Pensions are not usually at the forefront of a young worker’s mind. As a 19-year-old I have certainly never thought about my own. So why should young workers start saving into a pension, and why now?
by Grace Buckley
Early engagement with one’s pension makes accruing sufficient funds significantly easier. By saving from a young age, people can benefit from compound interest, meaning that every extra pound saved in your 20s can be worth four times that amount by the time you retire. Delaying long-term saving is costly: a 31-year-old would need to contribute 90% more than a 21-year-old to accrue the same sized pension pot. The later you leave to save, the less time it has to grow.
With the current minimum eligibility age of 22, we know that Automatic Enrolment (AE) has successfully brought more young workers into pension saving. Prior to AE, only 24% of 22–29-year-olds working in the private sector were active members of a pension scheme. That’s now 85%, the largest increase across all age groups. However, although AE has been highly successful in ensuring workers are saving into a pension, this policy has not increased engagement. Young savers face many obstacles with regards to their pensions, often feeling like it is too distant to consider necessary and being unaware of the financial benefits that saving early holds. There is also a lack of knowledge surrounding the tax system, tax benefits and state benefits. The absence of sufficient education surrounding pensions hinders engagement; research shows that 37.3% of 22- to 29-year-olds have no pension or lack of awareness of its existence. Many of these individuals are clearly unaware of their involvement in a workplace pension scheme via AE. To some extent, AE’s design is working well - providing a level of protection for all savers no matter their level of engagement with their pension savings.
Although AE is an advantageous saving scheme, it lacks a role in pension engagement. Thus, there exists a potential risk that increasing pension awareness may see a higher proportion of young savers opting out of AE. This may be driven by the desire that their shorter-term saving goals take precedence over their long-term savings. Money.co.uk reported that 17% of Generation Z (aged 18-24) workers were opting out of all their pension contributions and that this rate diminished with older generations. Generation Z tend to prioritise their short-term finance goals over their long-term saving desires:
- 32% saving for a home
- 31% saving for material goods
- 28% saving for a dream holiday
So, what can be done to engage young savers in their pensions now? Here are a few approaches to consider when looking to engage your young savers:
- Encourage young workers to practice saving: members have further highlighted the importance of building propositions to encourage young people to save. Evidence shows that individuals who cannot manage their finances now (short-term) have a lower capacity to save for the future (long-term). Young people can become more engaged with their pensions if they build a habit of saving now which can evolve into a pension later.
- Language: Research suggests that the use of the word “invest” over “save”, in addition to the use of measurable explanations such as “a 12% contribution would keep you above the poverty line” aids engagement and understanding. From communicating in this manner, twice as many young savers would recommend doubling pension contributions from 8% to 15%.
- Gamification has been highlighted as a popular engagement technique by some of our members amongst young workers. With pensions full of complicated processes and jargon, the use of gamification and interactive tools provide young workers with an easy way of wanting to engage with their pensions and understanding the step-by-step processes to manage their pots better.
- Engaging young savers in their pensions can be driven by promoting investment in concepts they are enthusiastic about such as causes relating to Environmental, Social and Governance issues. This can include deforestation, climate change and the invasion of Ukraine. Building on campaigns like Make My Money Matter, which uses easy-to-understand concepts, could help improve awareness of the power of pension investments. Interacting with these campaigns can cut your carbon footprint by 21x more than becoming vegetarian, giving up flying and switching to a renewable energy provider.
- Appeasing apprehension must be considered as mental barriers exist amongst young workers. Various negative connotations tend to be associated with pensions, such as infirmity, dependence and passing which can cause greater deals of anxiety, thus impeding open conversations about long-term saving. Visualisation techniques such as considering problems and concepts can change attitudes towards pensions and help anxious savers develop their expectations and vocalise goals and fears.
- Financial advice and guidance can be used in conjunction with other techniques to create a holistic approach for pension engagement. This can aid young adults in better understanding and managing their long-term investments to help meet their saving goals.
- Employers can play a key role in pension engagement amongst young workers. The Pensions Policy Institute found that this demographic had low levels of trust with pension providers. Therefore, young savers are more reliant on their employers and trust is assumed that they are acting in their employee’s best interest. Employers making their contribution to a worker’s pension more generous is a suggested solution to get young savers more engaged.