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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.
Achieving financial security in retirement is a complex affair for younger generations – and they are struggling with it. A 2017 YouGov report, Bridging the Young Adults Pension Gap, revealed that 44 per cent of 18–34 year-olds have no pension provision at all.
The attitudes and behaviour of millennials are partly responsible. But so is the environment in which they work and live.
Millennials’ connection to the corporate employer has been broken. The 2018 Deloitte Millennial Survey– a multi-national study with more than 10,000 respondents, mostly with a degree and in full time employment with large private-sector organisations – revealed that 43 per cent would leave their current job within two years if they had a choice. Only 28 per cent would stay beyond five.
Loyalty was weakest in companies perceived to be fixated on profits. This isn’t because profits conflict with the altruism so commonly associated with the millennial generation. It’s because they think corporates are greedy. Deloitte found that milllenials believe employers should: “Share the wealth, provide good jobs and enhance workers’ lives.” A company’s reputation for ethical behaviour was only the sixth most important factor when choosing an employer.
14% of all millennials have taken on gig economy roles instead of full time employment, another 43% would consider doing so.
So career paths are becoming ‘non-linear’, characterised by frequent job (or even career) changes and working multiple ‘gigs’ at the same time. Full-time freelancing is a common aspiration: Deloitte found that 14 per cent of all millennials surveyed had already taken on gig economy roles instead of full time employment, and another 43 per cent would consider doing so. These trends are hardly conducive to the creation of the single, large pension pot so valued by previous generations.
Millennials’ financial priorities are also having a negative impact on retirement savings. YouGov found that only 21 per cent who are able to save money, prioritised saving for retirement, well below the 32 per cent who prioritised saving for a holiday.
The corporate world and government have also played their part in making millennials’ retirement planning more difficult.
Corporates have shown scant regard for the loyalty bond. ‘Downsizing’ and ‘rightsizing’ in the 1980s and 1990s burst the bubble of ‘jobs for -life’. Offshoring continued the trend. Today, automation and artificial intelligence threaten not only blue-collar but white-collar jobs. And gig-economy business models mostly avoid the employment relationship altogether.
Employers have also minimised their responsibility for workers’ pensions. With the exception of government jobs, the defined benefit (DB) pension is destined to disappear from the workplace. Defined contribution (DC) schemes have taken their place, recusing companies from pension fund investment risk and passing it on to employees. According to the Pension Protection Fund’s Purple Book, only 12 per cent of private DB schemes were still open to new members in 2017.
On a positive note, auto-enrolment has rapidly boosted DC membership – from 1 million in 2012 to 8 million in 2017. Government is also looking to force-feed these DC pension pots. In 2018, minimum contributions were raised from 2 per cent of earnings to 5 per cent. In 2019, they increase again to 8 per cent.
But government is also removing incentives to invest in, and stay invested in, pensions. In 2011, tax relief could be claimed on a £255,000 annual contribution to a pension fund. This has dropped to £40,000. And in 2015, access to DC pension pots was allowed at age 55.
These policies risk encouraging millennials to spend their earnings now, rather than saving for a long-distant retirement.
Government has also removed the obligation to purchase an annuity when retiring –- increasing the risk of the less-disciplined spending their pension savings too quickly. This risk is exacerbated by low post-financial crisis interest rates making annuities appear unattractive. According to a May 2017 study by Retirement IQ, an annuity returning 7.5 per cent pre-crisis, would only pay around 5 per cent today – a 33 per cent decline.
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 don’t help those in the gig economy. It’s therefore critical for pension savings to move up the pecking order of millennials’ financial priorities. Education and engagement are essential.
Technology can help. Robo-advisers have had early success engaging younger generations directly. And Personal Financial Management (PFM) 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 10–20 separate DC pension pots).
Millennials are adaptable and nimble enough to deal with uncertainties.
Engagement will also improve as the investment industry responds to millennials’ demands for ESG (environmental, social and governance) investment choices. The 2016 Schroders Global Investor Studyrevealed that millennials ranked ESG factors as important as investment outcomes, while in 2018 it found that millennials allocated an average of 41 per cent of their portfolios to sustainable investments.
While previous generations certainly had to deal with an uncertain future as a result of war and cold war, the future millennials face is more complicated. Huge uncertainties prevail around climate change, the rise of populism, and the future of work. Deloitte’s study found that millennials are ‘uneasy’ with this uncertainty. But my sense is that millennials are adaptable and nimble enough to deal with these uncertainties and they don’t 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.
A redacted version of this article appeared in FT Adviser on 11 February 2019.