The rising cost of living

By Renny Biggins, Head of Retirement at TISA

Following Ofgem’s announcement in February raising the energy price cap, the rising cost of living is at the forefront of consumer concerns for 2022. Recent data released last week by the Food Foundation showed that the number of people experiencing food insecurity was one-fifth higher in January than six months previously.[1] AgeUK found that three quarters of the elderly have admitted that they are worried about the cost of living.[2] There is no doubt we are in a cost-of-living crisis.

On the same day that Ofgem announced a 54% rise in energy bills, the Bank of England increased interest rates from 0.25% to 0.5%. It also warned that inflation could hit 7.25% by April.[3] Combined with the planned increase in National Insurance Contributions and likely further increases in energy prices later in 2022, all but the very wealthiest are concerned by the reduction in take home pay. The ongoing Russo-Ukrainian war, and resulting sanctions, will exacerbate the issue.

This new crisis is compounding structural issues with intergenerational fairness. Recent studies show that up to a third of millennials will be lifetime renters. [4] And with rental prices for tenants outside of London rising by almost 10% in the last year, this makes getting on the housing ladder without help a huge challenge. Inevitably, house deposit saving will displace other forms of saving and take a lot longer to complete than for previous generations.

Given the macroeconomic factors in play, these issues will have an impact on debt, pensions, and savings and will be a decisive influence on policy for many years to come. We need to ensure that, in tackling some of the immediate effects of the cost-of-living crisis, we do so with a strategic and long-term vision in mind.

Broad-based inflationary pressures

The price of wholesale energy increased so sharply last year that many smaller suppliers went bust, forcing Ofgem to raise the energy price cap by more than 50% to £1,971 from April. There are now warnings that the price cap may have to rise again to £3,000 when it is next due to be reviewed in October due to the ongoing conflict with Russia.

Energy prices are not the only thing to be affected by the situation in Ukraine. Oil is expected to rise even more from an already historic high, with prices of oil products like petrol already breaking the £1.63 barrier and continuing to increase. Russia is the world’s third largest individual producer of oil, and responsible for about 11% of global output.

Both Russia and Ukraine are major producers of grain, and Ukraine is a key producer of rapeseed and sunflower oil. Inflation is therefore expected to affect food prices. These rises in energy, oil and food prices contribute to the already serious issue of the rising cost of living.

The effect on savings

While the interest rate rise is a small positive for existing savings, inflation, rising costs and taxes will hit consumer savings. The interest rate hike passed by the Bank’s Monetary Policy Committee in response to the rise in inflation, with the aim of bringing it back down towards the 2% Bank of England target, will result in a further increase in pressure on mortgages. Higher mortgage payments for those on variable rates (around one in four) means less disposable income to commit to savings and invest in the future. That same increase in interest rates meant to help combat inflation will further increase the debt burden for some but there is always an economic trade-off.

Existing annuities are also likely to be negatively affected by inflationary pressures. With most not including index linking, the real value will drop year by year, although the interest rate rise should reduce the impact. It is good news for annuity rates, as the interest rate rise should have a positive impact on gilt yields, so those considering annuity purchase will see an increase in the rates on offer.

Long-term reforms and short term solutions

Despite a small rise in interest rates, they remain at near historic lows, while high inflation eats into savings pots. For those who have managed to accumulate cash savings during the pandemic over and above rainy-day levels, they need guidance and support so they can approach investment decisions with confidence and knowledge, rather than languishing in cash if it is intended for longer-term saving. This is vital if savings are to maintain value over time. Measures should include proactive communication to ensure consumers are aware of the support available to them.

We believe that consumer guidance and support should be simplified, personalised, and more easily accessible. Examples of the help that is available to consumers are The Money and Pensions Service, which can help with debt and provide guidance around pension withdrawal. Other organisations such as AgeUK can provide guidance services and information tailored to specific demographics.

Further changes to auto enrolment that we have advocated for some time include reducing the enrolment age and abolishing the lower earnings limit. Proposals put forward from the 2017 Auto Enrolment review to lower the minimum age to 18 and reduce the lower earnings limit would help many young and lower earners start saving earlier.

But these are not appropriate today, as short-term cost of living pressures make increased contributions unsustainable for lower earners. In a choice of spending on heating and food or on a future pension, the former will understandably win.

What can be done today

But amendments can be made that do not create unsustainable burdens. It is also not unusual for individuals to be employed by more than one employer and earning collectively over the £10,000 trigger, but not eligible for auto-enrolment. A mechanism is needed to bring this group into the scope of auto-enrolment with the help of RTI data held by HMRC.

There have been calls to abolish the earnings trigger, resulting in all employees being auto enrolled, and a much broader group saving into their pension. Again, while we welcome the principle of bringing a wider group into the AE framework, we need to ensure efforts are targeted at the right demographic being enrolled.

Recent research has shown that participation rates remain constant at circa 90% across all eligible employees irrespective of their financial security levels. Even the bottom 3% of earners, with low levels of savings and often financially struggling, maintain this level of 90%.[5] If we expand AE to lower paid workers and households, we need to ensure we understand the impact this could have beforehand. Especially given the calls that we need to increase contribution levels in future years to the industry accepted level of 12%.

We look forward to Government outlining a route to implement the proposals from the 2017 review that acknowledges both the short-term pressures on personal finances and the need to bolster retirement savings in the long term. One way to achieve the removal of the lower earnings limit is to gradually reduce it over a period of years, work on which should start at the next annual review.

[1] https://foodfoundation.org.uk/press-release/new-data-shows-food-insecurity-major-challenge-levelling-agenda

[2] Three-quarters of over-65s worried about cost of living rise | Press release | Age UK.

[3] Bank Rate increased to 0.5% – February 2022 | Bank of England

[4] https://www.resolutionfoundation.org/press-releases/up-to-a-third-of-millennials-face-renting-from-cradle-to-grave/

[5] IFS: Automatic enrolment – too successful a nudge to boost pension saving?