Providers, advisers and the government all have a role to play in encouraging millennials to plan for their future, writes Emily Perryman.
The demise of defined benefit pension schemes, a later state pension age and increasing longevity mean building up a sufficient pension pot is becoming more important for the younger generation.
Advisers and providers are looking at how the industry can best engage people in their 30s, for whom saving for retirement is likely to be far down the list of priorities.
Philip Brown, head of policy at LV=, said young people are likely to be living on low salaries, focusing on paying off student debt and looking to get onto the property ladder. It is understandable that building up a comfortable pension pot may not be a priority for them.
“However,” he added, “it is vital people start planning for their pension early or they risk not having enough to live comfortably when they retire. Auto-enrolment has undoubtedly helped, but we believe more can be done through the introduction of regular reviews or automatically increasing contributions.”
Auto-enrolment
Statistics from the UK and other countries suggest young people are actually less likely to opt out of pension saving when they are automatically enrolled.
Richard Parkin, head of pensions policy at Fidelity International, said this is partly driven by the fact that if people are enrolled from the start of their working lives, they will assume it is the normal thing to do.
“Also, I expect that many of today’s younger generation will be more self-reliant than older generations and will know that if they do not make provision for their retirement, nobody else will,” he said.
“To make the most of this, we would like to see the current review of automatic enrolment reduce the lower age limit from 22 to 18, or even 16, so that being in a pension scheme is just part of being employed.”
One concept that may help is “save more tomorrow”, which is designed to help people gradually increase their contribution rates over time. Employees commit to saving an extra 1% of their salary each year, so somebody starting at a 5% of salary contribution rate when they join could be saving at 10% after five years.
Parkin explained: “Coupled with support from the employer, this would have them saving at a level that would be pretty certain to give them a decent retirement. And because their wages will hopefully have grown each year, they’re less likely to feel the effect of increasing contributions on their standard of living.”
Small steps
Kate Smith, head of pensions at Aegon, said it is important for the industry to show the younger generation how to take small steps that will make a difference. She said this will be pivotal to getting them engaged and feeling empowered, rather than overwhelmed or disinterested when it comes to planning their future finances.
“DC pension schemes need to be modernised to be appropriate for younger savers, so they are encouraged to save for retirement,” she added.
“They need to exist in a way that fits around the lives and demands on millennials today. Online and interactive pension solutions play a key part in this, allowing people to manage their pensions online alongside their bank accounts.
“Wouldn’t it be great if there was an Amazon Dash button for topping up your pension contributions? Or if you could simply ask Alexa to change your investment choices? These are the kind of developments today’s young people are probably waiting to see from pension providers.”
Although auto-enrolment is getting more millennials into the saving habit as soon as they start work, Smith said the system is over-engineered and needs to be simplified to make pension contributions more meaningful.
Smith added: “Providers can help by developing interactive support tools to capture the interest of younger savers and appeal to their appetite for technology. Advisers can help by working closely with employers to provide financial support and advice within the workplace.
“This is likely to become more common now that the tax and National Insurance exemption has increased to cover the first £500 of financial advice.”
Young people now have access to the Lifetime ISA, which enables them to save towards their first home or retirement. However, Philip Brown of LV= argued it is important the product does not detract people from saving into a traditional pension.
“People risk losing out on valuable benefits, including tax relief and employer contributions from workplace pensions,” he warned. “The best way to ensure young people make the right financial decisions is through regulated advice, but the cost is often far too high for them.
“It is vital that the cost of advice is brought down in order to help young people make the right decisions and robo-advice is one way to do this.”
Closing the advice gap
Some advisers are proactively trying to close the pension advice gap among younger people. For example, financial planning firm 1825 has been taking part in a number of employer-led seminars that demonstrate the importance of pensions and what the pension scheme offers.
Rachel Harte, financial planning consultant at 1825, said the seminars give younger people access to advisers which they may not have had otherwise.
Neil Prosser, managing director at Temple Wealth Management, suggested younger people are more likely to seek advice if they receive it from someone they relate to.
“Someone in their 20s is unlikely to want to speak to someone aged 50-plus about their finances,” he explained.
“Recruiting younger advisers means that they already have links with peers their own age and usually understand how to communicate to be heard, for example via social media and forums. Making the profession appealing to graduates and those looking to change careers can make a real difference.”
Prosser also said advisers need to be better rewarded. In the past, advisers used to get a commission for signing up new pension products, whereas today advisers make their money on fees.
“For younger clients starting a pension scheme, they want to invest as little as possible so it has minimal impact on their lifestyle.
“For advisers, there is no incentive to promote these pension products as the client cannot afford the £500-£1,400 set-up fee and the providers do not provide reimbursements for small monthly payments of £50-£100.
“If the industry takes a similar approach to how protection products are sold then there would be more enthusiastic advisers promoting this service.”
It is clear that the government, providers, advisers and employers all have a role to play in demystifying pensions and talking positively about the value of long-term saving.
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