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40 years and counting

Catherine Burtle, Senior Policy Analyst at the Institute and Faculty of Actuaries, on thinking about pensions before they’re cool…

Ask someone in their 20s “what will your life look like in 40 years?” and it’s likely they’ll struggle to answer. Reduce the time horizon a bit, “what will life look like in 10 years?”, and they might have some ideas about marriage, a mortgage, kids. Ask them what they’re doing at the weekend and you could get a detailed read-out of every burger, brunch and beer garden. Catherine Burtle, Policy Analyst

It’s not controversial to suggest that most Millennials aren’t particularly interested in thinking about their retirement. (Trust me – I’ve been to parties and tried to explain what I do.) And it’s not surprising when there are so many other big, important life events to cram in between now and State Pension age. 

The fact is that at a young age, at any age, it’s hard to picture your future self. Behavioural economists have been exploring ‘present bias’, the idea that people give greater weight to decisions with more immediate payoff, for years.

Speaking to millennial friends, for many there’s a vague idea of what ‘retired’ looks like based on the experiences of older generations. That picture usually features a significant birthday, a ‘happy retirement’ card signed by colleagues, perhaps a pair of slippers, garden shears or a set of golf clubs. That’s because those members of the generations before us who have had the luxury to ‘retire’ in the traditional sense, are more likely to have been well-looked-after by their employer, maybe with a generous DB scheme, and a defined age at which they would formally retire.

But this version of retirement is increasingly becoming a thing of the past. Retirement looks set to become a much more fluid concept in the future, as changing work patterns and a later State Pension age, mean people are required to supplement their earnings in order to comfortably transition into a fully retired state.

So if we don’t know what retirement will look like, we don’t know when it’s coming, we don’t understand how our pension works or why it’s different to the pensions our parents enjoyed, it’s no wonder we put off planning for retirement. But many have argued that getting people engaged sooner might help them to make better decisions. In short, we want to get a generation of hipster savers claiming they were thinking about pensions before they were cool.

Policymakers clearly have a careful line to walk, harnessing the inertia that has made automatic enrolment such a success, whilst also engaging individuals with their savings in a meaningful way. Engagement is a hot topic of discussion in the pensions industry with default guidance, midlife MOTs and life course approaches all being researched extensively. There are clearly many different ways to communicate with and engage savers with their pensions, and there are a number of actors who will need to decide the best way to do this, most notably providers, employers and the government.

The government is taking steps to simplify its guidance service with the introduction of the new Single Financial Guidance Body which will act as a central hub for all consumers’ financial guidance needs, including pensions. The introduction of this new body will provide the government with a clean slate, a space for new ideas, and an opportunity to set out a comprehensive centralised vision for how individuals learn about and engage with their savings.

Central to this plan will be the pensions dashboard (assuming that the government remains committed to the project). Creating an online resource to show people their pensions in one place will be a great start. Before people can start planning for the future, they need to know where they stand – at a minimum, how much they have saved and where.

Of course there are a plethora of data and functionality issues that need to be solved for the dashboard to become a reality. But the consensus from the pensions industry that it is serious about engaging people with their savings, particularly tech-savvy young people who are likely to need to keep track of numerous pensions throughout their lifetime. Catching up with likes of Open Banking in the rest of the financial services industry will be a great start. But the project needs government backing if it’s ever to become a useful tool, with new and old DB and DC schemes all taking part to create a realistic snapshot of people’s retirement savings.

If and when the dashboard is implemented there will be more work to do to ensure the numbers generated are meaningful. The next step will be to work out how best to explain what, say £30,000 in pensions saving (an amount which to someone struggling to put away enough for a house deposit, can look like an awful lot) will mean in practice. I, for one, am looking forward to having a better idea of just how much avocado toast I will be able to afford when I retire.

Read more about communication and engagement with pensions in our policy briefing ‘Retirement adequacy: an open goal’.