Impact of the cost of living crisis on auto-enrolment

When you factor in the rise in other day-to-day expenses, budgeting becomes a struggle for most — tough decisions will need to be taken.

This might include making significant lifestyle changes, seeking family help and taking on or increasing debt.

In recent research carried out by Tisa and Appinio, it was discovered that more than half (54.7 per cent) of respondents either occasionally, regularly or always take money out of their savings to supplement their disposable income.

Household finances are being squeezed like never before, so it is essential employees have access to as much help and support as possible

Furthermore, nearly 60 per cent of respondents reported having to dip further into their savings because of the rising cost of living.

This figure is expected to increase further, with reports of consumers planning to reduce pension contributions or even opt out entirely.

Concerningly, Penfold has recently announced that auto-enrolment opt-outs on its digital pension platform have risen by 29 per cent between March and July this year alone.

Further data from Tisa and Appinio’s research shows that a fifth of people (21.8 per cent) have less than £1,000 in “rainy-day savings”.

Once these savings are eroded, where money is spent becomes a matter of prioritisation. When it becomes a choice between eating and heating, it puts into perspective where pension savings fit.

We cannot predict how long this crisis will last, or what the resulting impact will be in the years and decades to come.

The long-term impact

Many decisions employees make will be made without understanding the impact this will have on future outcomes, and this is where employers have an important part to play.

In opting out, the benefit of the employer contribution and tax relief on personal contributions is lost, the advantages of compound interest are reduced, and it may be a period of years before re-enrolment takes place.

Furthermore, even a seemingly short opt-out period can have a significant impact on retirement outcomes.

It is essential that all other options are considered and support is sought before making decisions, so that future impact can be understood. 

However, when all other perceived options have been exhausted and more pressing priorities, such as eating and heating remain, then there is very little choice.

Savers should explore other options

But there may be other options for employees and employers that have not been considered. While minimum contribution levels to auto-enrolment are currently set at 8 per cent of qualifying earnings, it is the employer minimum that is set at 3 per cent.

If the employer is paying 6 per cent, then to meet the minimum contribution level, the employee would only need to contribute 2 per cent.

Of course, each employer will have their own contribution structure in place. However, it is worth employees who have considered opting out checking with their employers whether it is possible for contribution levels to be reworked, while maintaining the 8 per cent total contribution.

Taking it one stage further and subject to payroll processes allowing, some particularly paternalistic employers may continue with their contributions while allowing the employee to take a temporary contribution holiday — it would not cost them any more.

Where this results in a total contribution of less than the auto-enrolment minimum, it does mean the employee would need to be re-enrolled at the appropriate date. However, the continuance of the employer contribution at even the minimum level is a better outcome than paying in nothing at all.

Additional data from the research shows a high level of disengagement with the UK’s auto-enrolment pension schemes, with more than a third (34.1 per cent) of respondents reporting they have never heard of it.

When you look at this alongside the fact that a fifth have less than £1,000 in liquid savings, one must wonder how individuals are preparing themselves for retirement.

Household finances are being squeezed like never before, so it is essential employees have access to as much help and support as possible.

This can come from industry and government, but with the employer being at the heart of auto-enrolment, this is where the biggest turn to help may be focused.

Renny Biggins is head of retirement at The Investing and Saving Alliance