The latest Scottish Widows Adequate Savings index highlights a number of worrying trends regarding attitudes to pension planning amongst young people.
Most noticeable is that although the introduction of auto-enrolment means that 80 per cent of under 30-year-olds now make some form of retirement provision, 70 per cent of them are still not investing nearly enough into their pensions to provide for a comfortable retirement.
Our data also indicates that far fewer young people have their pension pots reviewed, compared with those closer to retirement age.
Over the past 12 months only 6 per cent of pension cases reviewed by financial advisers were for people aged between 31 and 40-years-old, compared with 45 per cent for those aged between 51 and 60.
There are many reasons for this shortfall, but it shows the urgent need for more education on the importance of investing early in pensions and the need to find an effective means to engage millennials with their pensions.
Younger savers underestimate pension needs
The challenge ahead is most obvious among the minority who opt out of auto-enrolment to prioritise short-term goals or debt management at the expense of planning for their retirement.
But the bigger issue comes from those who are already saving but simply don’t appreciate the scale of the job in hand – relying on basic auto-enrolment alone just isn’t sufficient to fund retirement.
Changing attitudes to financial planning is hard to achieve, especially as it’s accompanied by a broader social change. Put simply, the millennials think and behave radically differently from their parents, and this affects how they manage their money.
This generation are predicted to live longer than previous generations, so the pressure on them to save is greater than ever before. When you factor in the sharp decline of defined benefit or final salary pensions amongst this age group it means that the tried and trusted ways of fostering engagement simply don’t work any more. We need to reimagine retirement planning for the millennial generation.
New technology can help bridge the gap
On a positive note, we have seen a noticeable increase in the amount of new ‘robo advice’ and guidance solutions being introduced into the market, the majority of which are designed to be as millennial-friendly as possible.
Young savers are able to go online to access budgeting overviews, annual investment reports and guides to smarter saving, all of which are presented as non-threatening and in a form that is familiar to them.
These sites take into account tax and state benefit deductions and regulatory changes, which may not have been initially factored into budgeting plans, but which are crucial to the accuracy of the pension planning process.
There are tools which have been specifically developed to engage and educate, the aim being to make planning for retirement easier and give greater awareness of what providing a comfortable retirement income could actually cost. This is an important step for the industry in terms of addressing the education issue.
Automated guidance is still in its infancy, but it’s already encouraging to see the traction new techniques such as gamification are getting in the financial education space by helping users to confront and understand complex subjects easily by the application of a sense of fun and game-play.
In due course artificial intelligence and gamification may revolutionise the market, but ultimately it will be the partnership between traditional advice services and fintech businesses which will ensure the message hits home with millennials.
That’s the point where we can truly start to tackle the savings gap.
Peter Bradshaw is national accounts director for Pension Monster.