The pensions industry is selling a lie, argues Sara Benwell. Young people shouldn’t be pouring money into a pension. Instead, providers need to work with the retail industry to offer new, holistic savings products
I’m 27 years old, a paid up member of generation Y, and I won’t be paying any pension contributions beyond minimum auto-enrolment rates.
That’s not just because of the myriad financial obligations facing twenty-somethings, such as astronomic rent, saving to buy a property and student loans. It’s also because, contrary to what many in the pensions industry would have me believe, it doesn’t make good financial sense to pay more into a pension.
Auto-enrolment IS enough
With the constant pressure to save more from the government and providers, most millennials could be forgiven for assuming that destitution awaits them if they don’t ramp up their pension contributions.
However, the facts suggest otherwise.
The standard argument can be summed up by recent research from Now: Pensions. The company found that millennials expected to build up a retirement pot of £95,000, even though three-fifths have not yet started saving.
The research showed that to reach the dream pot of £100,000, young people would need to put away £70 a month for 40 years or £120 a month for 30 years. However, in reality, young people were saving on average only £22 a month.
We are already saving enough for the retirement pot we want, contrary to what the scaremongers would have us believe”
Morten Nilsson, the CEO of NOW: Pensions concluded: “Auto-enrolment will go a long way to getting young people into the savings habit but the sooner they start saving and the more they set aside each month, the easier it will be.”
So why won’t I be saving more? Because the underlying assumptions are wrong.
A young person who goes to university will enter the workforce at 21. Others will start their first jobs at 16 or 18.
Current projections suggest we will reach state pension age at 68, but we can safely assume that this will rise to at least 70. That means I will have 50 years to save for retirement.
Saving £22 a month for 50 years, gets me a pot of nearly £60,000. And as I get older, my contributions will actually rise in line with my salary, putting me well over the £100,000 goal.
That is to say: we are already saving enough for the retirement pot we want, contrary to what the scaremongers would have us believe.
But the argument only works if young people stay auto-enroled, and to ensure this, there is still much work to be done.
Hugh Nolan, chief actuary at JLT Employee Benefits, thinks employers could emphasise the massive gains that young people can get from tax relief and employer contributions. Specifically, he wants to exploit the idea of FOMO (fear of missing out).
“Why are employers who want people to sign up for a pension scheme not texting 23 year olds saying, by the way, this month we would have paid £27.50 into your pension scheme for you but you didn’t sign up!
Why are employers who want people to sign up for a pension scheme not texting 23 year olds”
“If I was a 22 year old, and I got a text every month saying ‘I just paid you and we would have paid you an extra £30 into your pension scheme if you’d signed up, but you haven’t, so that £30 was missed…[there could be] a running total after six and 12 months saying you’ve missed £180, you’ve missed £360. That would really focus my mind.”
Once we’ve got those people in the pension scheme, all we really need to do is make sure they stay there.
Keeping people enroled
While moving towards 8% minimum contribution rates would increase pensions savings substantially, in reality 4% is too high and will scare off people who are just starting out.
Nolan recommends a tiered approach: “I’d like to see the current 1% retained for under-25s, popping up to 2% for 28 year olds, 3% at age 30 and then 4% thereafter. It’s the American concept of ‘save more tomorrow’, which is: you make a commitment now to save more later.
“Whether it’s done on age bands or when you first join a scheme it steps up at a certain age, it gets people in the habit. I’d much rather have a 22 year old paying 1% in and not minding too much, than saying ‘do you know what, 4%, I could do without that’.”
The dangers of over-saving
Encouraging Gen Y to save more into a pension earlier could actually cause serious damage, says Damian Stancombe, head of workplace health and wealth at Barnett Waddingham.
The reality is actually you could be doing them great harm”
“Ignoring the debt issue and getting them to put loads of money into a pension scheme means you’re going to have people working for you who are financially on a cliff edge on a day-to-day basis.
“As an employer what I should be doing is actively encouraging my people to save for what is right for them whilst still contributing to a pension scheme on their behalf.”
Just because young people shouldn’t be saving more for a pension, that doesn’t mean they shouldn’t be saving more in general. Employers can help with that.
Research by BNY Mellon suggests that holistic savings may hold the key.
Paul Traynor, international head of insurance at BNY Mellon explains: “One of the conclusions coming out of the research was that there should be some kind of multi-drawdown pot available. In other words, if you put in place this single-purpose, tax-incentivised, retirement pot, it’s not going to work.”
Even getting young people saving for a house through a workplace scheme requires more education.
Traynor explains: “If you’re saving in a pension with your employer, the tax man is giving you an incentive and your employer is giving you an incentive, if you’re saving for your house within a workplace ISA there’s capital gains tax relief. Unfortunately millennials don’t understand that, the level of financial illiteracy is stunning, really stunning.”
I think we have to bend more to the retail trend”
Perhaps though, the reason young people are so apathetic about workplace savings solutions is because the pensions industry is pushing them towards unsuitable pensions products.
Simon Chinnery, head of UK DC at J.P. Morgan Asset Management thinks the pensions industry needs to change.
“We are not going to survive if we carry on with the very siloed, ‘it’s our way or the highway’ approach. I think we have to bend more to the retail trend… Because at the moment, the way things stand, even though there is a tax and a compounding benefit from the industry’s point of view, from people out in the real world the biggest concerns are much shorter term.
“Unless you offer flexibility, which is what you get in pretty much any other consumer-driven product, young people feel ‘I’m putting my money into something that’s unimaginably far off, for an outcome that’s completely uncertain, and I just don’t like that’.”
Stuck in the mud
Unfortunately, Stancombe doesn’t think the pensions industry as a whole will make the much-needed jump towards holistic savings any time soon.
This industry is very selfish”
“I am absolutely opposed to the idea that we think success is getting a load of young people to save a load of money into a vehicle they can’t access at 55.
“It should be their holistic financial positioning that we care about, and we don’t. We don’t because this industry is very selfish. It wants to collect those assets, it wants to hold those assets and it doesn’t like releasing them, but the reality for people is that that’s not for them.”
Gen Y may still have the last laugh. As Chinnery puts it: “All the messaging so far is pretty negative, ‘you won’t have saved enough’, ‘you’re insisting on living a long time’, ‘the state isn’t going to be there in any kind of meaningful way’.
“It’s very negative messaging for younger people, and I think that in time-honoured fashion they’ll just ‘go well to hell with the system, we’ll do things differently’.”
Perhaps I’m not the only one who’ll be sticking to minimum contribution rates, maybe we’ll start a savings revolution.
To hell with the system, we’ll do things differently”