Young adults delay saving for a pension

UK company pension funds have seen billions wiped off their value in the past decade, according to the latest figures from Aon Consulting – turning a surplus of £25bn in 1999 into a deficit of £96bn today. And most of this value destruction can be attributed to equity market falls during the global financial crisis.

Research by the Organisation for Economic Co-operation and Development (OECD) shows the average UK pension fund lost 17.8 per cent in 2008 – due to its 46 per cent exposure to equities. In total, the market crash destroyed £3,290bn of pension value in the industrialised world. But, even faced with this pension funding problem, young adults still do not see the merits of retirement planning.

Less than a quarter of independent financial advisers (IFAs) say they have noticed younger clients – under the age of 29 – taking more interest in saving for retirement in the past year, according to a survey commissioned by the Financial Times.

More worryingly, only 4 per cent of 20-somethings have actually started saving for retirement via pensions and individual savings accounts (Isas). Most individuals still start their planning between the ages of 40 and 49.

These findings are in line with three other studies that have shown young adults are becoming less inclined to save for retirement – even though the cost of any delay continues to rise.

Experts say the root of the problem goes beyond obvious reasons, such as a lack of income among university graduates already saddled with student debt. They believe the credit crisis has put people off investments in risky assets.

“Intuitively, it’s wise to save, but with all the doom and gloom in the media and people hearing that the market has lost 40 per cent of its value, young adults think that’s the reality of pensions – so they don’t bother,” says Barry Horner, an adviser at Paradigm Norton Financial Planning.

A study by Aviva shows that only 3 per cent of individuals now plan their savings 10 years into the future. A third plan their budgets on a month-to-month basis. If younger people could be persuaded to invest over the long term, the benefits are clear. A separate study by Hargreaves Lansdown shows that an 18-year-old who puts £300 a month into a self-invested pension plan (Sipp) for the next 47 years would end up with £920,000 by the time he turns 65, assuming a 6 per cent annual return after charges.

But experts say short-termism is only part of the problem. They also blame the way in which pensions are explained , which they say for years has proven too complex for a younger audience .

“It’s not a sexy topic,” says Chris Noon, partner at Hymans Robertson. “People who run pension schemes are technical experts who don’t necessarily know how to communicate its relevance .”

He says young adults are quickly turned off by 30-page booklets filled with complicated statistics and technical jargon. Eighty per cent of individuals under the age of 35 say pension information is confusing and “full of gobbledygook,” Hymans Robertson has found.

“If you are marketing an iPod, I don’t care if it has an XYZ drive. All I care is that it plays music. If your material is confusing, you’d be fired,” Mr Noon argues.

Aviva’s research reveals that the majority of young adults know that pensions offer tax incentives, but the majority cannot explain how those benefits worked.

The UK insurer has recently tried to tackle this problem by introducing a new software that tracks the point at which young adults become switched off by confusing information. Paul Goodwin, head of pensions at Aviva, says effective changes are often subtle, such as avoiding the use of percentages and pie charts.

However, Iain Tait at London & Capital says young adults who come out of university go into the property market instead.

“The changes in pension rules have caused people to become more reluctant in trying to understand how pensions work, even if a Sipp is just as flexible as a regular Isa.”

Mr Tait has tried to encourage younger clients to view Sipps in the same way as Isas or sharedealing accounts, but with even greater tax incentives.

Beyond these efforts, though, the lack of enthusiasm for pensions remains. AXA recently launched a campaign to change the name of pensions, which it believes further alienates young adults. But Laith Khalaf, pension analyst at Hargreaves Lansdown, says this move would fail to address the underlying reality that young people face.

He says children who watched their parents reap the benefits of both state and employer pension will no longer enjoy the same luxury.

“Tomorrow’s pensioners will not be so lucky, which makes you wonder how many of them will end up living in poverty; the term ‘pension crisis’ is not hyperbolic. The best and only way to avoid being caught up in the crisis is to build your own nest.”

There are some signs that attitudes may change, however. In a new study by Friends Provident, over half of young adults agreed that state pension will not provide enough for retirement. One third said they intended to start contributing into a pension before 30 – although paying off debt remains their first priority.

It’s a sign that wealth managers and advisers are beginning to get their messages across. However, they conceded that the solution will ultimately depend as much on changing the way pensions are explained as it does on parents regularly communicating with their children.

Case study Not all 20-somethings are reluctant to start investing. Jason Else started thinking about retirement at the age of 18 and began contributing to a pension two years later, after finishing his education and securing a stable income. Else, now 28, decided to invest early after seeing older colleagues struggle to maintain their standard of living. As the captain of a ferry, currently earning £55,000 a year, he has been able to join an occupational pension scheme, into which both he and his employer contribute 4 per cent. He also has a portfolio of investments with Hargreaves Lansdown, including shares in individual savings accounts.