs significant reform. The government’s recent response to The Taylor Review of Modern Working Practices indicates a greater willingness to intervene and set problems right in the labour market.
Less heat, more light
Against this backdrop, the RSA, supported by our partners at Etsy, launched an investigation into how long-term savings and retirement security for the self-employed might be improved. In doing so we followed five principles that were designed to sharpen our analysis and steer us towards viable recommendations:
1. Demographics matter — The self-employed of today are a different breed to that of 20 or even 10 years ago. Once a relatively affluent and highly skilled group, it is now home to many low income workers struggling to make ends meet. Previous RSA research identified six ‘tribes’ of the self-employed, ranging from the relatively affluent ‘Visionaries’ through to the lower paid and often retired ‘Dabblers’. While some stay in self-employment for the course of their working life, others drift in and out or start up in business at a much later age. Each of these groups would benefit from a different type of intervention.
2. Silver bullets are imaginary — There are no easy answers or catch-all solutions to the savings shortfall. Auto enrolment, which is often held aloft as the silver bullet to drive pension uptake, would with its current earnings threshold only enrol a modest percentage of the self-employed. Moreover, every intervention comes with trade-offs and must be considered in the context of winners and losers. For example, increasing Class 4 NICs and channelling the extra funds to a pension scheme would be unfair to employees whose full NICs payment does not support a personal pension.
3. Saving is for the lifecourse — The title of this report deliberately uses the term ‘long term savings’ to reflect the importance of having access to funds during one’s working life, not just at the point of retirement. The self-employed crave liquidity because they do not have access to Statutory Sick Pay to cover them during times of illness, and also because they suffer from fluctuations in income caused by seasonable business and late payments. Regardless of their job status, nearly every worker will need to dip into savings during their working life, for example to fund retraining or pay a deposit on a house.
4. Getting people started is only half the battle — Were the proportion of self-employed contributing to a pension to reach a par with employees, it would be considered an outstanding achievement. But it would not be enough. What matters is whether the self-employed are saving sufficiently, as well as whether they can draw upon their savings responsibly both before and after retirement. The self-employed face more difficulties than employees in reaching adequate saving rates because they have no employer to top up their contributions and must also deal with cash flow disruption.
5. Political palatability counts — Solutions to the savings shortfall are commonly judged on the basis of their technical feasibility. Is it viable to auto enrol the self-employed onto a personal pension? And would boosting tax relief simply open up the system to abuse? But as well as interrogating whether interventions are practical, they must also be judged on whether they are behaviourally effective, financially affordable, and — crucially — politically palatable. Reforms that take more than they give, or appear unjustified and disproportionate, are unlikely to win a public mandate and will remain untouched by policymakers.
With these principles in mind, the rest of this report lays out the findings from our investigation and presents a roadmap for reform. The second chapter examines the state of long-term saving among the self-employed and makes the case for the importance of pensions. The third chapter delves deeper into the barriers that prevent people from saving and from saving sufficiently. The fourth chapter then outlines several modest recommendations, among them to pilot a ‘sidecar pension’ model, expand the remit of the new single financial guidance body, and create a ‘pension passport’ to assist people transitioning from employment. The report closes by calling for a more radical proposal to replace our unjust tax relief system with a flat-rate tax bonus, which would benefit millions of low and middle-income savers.
Far from wanting to ‘save’ people from self-employment, our recommendations are designed to help more people to take part in meaningful self-employment, which at its best can offer economic security married with a deep sense of purpose. If long-term saving rates remain in the doldrums, the self-employed risk being consigned to a retirement of poverty and penury. But if the government and financial industry choose concerted action over inertia, the rewards could be equally profound: millions able to live out their later years with security, dignity and happiness, and thousands more willing to take the leap into entrepreneurship. This is a prize well worth pursuing.
- Read more from the RSA on retirement security for the self-employed: Recommendations
- Download the RSA Venturing to Retire report (.pdf)
- Follow the RSA on Twitter @theRSAorg
