Financially vulnerable employees under 40 could stop contributing to their workplace pensions, potentially leading to a “pensions time bomb” of almost £4 billion, Outra has warned.
The data science firm found that almost two million households made up of those aged 25 to 39 earning a combined income of £100,000 or less may decide to opt-out of their employer’s pension scheme to boost their take-home pay. If they all stopped an average 5% employee contribution, the pensions industry would face a £3.84 billion shortfall.
The company discovered that of the financially vulnerable households who are at risk of ending their workplace pension contributions, 551,000 are between 25 and 29 years old, 651,545 are between 30 and 34 years old and 675,790 are between 35 and 39 years old.
Peter Jackson, chief data officer at Outra and the former chief data officer at the Pensions Regulator, said: “Many young people – who are seeing their real incomes squeezed by the cost-of-living crisis – may be tempted to stop their pension contributions in order to get some extra cash in their pocket that will allow them to maybe keep all of their subscriptions to Netflix or Prime, afford their increased rent or mortgage or even simply be able to have a better weekly food shop.
“While this may make sense in the short-term for these households, if this trend happens at pace the cost to UK pension schemes in the long run is of real concern as, starved of income, Assets Under Management (AUM) will fall meaning they may not be able to offer pensions to households under 40 in the future.
“And when you add in the fact that when you opt out of a pension, you often have to stay out for three-years, the potential shortfall UK pension funds are facing from these households balloons to £12 billion. Simply put, raiding or under-funding pensions now to combat this cost-of-living crisis could simply be the catalyst for another cost-of-living crisis in the next two decades or so when the first of the Millennial generation look to retire.”