Inflation risks lower or no pension contributions 

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There is a real expectation that inflation and the higher cost of living could lead to a reduction in pension contributions or to opt-outs, according to Paul Cullum, head of financial services at economics consultancy Frontier Economics.

At the start of the Covid-19 crisis, levels of auto-enrolment were maintained and contributions increased as many people spent less during that period.

However, speaking at a webinar about savings adequacy, organised by the Association of British Insurers on Tuesday, Cullum said with inflation, people are cutting back on spending “and I would expect that many people will look at their pension contributions as well”.

He added: “Part of the flipside of default is that it's quite hard to change and go through all the processes to reduce pension contributions. But I would expect that to start to happen.”

Cullum hoped the effects of inflation to be temporary. 

“We don't know how quickly things will revert if energy prices start to fall, next year, and… some of the challenges of recruitment and redistribution of the workforce following Covid-19 should work their way through as well. So will it be temporary? I think we can hope that that is the case. But of course it may not be.”

He warned that the longer inflation goes on, the more people are likely to make “big behavioural shifts” in terms of contacting their pension provider to adjust contributions.

Cullum said: “The challenge for the industry is how do we respond to that when we start getting those requests? Obviously, we need to support customers because they are going through financial difficulty.”

He then pointed to the risk of savers opting out of their pensions without opting back in once the crisis is over.

“How do we make it easier that people come back into contributions in a few years’ time and that we don't end up with a cohort of people who have opted out? And a real engagement challenge [is] exacerbating some of the adequate savings challenges… with a cohort of people who've opted out during this crisis and then don't opt back in afterwards.”

Is there a savings adequacy issue?

During a panel discussion about savings adequacy, Chris Curry, director at the Pensions Policy Institute, said there is no market consensus as to what adequacy means but added those who are most at risk of not saving enough would be those aged 50 and over, as this group is unlikely to benefit substantially from automatic enrolment.

Curry estimated there are 11m people in that group, of whom 5m are unlikely to have saved sufficiently to maintain their standard of living in retirement by the time they reach their state pension age.

Other groups at risk of having a less adequate income in retirement include women, ethnic minority groups, those with long-standing health issues or disabilities and those who are “not in standard employment in the workforce” such as the self-employed.

Panellists also raised concerns over member engagement as a barrier to savings adequacy. 

Rob Barker, managing director for wealth at provider Aviva, highlighted the need for people to engage with their pensions via the pensions dashboard. He also called for lower charges for financial advice and consolidation of pension pots.

“There's a significant proportion of the population in the UK that are just not engaged with their pension. They've left pension pots of various employers over their career, and that leads to a poorer retirement outcome.”

Katherine Chapman, director of Living Wage Foundation, said a voluntary benchmark would provide savers an idea of how much they would need to save for retirement.

She said: “I do think there is place for a target or benchmark that would help people understand what the minimum is that they need to be saving. We're talking about a baseline here and a more realistic baseline for that minimum level and then they can build that into the long term planning.”

Are people not engaging with their pensions?

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