Spotlight on… Hannah Gilbert, author of “Pensions for the Next Generation: communicating what matters”

We speak to Hannah Gilbert, author of ShareAction’s recent report, “Pensions for the next generation: communicating what matters” which looks at how the pension industry can help savers engage with socially responsible investing.

You recently authored a report on pensions for the next generation, with ShareAction. Can you talk us through some of its key findings?

The report, Pensions for the Next Generation: Communicating What Matters, looks at how the pensions industry could innovate to help savers engage with the impact their money has on the world around them. We believe this can drive better savings, and fund a future they want to live in.

As a result of pensions auto-enrolment, millions more people are saving into workplace pensions, many for the first time. The next challenge is to move from wider coverage to higher contributions and thus to the promise of decent living standards in retirement for people currently of working age in the UK.

There are two potential risks: the first is that more people opt out of pension saving as contribution rates increase. If this happens, it will undo some of the early success in driving up coverage. The second risk, in tension with the first, is that mandatory minimum contribution rates, though higher, remain too low to deliver a decent quality of life for UK workers in retirement.

The report draws together arguments about needing to tackle low levels of saving (the UK has one of the lowest pension savings rate in the G20), with research that younger savers in particular do care about how their money is invested.

Having nudged people into pension saving through auto-enrolment, pension providers need to sell the benefits of pension saving more actively, so savers develop the “stronger sense of long-term personal ownership” that reflects the real responsibility individuals bear for their retirement.

Our most striking finding was that although all of the pension providers we spoke to refer to their online platforms as the primary source of information for members about retirement planning, investment choice and scheme governance, we also found only a small minority of members are registered to use their pension providers’ websites: active registrations for auto-enrolment pension providers’ platforms are typically under 10% (ranging from less than 2% to 20% of members).

How do you think millennials save differently to other groups? 

This question is bigger than our report! However, we came across a variety of resources showing that for many millennials, retirement saving is an aspiration thwarted by financial pressures of high living costs, paying off student debt and short-term priorities such as saving for a holiday or building up a ‘rainy day’ buffer.

Is the pensions industry doing enough to help millennials invest responsibly?

Responsible investment is a prudent approach to long-term investment and risk management that should apply to pension scheme default funds, whether or not pension savers, or their sponsoring employers, ask for it. From ShareAction’s work, we know that while almost all of the UK’s major automatic enrolment pension providers are committed to responsible investment in some form, there is a communications gap further upstream.

In recent years, the freedom and choice agenda for those over 55 years of age has dominated the pensions agenda in policy, media coverage and within providers. It is time to re-orientate some of that attention towards younger savers. The pensions industry is not, currently, doing enough to engage millennials in retirement planning generally.

“It is time to pay more attention to younger savers.”

Our research found that, other than the welcome pack and annual statement, most pension providers do not actively reach out to savers until five or 10 years before their retirement date. The opportunity to switch millennials onto the benefits of saving more earlier are being missed. Nearly half of people, 49%, said the only communication they received from their pension fund provider was their annual statement (YouGov 2015). Typical pension communications are legalistic and jargon heavy, and they fail to resonate with people emotionally.

There are the significant behavioural barriers disconnecting all members, particularly younger millennials from their pensions: contractually their employer selects their provider; temporally retirement is decades away; it is difficult to empathise with your future self; and we resist the upfront cost of pension contributions with uncertain and distant benefits.

These barriers are not insurmountable. The combination of behavioural insights and digital delivery provide cost-effective solutions to tailor communications to members. When 84% of members say they want their pension provider to engage companies to be more responsible, talking to people about how their money is invested and the impact it has on the world is a good way to frame communications.  The responsible investment activities already taking place provide an under-utilised opportunity to talk to pension savers about themes that interest them and might help them feel a more emotional connection to their pension.

One significant step forward would be if pension providers sought out what savers are interested in, for example through surveys, roadshows or annual meetings. For example, imagine a survey of members in 2018 asks them which of four SDGs they are most interested in and a member picks one on gender equality. In 2019, when the pension provider sends information to that member, it could be framed through the lens of ‘you said you cared about gender equality: here’s what we’ve been doing recently as an investor to promote gender diversity on boards and through company operations and supply chains’.

When it comes to socially responsible investing, what are the key areas that millennials want to invest in?

In addition to responsible investment, numerous surveys show that working people, especially younger people, are interested in aligning their workplace savings with their values. One report from EY, for instance, found millennial investors are nearly twice as likely as non-millennials to invest in companies or funds that target specific social or environmental outcomes.

Surveys carried out by Big Society Capital and Ethex show that health and social care, environmental projects and renewable energy and housing are areas that people care about in investment.

Do you think the pensions industry has a responsibility to ensure its members are investing ethically/socially? Or is this something you think should be driven by demand?

In pensions, the primary purpose of the investment power given to trustees, who are investing other peoples’ money, is to secure the best realistic return over the long term, given the need to control for risks. More recently, regulatory guidance has distinguished between financial and non-financial factors. Many environmental, social and governance factors are clearly quantifiable financial risks that need to be considered.

The distinction between ethical investment and responsible investment has been hotly contested for several years. Ethical funds emerged as a response to investors seeking to align their investments with moral views, and most ethical funds are designed by screening out sectors and stocks. Sin stocks’ frequently screened out by ‘ethical’ funds do not fully align with contemporary concerns. Millennials are more likely to be concerned about excluding coal and child labour than gin.

Millennials are more likely to be concerned about excluding coal and child labour than gin.”

Pension providers do have a responsibility to ensure their members are aware that there are alternative options to the default fund available. The precise responsibilities vary by type of pension, but pension providers do have a duty to understand pension savers’ views. Understanding members’ preferences would ensure that the list of alternative choices better matches their interests.

At the moment, there is no mechanism to capture ‘demand’: none of the pension providers we interviewed regularly surveys members for their views on how and where their money is invested.

To what extent is a lack of financial education affecting how millennials go about saving for pensions?

For those millennials who can put some money aside as savings, they are often hampered by lack of knowledge and confidence around financial planning.  For example, a YouGov study found nearly one in three under-35s have a poor knowledge of pensions.

Again, the industry has an opportunity to draw budgeting and planning apps in wider personal finance to raise financial capability. It is arguable that the decisions people make during the saving or ‘accumulation’ stage of pensions are more straightforward than those that they will face at retirement or decumulation. If pension providers are able to engage with millennials early in their pensions journey, savers may feel more capable and confident when facing the more complex decisions at retirement.

How well do you think millennials are coping when it comes to budgeting and personal finance?

Overall levels of financial literacy, capability and confidence are a challenge across the UK population. Millennials are in the early stages of their lifetime savings journey and saving even modest amounts when compounded over decades make a significant difference to retirement outcomes. Consider a basic rate taxpayer investing £250 a month (along with the tax relief they receive) into a pension fund that delivers 6% annual compound growth until they reach 65. The member who started saving into a pension at age 25 would have a pot worth £622,340, compared to a pot half that size for a person who started ten years later (unbiased.co.uk 2017).

What could the pensions industry do to communicate better with millennials?

The pensions industry needs to take a much more member centric approach to communications: smarter, personalised content, delivered at a time and across a platform that is accessible to members. Engaging and empowering savers early is vital if they are to achieve a decent retirement income.

More than half of millennials want to do their financial planning on a smart phone. Innovations in apps for personal finance like Moneybox, which allows people to round up the change from purchases and sweep the extra over to savings, show that reaching out to millennials with compelling content on communications platforms they want to use can overcome these challenges.

Disruption in areas of financial services other than pensions is bringing new web and mobile apps to market, from personal finance dashboards to robo-advice investing sites. Customer-centric design and user experience are central to their success. The seamless sign up to my Monzo card was incomparable to that of a premium incumbent. I can swipe through budget and payments analysis, set monthly targets and scrutinise monthly spend. No wonder all my millennial colleagues are out to lunch with a bright orange contactless card!

The pensions industry needs to take a much more member centric approach to communications: smarter, personalised content, delivered at a time and across a platform that is accessible to members.

Pension providers could invest in digital tools, including apps, to achieve greater engagement and two-way communication with their members. Pensions information could be more available and shareable via social media, allowing people to seek information from colleagues and friends, and to respond to social norms they perceive as relevant to them. Successful apps such as Instagram and Snapchat work through sharing of images. People’s pensions are invested in the real world and there could be associated, shareable imagery for many of these investments.

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