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

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:

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:

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.

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.”

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.