Why Gen Z are abandoning their pensions – I agree with Tom for a different reason.
henry tapper
Tom has written a great article that appears below and in the Times.I agree that there is good reason to prioritise other things than long-term saving when at work. But our parents insisted we paid the stamp (as my Grandma called it) and most of us still do.The reason that I agree Gen Z have good reason to give up saving is because people don’t link the 4% (after tax-back) to swapping work for a retirement wage they can live on.Putting up the amount we pay into long-term saving won’t encourage people to stay unless it’s linked to some purpose other than having a big fat pot of money.Government will be able to put up our contributions when the link’s been made between collective pensions and deferred compensation. That doesn’t mean long-term saving, it means waiting to get paid. That wait must be value for our moneyThose who control reward need to get this as well as the workforce. The Government has to make waiting to get paid – worthwhile. The numbers have to add up.
Struggling young earners can’t afford to save now for an income boost 40 years later — and that spells trouble ahead for the government
Does it make sense to opt out of your workplace pension? For many in the pensions industry, even posing this question is close to heresy, but out in the real world, life can be more complicated.
I was reminded of this recently when a twentysomething confessed to me that they had opted out of their workplace auto-enrolment scheme. We talked through the details and I can at least understand why they did what they did.
They have a young family and are trying to save to move to a bigger house, on a salary of £30,000 with a workplace pension that offers only the auto-enrolment minimum contributions. Broadly, the pension is costing about £80 a month out of their pay now, and using a reasonable set of assumptions, this could deliver an income of £400 to £500 a month (in today’s money) at the age of 68.
You might argue that a five-fold return on their money is not to be sniffed at. If you don’t want to be dependent on an increasingly unreliable and indebted state for financial security in retirement, saving money now is the way to go.
The problem comes when your earnings are barely keeping up with your bills, you need to provide for your kids and you need a bigger house.
We agreed that they should opt back in as soon as possible and it is a conversation we will revisit in the future. But let’s take this scenario one step further.
Suppose they hadn’t yet bought their first home. A Lifetime Isa might then look more attractive than that workplace pension. True, they would still be giving up their employer contribution but they would at least get the government top-up towards a first home.
Hyperbolic discounting and temporal asymmetry mean that £80 in the bank today, or the prospect of buying a first home in a few years, can look a lot more interesting than a few hundred pounds a month extra income in 40 years.
The basic problem here is that for low to middle earners (and some higher earners too), the statutory minimum auto-enrolment contributions are barely an adequate incentive to defer consumption of that slice of income for a few decades. With the cost of living problems, it is hardly surprising that opt-out rates have been going up for the past few years.
Anyone who has spent five minutes looking at the numbers knows that auto-enrolment contribution rates need to go up if we’re to forestall a retirement income crisis in the decades to come. In particular, employer contributions have to go up.
But the government has already juiced all the money it can out of employers, particularly in low-wage sectors like hospitality, supermarkets and care homes.
The government needs to give with one hand and take with the other. Cut business rates, or corporation tax, or national insurance rates, or minimum wages, or the reams and reams of regulations that make doing business so difficult (or all of the above). Put more money back in employers’ hands, then increase the statutory minimum pension contributions, so that employers are putting more money into employees’ retirement accounts.
Unless the government acts soon, the benefits of auto-enrolment will start to unravel.
Tom McPhail is a pensions commentator with 40 years’ experience across the industry
