Retirement was so simple for the Baby Boomer generation.
Career-long, reciprocal loyalty between employer and employee preceded a quantifiable, largely risk-free pension. Those days are long gone.
It is now widely recognised that millennials’ attitude towards pensions and savings is different from that of previous generations.
There are many factors driving this mentality as a generation who, it is widely viewed, value experiences and spending over saving.
The corporate world and government have also played their part in making millennials’ retirement planning more difficult.The way in which millennials approach careers has shifted entirely from previous generations.
A Deloitte study released last year showed that more than half of millennials plan to leave their jobs within two years of joining. It also found that they felt a lack of loyalty to their companies.
As a result, career paths are becoming ‘non-linear’, characterised by frequent job (or even career) changes and working multiple jobs at the same time - even becoming full-time freelancers.
These trends are hardly conducive to the creation of the single, large pension pot so valued by previous generations.
Difficult environment
The corporate world and government have also played their part in making millennials’ retirement planning more difficult.
Downsizing and rightsizing in the 1980s and 1990s burst the bubble of jobs for life. Offshoring continued the trend, and automation and artificial intelligence threaten blue and white-collar jobs alike.
Meanwhile, gig economy business models mostly avoid the employment relationship altogether.
Employers have also minimised their responsibility for workers’ pensions, with the defined benefit (DB) pension destined to disappear from the workplace. Defined contribution (DC) schemes have taken their place, recusing companies from pension fund investment risk and passing it onto employees.
Auto-enrolment figures have increased DC membership, from 1m in 2012 to 8m in 2017, boosted by the government’s minimum contributions increase to 5 per cent last year.
However, the government is also removing incentives to invest in pensions, by decreasing the amount of tax relief that can be claimed on annual contributions to a pension fund from £255,000, in 2011, to just £40,000 today.
These drastic changes to the pensions landscape, and the age at which people can access their pots being raised, encourages millennials to spend now rather than saving for a long-distant retirement.
Tackling the challenge
With so many having no pension at all, clearly the highest priority is to get more millennials to just start building their pension wealth. Once started, continuously feeding the pot becomes paramount.
Auto-enrolment and increased minimum contributions will make a difference, but do not help those in the gig economy.
It is therefore critical for pension savings to move up the pecking order of millennials’ financial priorities. Education and engagement are essential to achieve this.
Leveraging technology to entice millennials can also help, robo-advisers have had early success engaging younger generations directly.
Personal financial management tools, which present a single view of an individual’s financial affairs on a website or app, have the potential to allow advisers to service millennials efficiently (especially important considering that many could end up with 10 to 20 separate DC pension pots).
There is also an opportunity for open banking to further encourage millennials to take more control of their finances.
Engagement will improve as the industry incorporates millennials’ investment choices into portfolios.
The industry has witnessed how ESG (environmental, social and governance) factors are becoming ever more prominent as millennials have become more active in investment over the past few years.
Increasing asset allocation of the sectors millennials value will ultimately be crucial in encouraging engagement.
While previous generations certainly had to deal with an uncertain future as a result of war and cold war, millennials are faced with a variety of complicated issues. Huge uncertainties prevail around climate change, the rise of populism, and the future of work.
Millennials are adaptable and nimble enough to deal with these uncertainties and they do not see it as a crisis.
However, removing some of the uncertainty in the workplace, and especially around pensions, will be helpful. Millennials themselves, the business world, and government must do more.
Nick McCall is head of wealth management at Dolfin
