The youth employment crisis that Britain now faces has forced all of us to rethink what we thought we knew. Take pensions. The financial press – and financial services industry – has based all its modelling on the assumption that people start their career straight out of university, work for 40 years and then retire at state pension age.
It’s simple, we say, start saving early and compound interest and a fair investment wind will make you a pension millionaire in a few decades’ time.
But today’s graduates are really struggling. They are finding it hard to get entry-level hospitality work, let alone the kind of graduate-level jobs we have come to expect. You can blame the march of AI, or Labour’s National Insurance and minimum wage increases, but the fact is that a generation risks being cut out of the workforce.
More than a million working age young people are not in education, employment or training. Of these “Neets”, one in seven have degrees.
Delaying entering the world of work has a huge knock-on impact on personal finances. Research from Finder published this week put this into the spotlight. Finder found that someone entering the workforce on the average graduate salary immediately after completing their studies would retire with a private pension pot of around £363,000.
But if they fail to find work for 12 months – a very common situation today – their final pot is reduced by £18,000. A two-year delay, cuts off £35,000. These aren’t small sums.
And when they do eventually get employed, Gen Z will quite likely have less financial resilience than any generation in history.
Many choose (or rather are forced) to live at home after school or university, such is the nosebleed level of rent. Those who do escape the clutches of their parents will see that, at least in London and the South East, housing costs gobble up their meagre starting salaries.
This is where employers should step in. In days of yore companies were far more paternalistic than today. True, there were many more ‘company men’ and women who spent their entire careers with one employer so it made sense to reward loyalty. Family owner businesses felt a responsibility to people they may well have known their whole lives.
The days of building rows of terraced houses for workers are long gone, but there are certainly other schemes that could help staff build up some protections against the inevitable financial shocks of life.
And the government, to its credit, is pushing employers to adopt them.
This month saw the launch of the National Coalition for Workplace Savings with support from the Treasury, who you’d expect, but also Queen Maxima of the Netherlands, who I didn’t have on my financial policy bingo card.
Anyway, this coalition of 21 businesses is seeking to increase uptake of American-style save-as-you-earn schemes to help employees build emergency pots of cash. Aside from the public sector, there are some big names involved including the Co-op, Next, Greene King and Travelodge.
There are some minor issues to work through, such as where the money is held while it’s being saved and what interest rate it earns, but the basic principle is sound. It’s the next logical step from automatic enrolment of pension savings, using the same behavioural economic theory that uses inertia to help people build habits they know are inherently good but that they are far less likely to actually do if left to their own devices.
Auto-enrolment remains an unfinished project with the Government seemingly unwilling to expand its scope or compel employers to raise minimum contribution levels. The myriad of business tax rises imposed since Labour took power is probably something to do with that.
But this scheme would cost the state nothing and employers little, if anything.
One in five people has less than £1,000 in emergency savings. One in 10 people has no savings at all, according to the Financial Conduct Authority. The Treasury is absolutely right to be pushing companies to offer workplace savings but perhaps, as with pensions, it will need to compel them.
Almost everyone agrees that auto-enrolment was one of the biggest policy success stories of the past 20 years or more. It’s time to take the next step, and build the nation’s emergency savings.
