Calls for AE reform grow as research reveals broader savings benefits

Building on the success of auto-enrolment (AE) could help address broader savings challenges and encourage more liquid saving, research from the Resolution Foundation has found.

In line with this, the group urged the government to consider a number of AE reforms, including increasing minimum pension contributions, making wider use of sidecar savings, and making pension savings more accessible during people’s working lives.

Its report, which was part of a partnership with the abrdn Financial Fairness Trust, found that nearly one third (30 per cent) of working age families, rising to almost half (45 per cent) of low-income families, don’t have basic level ‘rainy day’ savings of at least £1,000.

As a result, Britain has a £74bn savings shortfall versus a country in which every working age family has at least three month’s income in precautionary savings.

"More encouragingly”, however, the report found that pension coverage has been transformed over the past decade, with auto-enrolment increasing the share of people saving into a pension from 47 per cent in 2012, to 79 per cent in 2021.

Despite this, it emphasised that many are still not saving enough for an adequate income in retirement, with 39 per cent, representing 13 million people, are currently not saving enough to meet the minimum target for an adequate retirement income.

The report admitted that confronting the UK's triple savings challenge is particularly daunting as there are trade-offs over which kind of saving to prioritise, with recent research revealing that additional pension contributions are not only funded out of lower consumption, but also lower savings and, in some cases, higher debt.

However, it argued that all three savings challenges can be met by learning from policy successes at home and abroad, urging the government to gradually increase auto-enrolment contributions from 8 to 12 per cent, with employer and employee contributions matched at 6 per cent each.

It recommended that these 12 per cent contributions also include a 2 per cent contribution into an easy access ‘sidecar savings’ scheme of up to £1,000, with contributions above this level going into a pension pot.

This, according to the report, would revolutionise the number of families with ‘rainy day’ savings in the same way that auto-enrolment has transformed pension saving, while also boosting people’s retirement incomes.

In addition to this, it suggested that making the UK’s highly inflexible pension pots more accessible during people’s working lives could also help them to cope with bigger life events or difficult circumstances.

In particular, it recommended allowing savers to borrow the lesser of £15,000 or 20 per cent of the value of their pension pots, which would be paid back via higher contributions directly into their pension pot at a later stage.

It noted that this more flexible approach already works well in the US, where around one-in-five participants in 401(k) plans have a loan against their pension at any one time, and around 90 per cent of these loans are repaid to their own funds in full and with interest.

Resolution Foundation economist, Molly Broome, stated: “Families across Britain face a triple savings challenge – not saving enough for rainy days, bigger life events, or for a decent income in retirement.

“One-in-three families in the country have less than £1,000 in savings – which left many people exposed during the cost-of-living crisis – while around 13 million individuals aren’t saving enough for an adequate income in retirement.

“We can address all three challenges by building on the success of pensions auto-enrolment to opt more people into both easy access and long-term saving.

“We should also offer people more flexibility over their pension pots, as other countries do, in order to help them with difficult circumstances. These reforms will improve families’ financial resilience during their working lives and into retirement too.”

Abrdn Financial Fairness Trust CEO, Mubin Haq, stated: “Britain is not a nation of savers.

"Too many have little to fall back on, lacking the rainy-day buffers that prevent a drama turning into a crisis.

“Savings are essential to weathering economic shocks but current financial initiatives have done little to boost savings for those who need them most. Greater contributions are also needed to prevent hardship in retirement.

“Pensions auto-enrolment offers a great opportunity to provide a safety-net millions don’t currently have. This would cover the funds needed for those rainy days, for when life shocks happen and help provide a decent income at the end of our working lives.”

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