Cost of living crisis makes AE expansion unwise

Cost of living crisis makes AE expansion unwise
Carolyn Mendelsohn/Bloomberg

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”.

However, when trade-offs are considered, the impact is significant, leading to a “22.2 per cent [fall in surplus income] upon implementation in 2025”.