Spotlight

A new narrative for pensions

Oct 01, 2018
The pension industry has struggled to get its message through to younger people, but maybe there’s a better way.

BY MUNRO O’DWYER

Let’s start at the beginning. What reasons do people give for not saving into a pension? Some believe that they don’t make enough money to save for a pension; they believe that they won’t need a pension; they are prioritising paying down debt; their employer doesn’t offer a pension scheme they can participate in; they are already struggling to manage their finances on a week-to-week basis. There is also a cohort that believes pensions are a con, associated with rip-off fees and rogue financial advisers.

Other reasons do get mentioned, but the list above covers more than 90% of individuals. From the pension industry’s perspective, this makes no sense. How can these people not see the benefits of tax relief or the magic of compound interest? Do these people not know that the State pension may be unsustainable? Don’t they understand that one in two children born today will live to be 100?

Both sides are simply not talking to each other, certainly not in any meaningful way. Late last year there, was a Twitter post from a financial advisor which stated: “By the time you’re 30, aim to have 1x your annual income set aside for retirement. At 40, 3x; at 50, 6x; at 60, 8x; and by retirement, 10x”.

There was lots of variety in the responses, but my favourite captured the disconnect perfectly: “By age 35 you should have double your salary saved. 35 year old me: I’M SUPPOSED TO HAVE A JOB??”

The cause of the disconnect

Why does the disconnect exist? Very simply, immediate gratification has enormous appeal. Psychologists tell us that humans act upon the ‘pleasure principle’, which is a drive to gratify our needs, wants and urges. In olden times, when people didn’t live very long, such thinking made sense – but we still live with that mental programming.

So, back to pensions and why people don’t save. Very simply, sacrifice is a hard sell. For confirmation of this point, ask any politician. Saving into a pension offers a route whereby we are saving for our future selves – a person many of us just don’t connect with. People plan for the near-term but when it comes to who they’ll be in 20 or 30 years, that doesn’t act as a motivator.

We are also more consumerist than in the past. Marketing messages promoting the latest technology, clothes, car or other purchase have very strong appeal and come at us from all directions – TV, billboards and now, our phones, iPads and PCs all facilitate a drumbeat of temptations. This all drowns out arguments around compound interest, of course, and income shortfalls in our seventies, eighties and nineties.

Generation Y and the millennials

So do we simply bemoan Generation Y and the millennials who won’t see things our way and save for a pension? That is just too simplistic. Pensions are not the only barometer of financial responsibility and pensions are not the only savings route that makes sense. There is lots of evidence to show that those in their twenties, thirties and forties can, and do, save for tomorrow. The savings vehicle is just not a pension – it is a home, a car, a wedding, some tangible aspiration. There may not be much that is tangible about a pension for a 35-year old when set against the financial challenges they are facing.

Consider the couple in their 30s who see the money they pay on rent every month as a waste and a diversion away from saving towards a house that offers a reasonably solid investment, but also delivers a home for their family. Pensions are very worthy, they are very helpfully tax-incentivised by the State, but they don’t offer that immediate tangible benefit that a step on the property ladder offers.

So the first challenge to recognise is that pensions have stiff competition for people in their thirties as demands on income for people in this age bracket are significant – rent, affording a mortgage, childcare, caring for dependants, and that’s before paying for holidays and the latest iPhone. How does the financial services industry react to these nuanced financial challenges? By giving blanket advice to put every spare penny into a pension. From the earliest age possible. And, as the Twitterati called out, this is not always appropriate, nor reflective of the financial circumstance of individuals, and ultimately it is unhelpful and doesn’t achieve the desired objective. 35% private sector pension coverage in Ireland proves the point.

Taking a fresh perspective

So what is effective? For a start, I believe that we need to meet people where they are in terms of their personal financial circumstances. We need to be smart about what we are trying to do. Many people who would benefit the most from support have a relatively low average level of investible assets, which means that it simply isn’t cost-effective for most advisers to spend time with them to develop or maintain a financial plan – so don’t make this the ambition.

Technology can help. Financial apps that can process the range of variables that make up an individual’s financial behaviours are needed. The mantra can’t be that saving for a pension is “right” and that not saving for a pension is “wrong”. Prompts are needed to improve individuals’ financial behaviours, prompts that are grounded in sound data-driven logic and behavioural theory, and these technologies have emerged over the past number of years.

Pensions can often feel like a very big commitment. A short while Googling “pension contribution rates” will lead to eye-watering amounts being required to deliver even a modest income in retirement. I would propose a different approach. I would argue that the best way to set goals is to make them so small that they’re fail-proof. Start there, and build on those initial (small) successes. Do that, and you create a domino effect that can help you reach more ambitious goals faster.

Learning a new language

We are about to embark on a new departure for pensions in Ireland. Auto-enrolment (AE) is planned to be introduced from 2022 and the philosophy is that AE will “nudge” young savers into a pension and inertia will keep them there. The UK is past this point and there are some great examples of communications that are being developed in that market. Last month, the Association of British Insurers launched a “Love Your Pension” campaign, with key messages around the fact that it’s your money; that a small change leads to a big difference; that when you save, your employer tops it up; that the Government tops it up too and it’s worth waiting for. Pensions have a really valuable role to play in supporting individuals to save, but those individuals have complex, messy financial lives and these factors need to be taken into account. Only then will we see significant success.

Munro O'Dwyer is a Partner at PwC Ireland.