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Is now the right time to increase auto-enrolment contributions?

With changes to auto-enrolment a strong possibility, we look at why increasing pension contributions in this way may not have the desired impact.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.

Financial resilience has become a central issue over the past two years as we continue to live with the consequences of the pandemic and – more recently – with the effects of inflation.

This week, we’ve released the second edition of the HL Savings and Resilience Barometer, produced in collaboration with Oxford Economics.

The barometer finds that:

  1. Financial resilience increased through the pandemic, largely due to periods of forced saving. But those gains have almost been wiped out by rising inflation. Life is getting more and more expensive. Surplus incomes, cash savings and pension investments have fallen across all demographic groups.
  2. Real disposable income estimated to have fallen by almost 3% in the past three months and will remain stagnant over the coming year, despite numerous government support packages.
  3. 41% of households estimated to have raided savings or taken on debt to fund spending.

What does this mean for households?

Nobody will escape the cost of living crisis unscathed. But for some households, it means an even steeper fall in financial resilience. In fact, over 40% of the population will face significant challenges to their personal finances. Households in the bottom 40% of incomes are projected to suffer a three times greater fall in their financial resilience compared to households in the top income bracket. Financial inequality across the UK will worsen.

What else is happening?

Against this backdrop, proposed pension policy changes could make lower income households even worse off if not carefully timed.

There are two proposed pension policy changes:

  1. Automatic enrolment expansion: removing the lower limit on qualifying earnings, so contributions start from the first £1 earned, and reducing the entry age from 22 to 18.
  2. Minimum pension contribution: raising the minimum contribution to 12% for all employees (6% from employee, 6% from employer).

Based on models from the Savings and Resilience Barometer, the impact of these changes could shrink disposable income, rainy day savings and net financial assets even further by 2029.

How could the changes to auto-enrolment affect the nation’s financial resilience?

Whilst the introduction of auto-enrolment in 2012 has been a success, the current economic environment restricts the potential of the proposed policy changes when it comes to financial resilience. Introducing an enforced increase at a time when people’s budgets are buying them less and less would come across as tone deaf to the cost of living crisis. It could result in the opposite of the intended outcome, rather than boost private pension provision, employees could freeze contributions or opt out of schemes.

We recommend that employers use a matching contribution basis to incentivise those employees that can afford to pay more to uplift, whilst also ensuring that those who can’t, won’t be pushed into debt by joining the pension. In our ‘Five to Thrive’ approach, building adequate rainy-day savings is identified as an important step in household resilience, and should be prioritised before employees begin to think about putting additional money aside for later life.

Our full Five to Thrive framework can help employers identify how they could guide employees to a financially resilient future.

Read more about five to thrive

Although increases to minimum pension contributions could be beneficial in the long term, the proposed changes do not adequately consider the nation’s current ability to save for the short term and may erode short term resilience particularly for the poorest households.

Nathan Long, Senior Analyst, says:

“The proposed enrolment expansion amendments should only be introduced when any lingering effects of the cost of living crisis have passed.

Exploring how to encourage pension members to increase their contributions voluntarily, may also remove the financial burden on members if they are concerned about affordability in the short term.”

How the changes to auto-enrolment might affect your employees

What can employers do to support their employees?

We believe employers have a prominent role to play in driving the financial resilience of the nation through shaping employee education and benefits.

We’d love to speak to you in further detail about our thinking. Please get in touch with a member of our team to find out more.

Savings and Resilience Barometer Report

Learn more about how the cost of living crisis is affecting the nation's finances.

Read full report

Automatic enrolment

Learn in more detail about how changes to auto-enrolment could affect your workforce.

Read report

More Articles

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.

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