Why should young people save for retirement and how can the industry help them? Jon Dadswell from Columbia Threadneedle has answers.
Pensions remain one of the greatest tools people can use to create meaningful wealth for themselves and their families during their lifetime, but it is often difficult to convince younger people to think about their financial future, especially one that is decades away.
Better education in the workplace will help, and information targeted at younger people describing the power of compound growth
As an industry, we need to find new ways of inspiring young people to take pension saving seriously; but against a backdrop of rising house prices and rental costs, increasing job insecurity and wage stagnation, this is no easy challenge.
Nevertheless, it is a challenge we must embrace if we are to inspire a generation to take control of their retirement planning and achieve a comfortable lifestyle once they stop working.
It is clear that the trend is for retirees living longer and for the state pension age to increase. In 2016, a 65-year-old man could expect to live on average to age 86.5, and a 65-year old woman to 88.7, while the state pension age is rising to 67 for men and women by 2028 – and it is likely to keep increasing.
Whatever age people begin drawing their state pension, it is clear that most will not be able to live a comfortable life in retirement if they rely on the state alone.
Getting pension planning right is therefore crucial, particularly so for young people, who have the time to convert even modest pension contributions into meaningful wealth in later life, through time in the market and compound growth.
Yet, as we have seen in the latest version of the Pensions Policy Institute's 'Future Book', the average employee contribution rate into defined contribution pensions as at 2014 is just 1 per cent and 2.4 per cent (for group personal pensions and DC trusts respectively).
Auto-enrolment has been a success (the greatest increase in participation between 2014 and 2015 was seen in the youngest age band according to the Department for Work and Pensions: those aged 22 to 29), but it has resulted in many people only making the current minimum contribution of 1 per cent.
Contrast that 1 per cent contribution rate with the fact that a median earner contributing 8 per cent of band earnings into a pension scheme every year from the age of 22 only has a 50 per cent chance of achieving the same standard of living in retirement they experienced in working life. Clearly, people need to save more.
Savings habit needs to be kick-started now
Time is on your side if you are a young person, but the pensions industry, along with asset managers, regulators and the government, must work to kick-start a savings habit among Generations X, Y (the ‘Millennials’) and Z if they are to achieve a successful retirement.
The government has tried to balance young people’s savings priorities in the form of the lifetime Isa, which allows people under 40 to save in a tax-free environment for their pension or a first home. This may well help, but the risk is that it is used predominantly to save for a home rather than retirement.
No gain without pain: Children and financial education
Any Other Business: Learning to manage money from an early age could help children get used to deferring gratification, potentially proving invaluable in saving for later life.
Better education in the workplace will help, and certainly information targeted at younger people describing the power of compound growth and how the pennies they contribute today will turn into pounds in 40 years’ time – Albert Einstein called compounding the 'eighth wonder of the world' for a good reason.
It is crucial that young people also understand that if their employer makes contributions, they will effectively be turning down ‘free money’ if they choose not to contribute to their scheme.
Moreover, giving a degree of control to people over their investments will help, as will transparency on charges and performance.
Change may also come if we work to overcome behavioural barriers and prompt pension savers to contribute without it being an effort or feeling forced.
New technologies will also help: pension planning, tracking and solutions-focused apps that young people can use 'on the go' should help drive engagement.
Jon Dadswell is UK institutional sales director at Columbia Threadneedle
