A new flock of recent graduates has been unleashed from university this past summer; starting work across a range of grad schemes. I graduated a year ago, so I consider myself part of that group at 22. At a recent housewarming party I brought up the topic of pensions and mortgage savings: you can imagine it went down almost as badly as the funding levels of pension pots post Carney’s recent rate drop.
The overwhelming response that my friends were not concerned about retirement and that a mortgage would “obviously” take priority over a pension. Most saw retirement as a distant event a good 45-50 years away, certainly not something to be concerned with now. Out of the 20-odd people I spoke to, not a single one highlighted retirement as something to worry about.
It is this attitude we need to change if we are to ensure that people of my generation have sufficient pension pots in a DC world. We cannot rely on the comfortable security of the DB schemes our parents benefited from, and must instead commit capital to growth in the future to provide for us when we do eventually retire.
How do we make this happen? And how do we stop young people putting off the decision to save a sufficient amount to ensure a comfortable life post-retirement. My generation was the first to grow up with mass instant gratification from Google, Twitter and Snapchat. We are also the most likely to spend money on dining out, have a daily Starbucks or spend money on ‘experiences’. We need to re-wire this short term attitude of spend now, save later.
Currently the government forces people to save for a pension through auto-enrolment but, at the current level, it is woefully inadequate to meet the needs that people of my generation will likely require from a pension. One potential solution is to enforce a much higher level of contributions than is currently required from the off, and then we would never know any different. I’ve been paying back my student loan since I started work and I’m used to it now, I don’t miss that money because I never really had it.
Clearly forcing people to save is one way but getting them to engage with saving is better. The challenge around this is how one solves the opacity and intangibility of pensions – your money gets sucked into a black box and spits out a return at a much later date which will hopefully be enough to cover your future outgoings. If we were to try to demystify this process of where the money goes and what happens to it (as illustrated better when buying a house, for example), maybe it would feel more tangible and make it easier for people to want to save more.
Alternatively, perhaps the solution lies outside of the industry. A recent essay by Dawid Konotey-Ahulu highlighted how traditional industry has been disrupted from the outside in. Uber has taken on transport, Amazon the high street and AirBnB the hotels. It doesn’t seem outlandish to consider adding pension schemes to that list. Consider the automation every industry faces and the ease with which this could spread to your scheme.
Ultimately, this is about convincing the current generation to save. As I’ve already heard from a group of disinterested young finance professionals, this is going to be a hard task. Potential government intervention or huge disruption could lead to a change in the current landscape, and ideally a group of well-funded retirement plans. It will, however, be interesting to see the state of my pension pot in 50 years’ time.