Cost of living crisis deepens pensions shortfall for UK's lowest paid

01 August 2022 4 min. read

Eight-in-ten workers are not saving at levels which are likely to deliver an acceptable standard of living in retirement, according to new research. As the cost-of-living crisis means workers have to prioritise meeting needs now over meeting needs later, employers need to do more to enable sufficient pensions contributions. 

Around the world, record rates of inflation are seeing the average salary spread thinner and thinner. As a result, many companies report that they are being asked by employers to raise pay in line with inflation, as the cost-of-living crisis sees households struggle to make ends meet.

However, while an increasingly common line of argument from businesses is that they are raising prices ‘due to labour costs’, the vast majority are not actually meeting these demands.

The proportion of workers not saving towards a pension has fallen, and the most common saving rate has increased

Recent research by business performance consultancy Ayming found that only 8% of employers had given all employees inflation-matching pay rises. For contrast, 13% of firms told the researchers they favoured tactics like “allowing dogs into the office” to help attract and retain talent.

As consumers are left with less and less once they have paid rent, met their spiralling energy bills, and contended with a hyper-inflated food-shopping expedition, many are left with little choice but to scale back spending. This is having major impacts on the economy at present – with many experts contending that plummeting demand has left the UK on the brink of a recession. But the impact of wages falling in real terms also have a long term impact, which may well lead to a crisis of another kind in decades to come.

Not saving enough

According to a study from pensions advisory Isio and the Resolution Foundation, commissioned by the Living Wage Foundation, of the UK’s working population, four-out-of-five people are not saving at levels which are likely to deliver them adequate funds in their retirement. While the number of workers not saving at all for a pension has fallen, and the most common saving rate has increased, simply taking this at face value risks obscuring a growing divide between the highest paid workers and the wider labour pool, who are being left behind.

Low savings levels are a long-standing issue, however, among the bulk of the population, the cost-of-living crisis is exacerbating the problem. With people having to reign in spending now just to keep their heads above water in the immediate future, many are having to sacrifice pensions contributions.

By the researchers’ reckoning, as things now stand, 16 million people will have less retirement funds than needed for an adequate standard of living in their lives after work.

The vast majority of low-paid workers are saving low amounts in cash terms

Katherine Chapman, Director of the Living Wage Foundation, said, “The current cost-of-living-crisis has hit low paid workers hardest, and many are not only struggling to keep their heads above water today, but also worrying about an uncertain future. This report shows that 16 million people are not saving at levels which are likely to prevent poverty beyond their working lives. Today’s cost-of-living crisis risks becoming tomorrow’s pensions crisis.”

It is a problem which is proportionally even worse among low-paid workers. The analysts found that of workers without any workplace pension savings, 75% were in the bottom weekly pay quintile. Meanwhile, their saving rate was well below average. As a result, fewer than 5% are able to save at a rate that will see them retire adequately. Looking ahead, this information is set to be used to inform a campaign for a Living Pension policy for UK employers and the Government, which could help improve the situation.

Paul Moffatt, Director & Pensions Tax Lead at Isio, which is working with the Living Wage Foundation on exploring the findings of the research, said, “We work with a wealth of industries to help their employees prepare for the future, but the research highlights the challenges being faced and the impact this will have on future generations. As an industry we have a responsibility to provide support now, before it’s too late and a Living Pension could help provide financial confidence for those that need it most.”