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Stark choices for pension savers as costs rise

Author: ICAEW Insights

Published: 11 Mar 2022

While auto-enrolment has been a success and the scheme is extended, the lowest-paid savers will face hard choices.

Ten years after the introduction of the biggest shake-up to workplace pensions in the UK, auto-enrolment has inducted at least 19.4 million people into workplace pensions, up from 8.7 million in 2012. This is 88% of all eligible employees, as of 2020, says the UK government.

Many of these employees would not otherwise have had long-term retirement savings.

The scheme has not been without criticism. 

There were arguments over opting-out decisions, and the stress on incomes of the lowest paid when it was introduced. The National Employment Savings Trust, set up to be the default fund manager, has around £23.1bn in assets under management. It faced opposition to its fund and investment decisions, and complaints from the private pension and advice market over state-sponsored competition.

Philippa Kelly, Director of Financial Services, ICAEW, said auto-enrolment had done well, but care would be needed when extending the scheme. “Auto-enrolment is definitely a good thing, but as it’s currently structured it is not going to go far enough. The government is making changes to bring more people into auto-enrolment, but the contribution levels required for a sustainable income in later life would not be affordable for most.”

Changes to the system

Over time, the scope of auto-enrolment development has continued, including increases to contributions from savers and employers, and suggestions on the age and earnings thresholds.

A government review in 2017 found that the government wanted to lower the age for auto-enrolment from 22 to 18 and abolish the lower earnings limit in the middle of the 2020s. There is now concern that these recommendations could slip towards 2030.

There is a private members’ bill for the extension of auto-enrolment in the House of Commons, which is working its way through the reading stages. It asks that the age limit be lowered to 18 and the qualifying earnings threshold be removed.

But it shies away from removing the £10,000 earnings limit, and it does not have a timetable for the reduction in the lower qualifying earnings threshold.

Other policy changes, such as the changes to student loans, may detract from the help that is being offered with the auto-enrolment, says Kelly. “You might be forced to pay more into your pension, but you may have to pay more for your student loan from your income. If the cost of living crisis endures or worsens, there’ll be a disincentive for those who are having to make hard choices about whether to save over and above the bare minimum, or even to remain opted in. It’s likely to be those who have the most difficult decisions to make who will be the most in need of retirement savings when the time comes.

“While there could be more systemic solutions that the government might be looking at, like opening up access to higher risk or less liquid investments in hope of generating a better return for pension savers, which might seem an impactful thing to do, it could be difficult to assess how this makes a difference to individual savers when they need it.”

The government has found that the private sector has seen the largest increases in pension participation. Since 2012, private pensions have risen from 44% to 86% of private sector eligible employees participating, as of 2020 – 14.3 million eligible employees. The gap between public and private sector pension participation is now 7.5% as public sector pension participation sits at 93%.

Those earning between £50k and £60k per annum had the highest participation levels of up to 93% between 2012 and 2020; while in the public sector the greatest increase in participants were earning between £10k and £20k, which rose by 14% between 2012 and 2020.

“As more people come into the system, it may be that a greater proportion of those on lower incomes drop out because they’re faced with starker financial choices,” says Kelly.

If the cost of living crisis increases and policy changes have an impact on savers’ net incomes, like student loan repayment changes, interest rates rises, and mortgage repayments and other costs rise, then pension contributions will be something that it cannot be assumed people will maintain.

Those with small investments may have more pressure for them to grow, and there may be challenges in the pensions industry in balancing the need for asset growth and taking climate change transitions into account, for example. 

 “The investment and pension landscape is changing as ESG factors increasingly come to the fore,” says Kelly. “But the cost of transition to ESG investments may be borne by those least able to afford it.” 

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