People with poorer mental health tend to have a lower income over their lifespan but there hasn’t been much research on their savings behaviour. We wanted to find out more about this using Understanding Society data – taking advantage of a 2012 change in the law which introduced automatic enrolment in a workplace pension scheme for anyone over 21 who earned £10,000 or more a year.
The background
At least 1 in 6 people in the UK have a common mental health condition – that is, mild to moderate depression or anxiety, for example, rather than major psychiatric conditions such as schizophrenia and bipolar disorder.
On average, people with poor mental health have lower educational qualifications, experience more unemployment, and earn less over their lifetime than those with better mental health. Earning less and being unemployed more can put them at risk of poverty in retirement, which is likely to be made worse if they are also less likely to have a workplace pension plan.
There may be a number of reasons why they’re less likely to enrol in a pension scheme, which may relate directly to their health, or to its effects on their working life.
Mental distress is an acutely challenging experience. Individuals often have to navigate the complexities of work, family and relationships with very little support while experiencing profound distress. This level of stress may lead to ‘cognitive overload’, making it harder to put in the time and effort to work through complex decisions involved in pension plans such as projected earnings, expected changes in spending over time and the rate at which one can afford to save.
It may also make people more likely to put off the decision until it’s too late, or to spend now, rather than saving for the future. Also, the link between poor mental health and lower earnings as well as unsteady employment may mean that they’re potentially more likely to work in jobs which don’t offer workplace pensions.
A change in the law
Automatic enrolment in workplace pensions came about after the Pensions Act 2008, which set out to tackle a fall in pension savings among people in the private sector. The change was implemented over 5½ years from 2012, with contributions gradually rising from 2% (with at least 1% coming from the employer) to 8% (at least 3% from employers) between then and 2019. In that time, over 10 million workers were automatically enrolled in a scheme.
Using the data
This change in the law allowed us to look at data between Wave 1 of Understanding Society in 2009-10 and Wave 8 (2016-17), comparing the period before and after the law changed. In waves 1, 2, 4 and 6, if they were in work at the time, participants were asked whether their employer ran a pension scheme, and if they belonged to it. Each wave of the survey also uses the General Health Questionnaire, or GHQ-12, to assess participants’ mental health.
Other questions in the Study allowed us to take into account factors such as age, education, race, marital status, income, and physical health. We could also consider the type of occupation and industry they’re in. We chose to focus on employees in the private sector, as the issue of low workplace pension participation was greatest for these employees.
Results
After the introduction of automatic enrolment in 2012, there was a big increase in workplace pension participation for private sector employees who were eligible, from about 65% to almost 90%. There was also a significant increase for those in the private sector who weren’t eligible (because they didn’t earn enough or were under 21), but chose to opt in anyway.
If we look at mental health alongside pension enrolment, we can see that before the law changes, people who aren’t experiencing psychological distress are over 5% more likely to be enrolled in a workplace pension scheme than those who are.
After 2012, there is a large increase in enrolment for both groups – but, most importantly, the lines converge: the gap between the two groups closes.
While women tend to experience greater levels of poor mental health, the gap in pension enrolment was larger for men before automatic enrolment. Automatic enrolment closed the gap in participation for both men and women.
Although people with poor mental health tend to earn less than those with better mental health, they were only slightly less likely to meet the £10,000 earnings criterion for automatic pension enrolment.
For men, there was a small difference in whether a pension scheme was available – 64.7% of those without poor mental health worked somewhere which offered a scheme, compared to 61.3% of those with poor mental health. There was no significant difference for women in this respect.
Conclusion
Overall, we found that there was, as we expected, a difference in rates of saving for retirement between people with different experiences of mental health. Before the law changed, those with poorer mental health were less likely to have a workplace pension, potentially putting them at greater risk of poverty in older age.
The intended consequence of automatic enrolment was to increase savings rates in general, and we can say that it has done that – but we can also say that it has had a successful unintended consequence: closing the mental health gap in workplace pension participation.
Authors
Karen Arulsamy
Karen Arulsamy is a Research Fellow at the Health Economics Research Unit at the University of Aberdeen
Liam Delaney
Liam Delaney is the Head of Department for Psychological and Behavioural Science at LSE
