Cost-of-living crisis forcing people out of pension schemes - is regulatory change needed?

The number of employees opting out of company pension schemes is rising in response to the cost of living crisis, according to research from workplace pension and savings provider, Cushon.

Almost half of businesses (45%) with more than 500 employees report that some people are already leaving pension schemes whilst four in ten (40%) also report that some employees are reducing their contributions in order to survive the cost of living crisis.

Although the number of employees currently opting-out of pensions schemes is relatively low – with Cushon research showing just one in ten (11%) are considering doing this – the risk is that people will increasingly be forced to cut pension contributions as increased living costs continue to be felt.

Nearly eight in ten (77%) people say they are planning to reduce outgoings to get through the current crisis while seven in ten (67%) feel anxious about their finances at present.

At the same time, there have been worrying media headlines about the security of people’s pensions following market reactions to the government’s mini-budget. While this mainly impacts defined benefit pension schemes, this is not necessarily being made clear and therefore risks provoking fears over the security of pension pots which could lead more people to reduce or cut contributions.

People are also increasingly calling for their employers to offer financial wellbeing support – almost half (47%) of businesses say that their employees want support schemes introduced. There are several different options that employers could consider to support staff including:

• Pensions redirect – allowing some of employers’ and employees’ pension contributions to be directed into accessible savings,
• Salary sacrifice – where someone agrees to reduce their salary by an amount equal to their pension contributions and their employer will then pay their total pension contributions which saves both the employee and the employer money in lower NI contributions – on average £200 per person,
• Workplace savings schemes – enabling payments to be deducted directly from employee pay and funneled into a savings account that employees can access when they need to – helping them build a rainy day fund.

Steve Watson, head of policy and research at Cushon, commented: “Even with the recently announced cap on energy bills, millions of people are still facing impossible financial choices in the current crisis. People urgently need more support to ensure that stopping or reducing contributions is a last resort and a potential retirement savings crisis is avoided.

"The recent reporting around the Bank of England’s financial intervention in the bond markets has not helped either. By stoking fears that the pensions market is unstable, this risks misleading savers into making financial decisions which will hurt them in both the short and long term.

“There are many things employers can do to help employees build a financial buffer so they’re better able to weather the storm. Being able to offer generous and effective workplace savings schemes would ensure that people can financially plan for the future whilst having enough to get through the current crisis. However, without regulatory change, employers aren’t able to auto-enrol employees onto these schemes which is reducing their effectiveness and ultimately reducing people’s ability to build up a savings buffer. By providing additional support, employers can help to ensure that cutting pension contributions becomes a last resort and people’s financial futures remain secure.”