Why millennials are less engaged with pensions

Recently I wrote about matching pension contribution designs and why they don’t always work for younger people. That emerged from data in our survey of DC pensions provided by FTSE 100 employers, more of which here, which showed that most plans feature ‘matching’ contribution designs.

I wondered whether the approach being followed really works, when younger millennials don’t appear to benefit as much as their baby boomer colleagues. Let’s look at the root cause and the near future.

Why don't younger people want to save in pensions as much as their older colleagues?

Because they are human beings, and we humans are simply not hard-wired to worry about problems some decades away. (Don’t believe me? Talk to people in their 50s and 60s about going to a care home in later life and see how much appetite they have for that conversation. This characteristic is not unique to the young.) In that context, it is easy to appreciate why millenials are less engaged with pensions than their older colleagues, and why they perhaps always will be.

One solution might be bringing forward the potential time horizon for consumption. And, as if by magic, here comes the Lifetime ISA to do just that (more here). The Lifetime ISA is proposed to permit savers to use the proceeds to buy a first home or even to cash out, if they are willing to pay a penalty – meaning that the money saved may be more ‘tangible’ and less remote to millennial savers than pension assets are.

If the LISA saver neither buys a home nor cashes out, they can use the money for retirement from age 60. So pension and LISA don’t have to be an either/or choice –the LISA could provide a pension, but one that the employee perhaps feels 'closer' to and more engaged with.

Ah you say, but what about that penalty on early access? Well, yes, but isn't that a neat trick to encourage long term saving? A penalty means your money is available, but you'll probably only access it if you really, really need it. Lest we forget, you can have early access to pensions after a 55% tax charge, in the form of an 'unauthorised payment'. That 55% charge isn't often (ever?) cited as a reason to avoid pensions, so would the lesser penalty on LISAs really dissuade potential savers?

If we look at a typical pension matching design, the more an employee saves, the more an employer will contribute. There is an implicit message from employer to employee here: ‘We think it’s important to plan for the future and we’re going to help you, if you help yourself’.

If that logic applies to saving in pensions, why wouldn’t it apply to Lifetime ISAs? Might employers be willing to pass money to employees for them to save in Lifetime ISAs? Might the Lifetime ISA even be better appreciated by employees?

But there’s an important consequence to consider. If employers were to permit pension money to go to LISAs under current matching designs, they would probably find that their contribution costs would increase – more millennial employees may want to take advantage of the full match into a LISA than they do into pensions. What might that do to matching contributions as we know them, particularly when combined with auto-enrolment increases from 2018 and 2019?

So again, we need to take a long, hard look at what we are trying to do here. Are pensions really the ‘one true way’ to save? Should we be telling people how they have to save, or should we be listening to how they want to save?