Threshold adults favour medium-term saving over pensions

A new report by the Pensions Policy Institute suggests that savers described as developing a career path and “taking on responsibilities associated with adulthood” are limiting their participation in pension saving due to the competing priority of establishing themselves as adults.

Those financial or social establishment goals could include starting a family or saving for the purchase of a first home. Threshold participants in the qualitative research, aged between 25 and 39 years old, were more likely to pay low or no pension contributions than older interviewees.

The difficulty with just increasing auto-enrolment contributions is that more of them will opt out

Natalie Flood, Redington

The research also suggested that this deferral of saving is based on subjective ideas about their age – participants saw pension saving as a marker of being a “real adult”, and as such some did not feel ready to engage with it, regardless of income level or incentives offered by their employer.

Could ‘save more tomorrow’ help?

Of course, if threshold adults are allowed to persist with low rates of saving, their retirement provision could end up being wildly insufficient. The Pensions and Lifetime Savings Association has called for the increase of auto-enrolment minimum contributions to 12 per cent of earnings to help savers hit their retirement targets.

But given the legitimacy of these shorter-term financial goals, the report’s author, PhD researcher Hayley James, has suggested that more needs to be done to help young adults navigate these competing objectives.

“It’s perfectly reasonable for threshold adults to focus on establishing themselves,” she said. “While they seem in some ways quite passive from a pension participation perspective, they are actually doing that on purpose.”

James said an upgraded form of auto-escalation, which would link increases in contributions to pay rises and the achievement of people’s life goals, could help members catch up on their target savings level without having to sacrifice goals like housing purchase.

“If pension saving doesn’t work with the reality of people’s lives, how is it fit for purpose?” she asked. According to James, roundtables with pensions industry insiders revealed that many HR departments know when their staff reach life goals like getting married or having children, and could adjust pension arrangements accordingly.

Tom Selby, senior analyst at AJ Bell, said auto-escalation could be a useful tool in the UK: "Ultimately people have various different priorities for their spending today and retirement policy needs to account for that. Save more tomorrow has attractions in that it utilises behavioural traits to boost contributions at a time when people feel able to afford them."

Will young adults opt out?

Whether on the threshold of adulthood or more established in life, research shows that everyone is susceptible to present bias and myopia. This raises the prospect that threshold adults may need to be pushed to save more via inertia and auto-enrolment.

However, the PPI research suggested that they might opt out if this happens.

“The difficulty with just increasing auto-enrolment contributions is that more of them will opt out,” said Natalie Flood, vice-president of DC consulting at Redington.

Flood also supported introducing flexibility into the pension system, for example by allowing savers to use their savings for certain expenditures other than retirement.

“What we see in other countries where people are allowed to withdraw from their pensions is that they are much more willing to save in the first place,” she said.

“It’s not great if people withdraw the money, but then it is their money,” she added, explaining that as pots get bigger people become reticent about withdrawing.

Flexible spending has been introduced to the UK via the lifetime Isa, although takeup of the product has been sluggish.