Experts from across the pensions industry have warned that the cost-of-living crisis is likely affect people’s abilities and willingness to adequately save for retirement, especially those not in scope of auto-enrolment (AE).

Responding to the Office for National Statistics’ (ONS) figures on pension participation, many commended AE for driving participation growth to a record-high of 79 per cent of employees now saving into a workplace pension, as at April 2021.

However, Quilter head of retirement policy, Jon Greer, noted that the 1 percentage point increase on April 2020 was mainly down to the jobs created by the government to help fight Covid-19 during the early days of the pandemic.

“Many of the people that took those roles were put into public sector workplace pension schemes as a result boosting participation,” he said.

“However, many of these were transient roles that may well already no longer be in place so this increase could be short-lived.”

Greer added that although AE had so far proved to be a huge success, the “real test” has begun.

“The cost-of-living crisis that many are only just starting to feel will stretch finances in a way many have not experienced before,” he continued.

“People may choose to opt out of funding their retirement in a bid to have more money in their pocket today. AE largely relies on people’s inertia but significant financial pressures on someone’s finances today may make people take action and reduce or stop pension funding altogether.”

He noted that the increase in living costs will make retirement saving even harder for self-employed workers, whose finances are often more unpredictable.

As many self-employed people have already suffered a significant financial shock during the pandemic, they are unlikely to be prioritising their pension provision at the moment and a solution needs to be found urgently, Greer warned.

These fears were echoed by Aegon head of pensions, Kate Smith, who said that more work needed to be done to help low earners and younger employees save into a pension.

“Only 20 per cent of employees aged between 16 and 21 are in a pension scheme and the pension participation rate in the private sector was only 43 per cent for those earning between £100 and £199 a week, compared to 88 per cent in the public sector,” she commented.

“This shouldn’t be a surprise given these groups are largely excluded from AE.”

Standard Life managing director, pensions and savings, Colin Williams, added that the cost-of-living crisis was arguably AE's “biggest test to date”.

“The current cost-of-living crisis is squeezing household budgets and while savings rates have held up well to date, many people will be assessing every cost right now,” he said.

“This is evident in the figures where participation among private sector workers earning between £100 and £199 a week are far lower than the average at 43 per cent.

“However, the pandemic indicated that savings habits, once formed, tend to stick and we’d hope that people would take the long-view when it comes to preparing for retirement.”

EQ Financial Planning chartered wealth manager, Adrian Kidd, said that while the ONS’s report may appear like good news, the numbers that really matter are what people are contributing and higher living costs could negatively impact those figures.

“I suspect, and fear, that rates of contribution are nowhere near what they need to be and that any plans to uplift contributions among employees will be shelved to pay for higher living costs elsewhere,” he stated.

“The current level of inflation poses a real threat to people's desire to contribute more to their pensions."

Aviva director of workplace savings & retirement, Emma Douglas, was more positive, noting that while the rising cost of living was placing “extreme pressure” on household finances, the data from the ONS gave “confidence” that savers understand the importance of pension saving.

Cushon CEO and founder, Ben Pollard, added: “During what has been a really tough economic time for a lot of people, it’s encouraging to see that such a high number of employees had a workplace pension in April of last year. But, despite these strong figures, the pensions sector still has challenges to overcome.

“We know that AE fails to capture everyone in the workforce, and complex rules and language can be off-putting to employees, while outdated communication approaches make it difficult for people to engage with their pension. There’s also limited transparency around environmental and sustainability issues, despite the fact these factors are becoming increasingly important to savers.

“Until we align pensions with people’s values, and bring the experience up to the standards people have come to expect, engagement with pensions – and therefore contributions – will remain low. Because while it’s great we have more people saving, we still need to get more people saving enough for their circumstances.”

Interactive Investor head of pensions and savings, Becky O’Connor, concluded: “If we want more people to be less dependent on the state pension in retirement, it would help if the boundaries around AE participation are relaxed.

“The disparities between public and private sector pension provision must also be urgently addressed. There is significant pension inequality between employees who are employed by the public sector with defined benefit schemes and those with defined contribution schemes in the private sector.

“The public/ private pension inequality will continue to be a troubling feature of retirement for millions of current workers. Those in the private sector who are auto-enrolled and therefore assume their retirement will be OK may be unpleasantly surprised, not just by how little they end up with, but also by just how far behind their ex-public sector friends they are.

“Unfortunately, AE on its own will not make this gap go away. There are a number of measures to consider: higher employer contributions as well as removing the AE minimum age and threshold, could help.”

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