Govt urged to act on AE recommendations in light of Covid-19 impact

The government needs to act on previous industry recommendations around auto-enrolment (AE) to protect those worst hit by the Covid-19 crisis, Scottish Widows has said.

The firm stressed that the “golden era of progress” in pension savings habits of young people could be in danger of running out, as research reveals that almost half (49 per cent) of 22-29 year-olds are still not doing enough to prepare for later life.

Furthermore, the report warned that 40 per cent of people are still failing to save adequately, with 15 per cent failing to save at all.

It noted that despite the positive impact of AE, and an 11 per cent increase in the number of young pension savers saving adequately (51 per cent), there are growing concerns around the damage Covid-19 will do to retirement planning.

Scottish Widows emphasised that many of the UK’s youngest savers in particular are excluded from the benefits of AE, with savers aged 18-22 missing out on "vital contributions" until the government acts on recommendations to lower the AE threshold.

The government has repeatedly committed to a "mid 2020s" timeline for changes to the AE age threshold, subject to an industry consultation and the introduction of legislation, although no concrete plans have been outlined.

Commenting on the findings, Scottish Widows head of policy, Pete Glancy, emphasised that AE had “transformed” the retirement prospects of millions, with young people in particular benefiting through the initiative.

He added: “However, we shouldn’t be celebrating prematurely as we are still seeing the nation’s youngest savers excluded from these benefits (18‐22‐year‐olds).

“We also recognise that the next 12‐18‐months is going to be about businesses and individuals getting back on their feet.

“With the impact of AE having plateaued, now is the time for policymakers to focus on cohorts of the population, like young savers and those hardest hit by Covid‐19, who are not yet benefiting from the current system and need effective solutions to help them save for the future.”

It is not only young savers who have been impacted by the current crisis, with more than half of savers (54 per cent) continuing to worry out of money in their retirement, especially in light of the impact of Covid-19 on their personal finance.

Recent research from the firm revealed that around 3.7 million people have stopped or reduced pension contributions during the crisis, leading to renewed calls for the introduction of a single lifetime savings pot.

This would be funding through an extension of AE, and, according to the Scottish Widows, would provide savers access to financial support during moments of financial crisis, without detracting from their retirement provisions.

The latest report revealed that those from ethnic minority backgrounds have also been disproportionately hit throughout the current crisis.

For instance, the firm found that twice as many people from ethnic minority backgrounds who have a pension and are not yet retired have reduced or stopped pension savings during the current crisis, compared to the rest of the UK.

It stressed that this disproportionate impact is likely to increase further, adding that even before the crisis those from ethnic minority backgrounds were more likely to face a financial shortfall in retirement, with just over half (55 per cent) saving the recommended minimum, compared to 60 per cent for the wider population.

The report explained that this is likely due to the fact that almost one in five (18 per cent) people from an ethnic minority background work multiple jobs, and therefore may unfairly miss out on pension contributions.

This issue arises as 'multi-jobbers' will have their income split across different employers, and therefore often fall below the minimum earnings threshold.

Again, despite previous industry recommendations and commitments from the government itself to scrap this rule, and instead base contributions on full earnings, no changes have yet been made.

If enacted however, the firm emphasised that this could increase worker's contributions by as much as 60 per cent and make “a real difference to retirement prospects”.

Glancy added: “We must face up to the fact that the pension system unfairly penalises those who are in low paid work.

“Scrapping the minimum earnings threshold would allow millions of multi‐jobbers, which include some of the hardest working and most financially vulnerable members of society, to benefit from auto‐enrolment like everyone else, and is long overdue.”

    Share Story:

Recent Stories

DB risks
Laura Blows discusses DB risks with Aon UK head of retirement policy, Matthew Arends, and Aon UK head of investment, Maria Johannessen, in Pensions Age's latest video interview

Sustainable equity investing in emerging markets
In these highlights of the latest Pensions Age video interview, Laura Blows speaks to Premier Miton Investors fund managers, Fiona Manning and Will Scholes, about sustainable investing in equities within emerging markets

Keeping on track
In the latest Pensions Age podcast, Sophie Smith talks to Pensions Dashboards Programme (PDP) principal, Chris Curry, about the latest pensions dashboards developments, and the work still needed to stay on track
Building investments in a DC world
In the latest Pensions Age podcast, Sophie Smith talks to USS Investment Management’s head of investment product management, Naomi Clark, about the USS’ DC investments and its journey into private markets