by People's Partnership
| 19 Dec 2022
Pension schemes and those saving into them could not escape from the economic impacts of the invasion of Ukraine and the ongoing economic fallout of the pandemic. As a result, we are now grappling with generationally high inflation and sharp falls in both bond and equity markets.
What does this mean for Defined Contribution pension saving? In November, The Office for Budgetary Responsibility forecasted a fall in real household disposable income of 7% over the next two years, which will take household incomes back to around their 2013 level.
As struggling households spend more of their money on essentials like food – where price increases have been particularly sharp – they will be the worst affected. The Government’s energy price cap on unit prices will only partially ease the financial woes of a significant proportion of the population.
Research shows most savers have no plans to stop paying into their pensions
This hardship has yet to really pass through into pensions policy or pensions saving. So far, there have been small increases in the opt out rate from auto-enrolment – from 7.6% to 10.4% between January 2020 and August 2022. There have also been no increases in the cessation rate. Our own research shows that just 4% of UK pension savers surveyed would consider stopping their pension contributions in the next 12 months.
A further 4% would think about reducing how much they save into their pensions over the next year. This is compared to 35% who said there’s a possibility they would reduce their holiday spending in the next 12 months. The same research shows that one in five (21%) of those surveyed have cut back on holiday spending. More than four in 10 (44%) now buy cheaper brands or ‘own label’ products. A third (33%) are also reviewing their direct debits or standing orders.
This research reinforces the importance of retirement saving. Government data shows that a record £112 billion was saved in 2021 – and although this may change in 2023, so far, pensions policy has remained surprisingly resilient.
While the cost-of-living crisis has not yet affected the huge successes of auto-enrolment, it has likely seriously affected its future. There is no plan for the implementation of the 2017 review reform package: reducing the age threshold for automatic enrolment from 22 to 18 and removing the lower earnings threshold on contributions.
It’s hard to see how the Government can implement changes to auto-enrolment during an economic crisis of this sort. Government and the wider pensions industry can, though, use this time to prepare the ground for reform once the crisis has passed. A consensus needs to be reached by employers, unions and policymakers on what the future of auto-enrolment should look like – and how the issue of under saving should be tackled.
Steady progress has been made on pensions dashboards
Despite these challenges, the DC sector has made steady progress on other longstanding priorities. 2022 has been the year the DC sector began to really get to grips with pensions dashboards. The trajectory for dashboards is now set, with DWP, MaPS, TPR and the FCA now having published the information that schemes need or consulting on final rules. It’s now a case of schemes getting ready to connect to the dashboard system from April.
Here’s to a productive 2023.