When you think of retirement, what images come to mind? For younger individuals, the idea of retirement may not be as rosy as it once was for older generations. A research study has found that younger pension savers view retirement as a gradual transition into working less, rather than a sudden stop. They also anticipate taking on caring responsibilities for grandchildren, elderly parents, or both. The introduction of auto-enrolment has further complicated matters for the under-45s, as they now have multiple pension pots to actively manage as they age. However, there are concerns about the lack of knowledge surrounding pensions among savers. A survey conducted by consumer website Boring Money revealed that over 20% of respondents were unaware that their workplace pension funds were being invested. Less than half had a clear understanding of the fees they were paying. Despite this lack of understanding, only 20% of respondents had taken any further action after reviewing their annual pension statements. Founder of Boring Money, Holly Mackay, emphasizes the need for better communication from pension providers to address this issue. The survey also highlighted that a significant majority of pension holders, especially younger individuals, would like to know where their pension funds are being invested. So, how can providers better engage with younger savers and improve outcomes for consumers?
A major problem with UK workplace pensions is that savers have little to no control over who manages their money. The pension provider is chosen by the employer, and the customer relationship remains largely at a corporate level. This lack of control means that savers have limited options for expressing dissatisfaction or seeking better service. The turnover rate of employers switching from one pension provider to another is virtually zero, according to Tom McPhail, a pensions expert at the Lang Cat consultancy. With a captive customer base, there is little incentive for incumbent pension providers to improve customer engagement and service levels. While individuals can open private pensions, this exacerbates another issue – the proliferation of small pension pots. Many young individuals working in TV and radio, for example, are hired on fixed-term contracts and are automatically enrolled in a new pension scheme with the same provider each time. This leads to multiple small pension pots that are often neglected or viewed as an unnecessary hassle. Boring Money’s survey found that over half of respondents aged 18-35 had less than £5,000 spread across their workplace pension pots, and many expressed a desire to consolidate them in the future. However, with such small sums at stake, it is uncertain whether pension providers will compete for their business.
In addition to these challenges, there is the issue of inertia. Many individuals fail to see the value in saving for retirement, which hampers their motivation to address pension-related matters. Consolidating pension pots is not an exciting task that people look forward to doing. Boring Money’s survey found that nearly 10% of respondents felt confident in making changes to their pension plans. However, if they have to wait on hold for 30 minutes to speak to their workplace provider, their enthusiasm may quickly diminish.
So, what is the solution? One potential solution is the introduction of a “pot for life” concept in pensions. Instead of being stuck with the pension provider chosen by their employers, workers would have the right to have their contributions paid into a pension scheme of their choice. This would introduce more competition into the market and allow individuals to engage with their pensions from an early age. The Department for Work and Pensions has already taken note of this idea and pensions minister Laura Trott has expressed interest in exploring it further. The main challenge lies in making the process seamless and pain-free for employers. They would need to modify their payroll systems or introduce a clearing house to handle payments into multiple schemes. The Pensions Regulator would also need to ensure that consumers have access to a default fund with capped fees to avoid swapping a well-run, low-cost workplace pension for a higher-cost alternative. By introducing competition and making it easier to compare providers, the retirement expectations of younger individuals can be better aligned with the people managing their pensions.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. Contact her at [email protected] or follow her on Instagram @Claerb.
Reference
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
