Shantel Okello, a policy researcher at the Pensions Policy Institute, delves into the findings of a new report into the retirement savings challenges faced by young people.
On 26 February, the Pensions Policy Institute (PPI) published ‘The Concerns of Gen Z’, a new report sponsored by the Institute and Faculty of Actuaries (IFoA).
The report explores the financial challenges facing Generation Z – those born between 1997 and 2012 – and the long-term implications these challenges may have on their ability to achieve financial security in retirement.
The findings highlight the urgent need for targeted policy interventions to address the unique barriers Gen Z faces in building adequate retirement savings.
Barriers to saving: Financial pressures and working patterns
Despite Gen Z’s improved access to workplace pensions compared to previous generations, various financial pressures make it challenging for many to prioritise retirement saving.
House prices being eight times the average annual salary, alongside student loan repayments, reduces disposable income, limiting the amount available for pension contributions.
Additionally, many in Gen Z work in irregular or gig-based roles that do not offer employer pension contributions. While automatic enrolment sets a strong foundation, the current minimum contribution rates may be insufficient to ensure an adequate retirement income.
As part of phase two of the Pensions Review, which is expected to focus on the adequacy of pension savings, there is growing recognition that the current minimum contribution levels may not be enough to ensure a comfortable retirement for Gen Z.
PPI modelling suggests that a median earner saving at the minimum contribution level could accumulate a defined contribution pension pot of approximately £158,000 by the time they reach state pension age, equating to just £13,000 a year in retirement, excluding the state pension.
When the state pension is included, this retirement income increases to £24,500. However, this income still falls short of the Pensions and Lifetime Savings Association’s moderate retirement standard for a single retiree (£31,300).
Fragmentation of savings further complicates retirement planning, as career changes and short-term jobs lead to small, disconnected pension pots. The move away from defined benefit schemes places greater responsibility on individual savings decisions and exposes Gen Z to increased investment and longevity risks.
Policy solutions to improve pension outcomes for Gen Z
The report identifies several areas where policymakers and industry leaders can take action to improve retirement outcomes for Gen Z.
Expanding pension access for gig workers and the self-employed would address gaps in participation, ensuring broader retirement savings. A review of automatic enrolment contribution levels may also be necessary to determine whether minimum contribution rates are sufficient for an adequate retirement income.
Wider policy measures that address the financial challenges facing Gen Z, such as housing affordability and student debt, could also improve their long-term saving capacity.
To address the issue of fragmented pensions, the introduction of default consolidators could simplify the management of small, deferred pots.
In addition, given Gen Z’s reliance on digital platforms for financial information, pension communication and guidance must be adapted to align with their financial habits.
With 45% of Gen Z turning to social media for financial guidance, providing information and tools tailored to their digital preferences can increase engagement and support informed decision-making.
A key opportunity for improvement
Gen Z face distinct barriers and opportunities shaped by their economic and social context. Addressing these issues is crucial not only for Gen Z’s financial security but also for the sustainability of the pensions system.
Policymakers and industry leaders have a key opportunity to mitigate risks, improve engagement, and build a more inclusive pensions landscape that reflects the needs of this generation and those that follow.
For a more detailed analysis of these issues, ‘The Concerns of Gen Z’ is available on the PPI’s website.
Shantel Okello is a policy researcher at the Pensions Policy Institute.
