At yesterday’s Pension PlayPen coffee morning, Con Keating made an important point ab0ut the lag between interest rates rising and those rising hitting household spending.
This came as a surprise to me and many others in the room as the noises off on interest rates suggest they may have peaked. The Bank of England’s rate may have peaked but for most savers, the pain of interest rises is yet to come.
This chart makes the point very well. Because of the delays created by fixed rate mortgages running on, the impact of rising interest rates is only being felt today, we are currently paying on average 3.07% against nearly 5.7% which is the variable rate and 6% which is the rate at which new 2 year fixes can be bought.
The fixed rate has recently fallen slightly which suggests that the market is counting in some falls in mid 2024 but the underlying message is that the black line will continue to rise over the next twelve months to meet the red and blue lines.
Higher for longer
The implications for pension saving are worrying. So far, people have not stopped saving because of the rise in inflation, because the big ticket item in their shopping basket, the mortgage, has remained low.
But when fixes fall away and people refix or go to variable, the pain will start.
Which is why I think it highly unlikely that the Government will get on with requiring increases in the auto-enrolment rate anytime soon.
The 2017 reforms, due to be implemented in the “middle of the 2020s” are now enabled by legislation but they are very far from being on the Chancellor’s priority list.
While all the evidence from Australia is that people are comfortable to be nudged into higher contributions, there is precious little evidence that the dramatic increases proposed by the 2017 auto-enrolment review can be implemented in one go.
I expect to see the Chancellor push back the implementation of any increase of AE contributions till after the next election , handing the problem to a future Government.
I also expect to see middle England households wince with pain when the high levels of household mortgage debt bite. An increase on a fixed mortgage from say 2% to 6% will dwarf any other increase to household budgets. I fear that many households have allowed this elephant to sit quietly in the corner of the room , but it will make its appearance at some time and when it does, mortgage holders will look to voluntary expenses to cut
Nobody should suppose the public doesn’t know their pension contribution is a voluntary expense.