How to make workplace pensions relevant for younger people

Employers have been urged to create a generation-targeted communication strategy and the government has been encouraged to consider building flexibility into the earlier stages of workplace saving.

Paying into a pension is far down the list of financial priorities for those aged 18-29, a Barnett Waddingham survey published last month has found (see graph).

The survey indicated saving behaviours and priorities vary significantly between generations, underlining the need for targeted communications.

Four out of five (81 per cent) of those aged 18-29 said they did not understand pensions while a slightly larger proportion (85 per cent) stated their primary financial priority was saving for a house.

The figures suggested regardless of current wealth, young people would actively choose to save for a home over building a pension, while 41 per cent said their secondary priority was paying off debt. Just 4 per cent of this age group chose building a pension as their saving priority.

“For many people the pension is a later-in-life savings vehicle," said Damian Stancombe, head of workplace health and wealth for Barnett Waddingham. "If it’s not delivering value today or tomorrow why would a 25-year-old imagine value in 40 years' time?”

Stancombe said he thought the rise of the corporate Isa prior to the financial crisis had offered young people a suitable vehicle for their shorter-term saving needs. Since the crisis, the corporate Isa has remained relatively under-developed as a savings vehicle, he said.

“The word pension is like a dark art,” said Stancombe. “Replace it with ‘lifetime Isa’ and you get a different reaction… people understand they own it.”

Low engagement with pensions across Generation Y has been seen as inevitable given the increasing financial pressures for young people from increased tuition fees, rising living costs and booming house prices. 

Auto-enrolment has focused on getting younger people on the savings ladder, if mostly at low initial contribution levels, but opt-out rates are expected to increase as mandatory contribution levels go up.

Plumbing products supplier Wolseley UK has reported an opt-out rate that is gradually increasing, with new joiners, especially younger people, proving less engaged by the pension offer.

Morten Nilsson, chief executive officer of mastertrust Now Pensions, said he thought it crucial for the government to focus on making pensions saving more attractive to young people.

Nilsson referenced overseas initiatives that have been implemented by other countries to tackle issues of adequacy and access for young people: 

“In New Zealand the government’s Kiwisaver workplace pension saving program allows savers to make withdrawals to fund a deposit for their first home, while in Cyprus, savers in the Provident Fund can, in certain circumstances, apply for loans from their pension fund,” he said.

Pension freedoms announced in the Budget have opened up new flexibilities for people nearing retirement, but those choices remain a long way off for younger savers.

Nilsson said he thought new initiatives could reinvigorate pensions for young people, providing they were low-cost and easy to understand.

Tony Dolphin, senior economist and associate director for economic policy at the Institute for Public Policy Research, said education would be key to engaging younger people, but careful timing and delivery would be crucial to its success.

“The main time to deliver an individual message will be when they first start work… that’s the time to hammer home the message,” he said.

Dolphin also urged the government and employers to highlight the inadequacy of the state pension. “There is a myth that pensions aren’t worth doing because the state will top up anyway, which isn’t the case,” he said.