Think of retirement and what kind of images come into your mind? The younger you are, the less rosy they’re likely to be.
While older generations of “Saganauts” might have stopped work entirely, and collected a generous pension as they headed into the sunset, the under-45s face a very different set of financial challenges.
This week, a research study has found younger pension savers are more likely to see retirement as a gradual shift towards working less, rather than a hard stop. They also expect to be juggling caring responsibilities in later life for grandchildren, elderly parents or both.
Thanks to auto-enrolment, the under-45s face the added complication of having lots of different pension pots to manage actively as they age — but will they be ready for this? Although millions more are now saving for retirement, there are worrying levels of ignorance about the basics.
A survey of 4,000 savers by Boring Money, the consumer website, found over one in five did not know that the money in their workplace pension was actually being invested — let alone what it was invested in.
It gets worse. Fewer than half (47 per cent) said they had a clear understanding of the fees they paid. And while seven in 10 had looked at their annual pensions statement in the last year, only two in 10 said they had actually done anything further.
“This is a clear failure of how workplace pensions communications are working for people,” says Holly Mackay, founder of Boring Money, adding that a “Consumer Duty klaxon” should be sounding loudly for pension providers to up their game.
However, there is hope. Nearly two-thirds of pension holders surveyed say they would be interested in knowing where their money is invested, and that number rises significantly in younger cohorts.
So what could providers do to engage meaningfully with younger savers? And — fresh from a run-in with my own workplace pension provider — how could we radically restructure this relationship to get a better outcome for more consumers?
The biggest problem with UK workplace pensions is that people saving into them have very little say (if any) in choosing who manages their money.
Our pension provider is picked by the company we work for — and the “customer relationship” remains very much at a corporate level.
So if we don’t like how long we have to wait on hold to speak to a human being who actually knows anything about pensions; the investment choices available; our fund performance; the fees being charged on alternatives to the default fund or the lack of digital functionality — tough luck! We cannot easily take our custom elsewhere.
You should of course complain to your company pensions rep, but there’s little evidence this moves the dial. “The turnover rate of employers moving from pension provider A to pension provider B is virtually zero,” says Tom McPhail, pensions expert at the Lang Cat consultancy.
With a captive customer base, there is little incentive for the incumbents of the pensions world to improve on the lacklustre levels of engagement and customer service many consumers in the workforce receive.
You could, of course, open a private pension as well. But that brings me to the next problem — the proliferation of small pension pots.
I’m not knocking auto-enrolment, which has been fantastically successful, but just like company pension schemes, it hasn’t been designed with consumers in mind.
I know plenty of young people working in TV and radio who get hired on fixed-term contracts, and are auto-enrolled into a new pension with the same provider each time. Once a year, a blizzard of postal statements containing tiny sums hit the doormat (assuming they have kept their address details up to date).
Many tell me they now opt out, leaving the company contribution on the table, as they have come to view pensions as a hassle that’s not worth bothering about.
Boring Money found that well over half of 18-35 year olds it surveyed had less than £5,000 in their workplace pension, in many cases spread across multiple small pension pots.
Unsurprisingly, this group were also the most likely to say they wanted to consolidate in future — potentially 1.9mn consumers if you scale up the survey numbers. But with such small sums at stake, will the sleeping giants of the pensions world bother competing for their business?
Established investment platforms and pensions apps like PensionsBee, Penfold and Circa5000 are keen to snap them up, and have much better digital tools and educational content to boot (though watch the fees).
But the final problem is inertia. What’s the incentive for getting round to this stuff if you see little value in pension saving? Consolidating my pots is hardly what I’d look forward to doing at the weekend.
Nearly one in 10 of Boring Money’s sample said they would be confident in making a change to their pension, but if you have to wait on hold to your workplace provider for 30 minutes, there’s a risk this will kill your enthusiasm.
So what’s the solution? Well, one piece of pensions jargon I hope we’ll hear much more about in future is a “pot for life”.
Instead of accepting the provider our employer might choose for us, workers would have the right to get their contributions (both their own, and their employer’s) paid into a pension scheme of their choice.
“If the consumer gets to choose their pension provider, as they can do in Australia, this will introduce a much-needed element of competition,” says McPhail, who likes the idea so much he’s made a podcast about it.
This would end the headache of constantly needing to consolidate after changing jobs, and make it much easier for people to focus on engaging with their pension from an earlier age.
Pleasingly, the “pot for life” idea was flagged in a Department for Work and Pensions consultation this summer and pensions minister Laura Trott appears keen to explore the idea further. Nothing in the pensions world happens quickly, but it wouldn’t require primary legislation.
The biggest challenge will be making the process pain-free for employers, who will have to modify their payroll systems or introduce some kind of clearing house to handle paying into multiple schemes.
McPhail stresses that the Pensions Regulator would also need to ensure consumers have access to a price-capped default fund. “You wouldn’t want to swap a well-run, low-cost workplace pension for a glossy fund with high charges,” he adds.
If Australia is anything to go by, bringing greater competition into the workplace savings market would make it easier to compare the performance, fees and functionality of different providers.
Young people’s expectations of retirement are changing — but so too should our expectations of the people managing our pensions.