PART 2 OF 5
In part 2 of this series, Tom Hibbard continues his assessment of the problems contributing to a lack of engagement among Millennials with their pension.
So why are Millennials so disengaged with thinking about retirement? Firstly, we have the constant rhetoric that we’ll all outlive our pensions. Life expectancy is increasing and this is bad news for pensions. In 1970, the average worker only needed their pension to last for 13 years once they had retired. Shift forward to 2014 and this figure becomes, on average, 22 years. Taking another leap forward, those who are currently in their early teens and that outlive their peers, might need their pension to last for 55 years even with a retirement age of 75.
At first, this may seem a ridiculous thought, living to be 130, but not when you consider the rate of medical and technological advancement we are witnessing. After all, the world’s oldest person died recently in Japan at the age of 117. I read a book last year called ‘The Future of Almost Everything’ by Patrick Dixon, a well-known business consultant and ‘futurist’, who said “It is reasonable to assume that knowledge and capacity in healthcare will continue to double every 24 months. This means we will know 10 times as much in a decade as we do today, 100 times more in 20 years and 1000 times more within 30 years.” Speaking at a Wired conference in 2011, designer Richard Seymour stated that “the first person to live for 1,000 years is probably already alive.”
Secondly, Millennials, overall, are often unaware that their pension is their responsibility and additionally, there are behavioural economic effects at work that hinder them further. ‘Present Bias’ is the tendency to give stronger weights to payoffs that are closer to the present than the future. People see pensions as something that is a long way off in comparison to paying for a wedding, saving to buy a property or repaying student loan debt. I overheard someone in the pub recently say, “I’m only 38, I’m way too young to be thinking about a pension with everything else that’s going on.”
Another behavioural effect and one that is just as dangerous is ‘Anchoring’; this is the tendency to rely on the first piece of information offered. In this case, we’re talking about the minimum contribution. Although better than nothing, often employees believe that as this is mandated, this is enough to provide them with the lifestyle they want in retirement and they no longer need to think about it – The PLSA recently found that "51% believe that the government's minimum contribution rate is the recommended amount to save for retirement."
The final reason I’ll mention which contributes to the lack of engagement is a lack of understanding of pensions amongst Millennials. This is probably the easiest one to observe given the stories we constantly read in the news. Financial literacy is a major issue in the UK; 4 in every 5 adults in this country have a numeracy level below GCSE C grade. To put this into context, this means that 80% of people would get less than 31% on a GCSE Maths exam. A great example of an organisation who understands and tries to resolve this problem is NEST, who conducted a numeracy and literacy survey and pitched all their advertising at that level of understanding.
Let’s look at the breakdown of where we accumulate our pension benefits across our lifetime. Only 10% comes from contributions, which I can believe, but what really surprised me was that only 30% accumulates during our working life, meaning a massive 60% comes from returns post-retirement. Why this really concerned me was that countless people without either the knowledge themselves or access to advice of some kind, will end up buying an annuity as it saves them having to make any further decisions in the future. Consequently, they will forego the 60% extra benefits they could accumulate. We’re getting a bit ahead of ourselves here though as the main point to be made, is that if we don’t save the estimated more than 10% of salary in the first place, there’s no chance of accumulation in any scenario.
In Part 3, we’ll start to look at some possible solutions to meet this growing challenge.
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