Covid crisis puts pension enrolment in jeopardy

PENSIONS auto enrolment has been a resounding success.

But the fear is that coronavirus could put a dent in the drive to encourage people to save sufficiently for their retirement.

It is not yet clear how many employees, battling to make ends meet, have been forced to halt payments.

But Scottish Widows research, quoted by Actuarial Post, suggested more than 3.7 million had reduced or stopped saving into their pension entirely.

Tom Selby, senior analyst at AJ Bell, told FT Adviser that the figures for 2020 would inevitably be hit, primarily because around eight million workers have been furloughed and therefore will likely have seen a reduction in their auto enrolment contributions.

He said: “This will only amount to a maximum of a few hundred pounds, however, and should represent a temporary blip rather than a new retirement crisis. As the UK hopefully begins to return to normality, political focus does need to shift towards building financial resilience across the system.

“This must include encouraging people to take responsibility and save over-and-above the auto enrolment minimum where they can afford to.”

Kate Smith, head of pensions at Aegon, added: “Some employers with generous contributions are already looking to cut back to auto enrolment minimum rates, either temporarily or permanently, and we may see more of this as the economic crisis begins to deepen.

“We could also see an increase in employees opting out of schemes to ease financial struggles, while others will lose their jobs and, with it, access to a workplace pension.”

In general, opting out of auto enrolment is rarely a sensible decision. In doing so you are essentially turning down free money in the form of your matched employer contribution, as well as the additional boost of pension tax relief.

Once you have made that contribution the money is yours – albeit you won’t be able to access it until your mid-50s – so even if you lose your job your auto enrolment pension will remain your property. Employees who decide to pause their contributions can ask their employers to allow them to opt back in at any time.

The longer employees are out of the pension scheme the more difficult it will be to make up the savings gap, which could have an impact on their retirement plans. Auto enrolment was rolled out between October 2012 and February 2018.

Minimum contribution rates are eight per cent – three per cent from the employer and five per cent from the employee.

Latest data on workplace pension schemes from the Office for National Statistics revealed that payments to defined contribution (DC) schemes – now more or less the norm outside of the public sector – rose from £1.7 billion in 2017 to £4.8 billion in 2018; employers’ contributions to DC schemes jumped from £5.5 billion to £12 billion. Last year employees’ contributions to DC schemes were £6.3 billion while employers’ contributions were £14.1 billion.

The ONS estimated that total membership of DC occupational pension schemes reached 22.4 million at the end of 2019.

But other figures from Scottish Widows illustrate there remains a long way to go.

The level of adequate savers – those putting away the recommended minimum 12 per cent, four per cent higher than the auto enrolment minimum – has reached a record high of 60 per cent, but that still leaves 40 per cent with work to do.

More than half of 22-29-year-olds are now saving adequately for retirement – a significant increase of 11 per cent on last year’s figures (from 40 per cent to 51 per cent). But 49 per cent are still doing nothing to prepare for later life.