Expanding auto-enrolment during a cost of living crisis would significantly undermine retirement resilience, with low-income earners seeing their surplus income decrease by almost a quarter, according to a new report from Hargreaves Lansdown.
Inflation, and the rising price of food, fuel and other essentials, has led to a fall in living standards not seen since the 1950s, according to forecasts from the Office for Budget Responsibility in March.
The pensions industry remains keen for the government to implement proposals arising from the 2017 auto-enrolment review, which would lower the age threshold from 22 to 18, and start savings from the first pound of earnings; while many, including the Association of British Insurers, have also championed an increase in the minimum contribution to 12 per cent.
However, modelling from Hargreaves Lansdown, in partnership with Oxford Economics, suggests the costs of implementing these reforms in the current economic climate would be significant, and the poorest would be subject to a further squeeze on their income and living standards.
Now is not the time
Hargreaves Lansdown included the findings from its Savings and Resilience Barometer in its report published on July 11, which argues that the timetable for AE expansion should be set back until the cost of living crisis has abated.
The research acknowledges the potential benefits of raising the AE minimum rate to 12 per cent, which could add 9.3 per cent to the adequacy of the nation’s pension savings — more than double the 3.4 per cent increase reaped by AE expansion.
However, it warns that focusing on these benefits in the short-term does not take account of the significant trade-offs they entail, especially as regards household resilience.
When analysing the impact of AE expansion, the report projected that surplus income would fall instantly by 3.0 per cent in the auto-enrolment expansion scenario. "This would, in turn, feed into a 3.3 per cent fall in rainy day savings adequacy (this is measured as holding three months’ essential expenditure as cash) and 3.3 per cent fall in our net financial assets measure by 2029”.
The impact of raising the minimum rate to 12 per cent would be “even more stark,” it continued, with an immediate 8.8 per cent decrease in households’ surplus income, followed by “a knock on fall in emergency savings adequacy of 9.8 per cent by 2029 and a fall of 9 per cent in our net financial assets measure”.
Without considering trade-offs, lower income households would benefit most from the reforms, the report explained, “[improving] their pension value by 15.5 per cent compared to 3.5 per cent for everyone under automatic enrolment expansion[...] and 27.8 per cent compared to 9.3 per cent under an increase to 12 per cent contributions”.
People on lower incomes are particularly affected as are younger people who may find they can build bigger pensions but struggle to get on the housing ladder – we think a more nuanced approach needs to be taken.Helen Morrissey, Hargreaves LansdownHowever, when trade-offs are considered, the impact is significant, leading to a “22.2 per cent [fall in surplus income] upon implementation in 2025”.
“This leads to a fall of 8.7 per cent in liquid asset resilience and 4 per cent fall in net financial assets by 2029 for the automatic enrolment expansion scenario. The decline in short term resilience across these three indicators is even higher in the 12 per cent contribution scenario.”
A similar effect is evidenced when looking at the impact between age groups. Millennial and ‘Gen Z’ households “see an improvement in their pension value of 5.7 per cent compared to 3.5 per cent for the nation overall under automatic enrolment expansion[...] and 14.5 per cent compared to 9.3 per cent under an increase to 12 per cent,” the report explained.
However, this has a significant trade-off impacting all indicators of short-term resilience, but particularly potential house-buying, as the overall fall in net financial assets makes it even more difficult to save for a deposit.
Don’t be hasty
Rather than rushing into the reforms now, while the cost of living crisis is acute, Hargreaves Lansdown recommends a more cautious approach to timetabling, setting the most consequential reforms back until the crisis has abated.
This, it argued, means the reforms should not be implemented before 2025.
Rather than making mandatory increases to minimum contributions, it suggested the government should encourage people to increase their contributions voluntarily as and when they are able.
“The potential to pay more into a pension and get a matching contribution from the employer could be an attractive incentive. Previous[...] analysis shows as many as six in ten people could be encouraged to boost their contribution if such an arrangement were available, so we would welcome a further study to see the potential impact of these arrangements,” it continued.
“Such arrangements could be popular as people only increase contributions as they need to, and employer contribution increases are targeted towards those who value them.”
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey said: “Boosting pension saving is hugely important but cannot be tackled in a vacuum. Unless changes are timed carefully, we risk placing demands on people to save for tomorrow that risk undermining their financial position today.
“If people are struggling with their day-to-day costs, then we risk any further boost in pension saving leading to people saving less and even building up debt.”
She acknowledged that reforming and expanding auto-enrolment could potentially be of benefit, but reiterated that it should not proceed without regard to the challenges people are facing today.
“People on lower incomes are particularly affected as are younger people who may find they can build bigger pensions but struggle to get on the housing ladder – we think a more nuanced approach needs to be taken.”
Lang Cat’s director of public affairs Tom McPhail welcomed the report’s nuanced take, pointing out that, “to a man with a hammer, every problem looks like a nail”.
“The pensions industry is very good at demanding the government legislate to give it more money, so it is welcome to hear a more measured voice in the debate,” he said.
“Before demanding more money, the pensions industry also needs to do some heavy lifting on pension taxation reform. Everyone knows this is a hugely inefficient waste of public money but it is also complex and politically challenging. The pensions industry should be taking a lead to show how it can be achieved.”
Benjamin Mercer is a senior reporter at Pensions Expert, FTAdviser's sister publication
