The changing nature of retirement, with the introduction of auto-enrolment, means that we need to start thinking differently about our savings.
Engaging with younger people on the issues the industry believes are important – such as fund choice, retirement date and contribution rates – is an expensive and time consuming practice which in many cases simply confuses or compounds concerns, particularly when many have no pension or long term savings.
We need to start from step one, and get people thinking about saving more generally. Down the line we can then think about having conversations regarding fund choice, retirement date and contribution rates. But for the time being our efforts need to be focused elsewhere.
Dialogue is crucial, and the discussion around pensions saving must change. Comparisons can be drawn with mortgages, which over the years have evolved from a dull financial services product to something that people engage with and even openly discuss at dinner parties. This evolution has happened as people have become increasingly able to understand the importance of a mortgage and are engaged with what the mortgage industry can offer them.
Thirty years ago a mortgage was just a long term loan that you got from your bank to buy a house. Over the past few decades, mortgages have become a financial services product that you can interact with; they now have different styles – fixed, variable, repayment, offset – and can be changed to chase better rates. They can be used to borrow out of to buy big ticket items such as a car, and people generally can get more out of them. Consequently mortgages became part of the everyday financial landscape and part of conversations between friends and families.
Pensions are set to follow this trend over the next decade or so, as auto-enrolment leads more people having meaningful pension pots. With their savings growing, people will naturally take more interest in pensions.
As the dialogue shifts and providers of pensions start offering new products, people will start to engage more with their pensions just as they did with their mortgages. The pension might yet become a positive dinner party conversation!
But we still have some way to go until we are at that stage. There has been broad failure in getting the saving dial moving, and we know that generally employees don’t ask to join their company pension scheme voluntarily, hence the introduction of auto-enrolment.
But as people become accustomed to having pensions savings, a shift in perception will occur. Until this day comes the most important thing is for providers to take the government’s lead and simply get people saving.
The amount is perhaps less critical at first; it is the culture of saving that needs to be pushed through. People must feel that it is important to save a little now, but work towards saving more tomorrow.
Once people have started the saving habit, and have a meaningful amount invested – such as the amount it would cost to buy a new car – then they will naturally become more interested in what this means for them.
They will also be prepared to have more in-depth conversations about fund choices, income requirements and the link to their expected standard of living in retirement. They will better understand the gap between what current contributions will give them as income and what they want. Discussions on these more complex areas of pension provision prior to people having a meaningful pot simply makes pensions saving feel too complicated and out of reach.
From an industry perspective, pensions providers need to recognise that when people first start saving for retirement, their target date is not set in stone and their general expectations won’t yet be well-defined, so pensions need to be wholly flexible.
This means that providers need to look again at how they develop lifestyle strategies and make sure they recognise that it is acceptable to start saving a little at first.
As an industry we need to be part of the dialogue that leads to a shift in the public’s perception of saving, and encourages them to think positively about choices available to them in funding their retirement.