This week’s blog was written by Nigina Mirbabaeva, an Intern here at the Financial Health Exchange. A panel discussion held by MRM Communications* in April debated whether young people need to change their financial priorities towards pensions and long term saving over buying a house. With this debate as a backdrop, Nigina explores the financial balancing act that young people face and how the government has targeted young people’s “aspiration gap” with a number of recent policies. Nigina then considers how policy makers, financial services, and other stakeholders can help young people see the benefits of saving for the future.
The situation for young people today is twofold – on the one hand, there are endless opportunities before us that our parents could only dream of – we can invest and open businesses almost instantly, while technology affords alternatives to education and broadens our horizons. On the other, we are also a generation that struggles the most – with uncertainty about the future looming over us. The ever-increasing housing prices, poor saving incentives, and staggering education fees are all pressing down on the 18-25 age group, dubbed as “generation A” – the generation that has lived for most of its adult life under the shadow of austerity.
The government, realising the challenges young people face, has put forth measures to alleviate our struggles, describing April’s budget as the one that “puts the next generation first.” These measures included the new Lifetime ISA to encourage saving, and the increased minimum wage. Yet the high student debts and low disposable incomes that young people face may pose a barrier to getting the most out of these policies and young people may still struggle to find enough money to save in the first place. Some critics are also concerned that the flexibility of the Lifetime ISA scheme could persuade young people to opt out of company pension plans, and therefore hinder the government’s automatic enrolment pension schemes. So amidst all the contradictory policies, it is worth exploring what Generation A actually wants and how the government can help us achieve this.
The Aspiration Gap
“It’s difficult for young people – to get a job, to get an education, to get on the housing ladder, the youth are disenfranchised” – Darren Philp, of The People’s Pension.
Like the generations before us, we are infatuated with the idea of calling four concrete walls ‘ours’ – exasperated by outrageous rent prices and dreadful landlords which result in a vicious cycle of month to month rent payments and precarious living conditions. Yet a recent report by MRM Communications, “Generation A: From Austerity to Aspiration”, suggests that this prioritization of housing over longer term investment (such as pensions) is a concern. What we should be focusing on, they argue, is funding our Golden Years.
The challenge is that young people do want to save and to take advantage of the same investment opportunities our parents had. We want to have it both ways, but feel we aren’t able to just yet. Our financial situation is either too meager to accommodate saving, or the trust in the financial industry is so low that it prevents us from taking action. What remains is the conflict between our short term and long term needs – a huge aspiration gap between what young people want to do and what they feel they actually can do.
Part of the reason for this is our psychology, says Jason Butler, author of The Financial Times Guide to Wealth Management. It has become socially acceptable to be terrible at managing finances – “It’s almost like a badge of honour to be crappy with money” Jason says. We don’t think of the future, and don’t make rational decisions when it comes to prioritising money because we are simply not wired that way. Our brains want the easy way out, causing us to make imperfect decisions. So instead of focusing on the benefits of pensions, which may take a lot of time and energy to understand as regulations constantly change, we choose to focus on housing.
Furthermore, the current economic environment is also a great obstacle to appropriate saving and investment; we still have a long way to go before we reach the types of financial opportunities our parents had. Young adults are now less likely to be in work than before the recession, and an additional 395,000 jobs would have to be created to reach the pre-crisis youth unemployment level. And while tuition fees (and subsequent student debt) keep increasing, wages have been in deep freeze over the past decade. The result? Generation A is locked in a never-ending battle to make ends meet, pay high rents, and repay student debt to focus on longer term plans, and do not feel that they can afford the recommended 10% of their income per month to go towards a pension contribution.
Retirement views – do we need to rethink?
Depending on the choices we make in our working years, retirement can either be a point of financial independence, or a difficult time with debt, welfare dependence and wellbeing issues. “Everyone is living longer and if we do not encourage or incentivize people to save, the threat of living in poverty in later life is very real” Jonathan Bland of Pension Geeks says. It is for this reason that MRM advises that young people focus on long term planning. Despite a basic understanding of the retirement concept and the associated financial strain, young people still put the issue to the back of their minds, choosing to focus on shorter term goals. In fact, research shows that most people do not start thinking about their retirement prospects until the age of 48, by which time it’s arguably too late to put away a meaningful sum to support life post-work. For young people today, putting money away for retirement may seem more impractical because of the low disposable income they have. Of the 65% of people who are not saving into a pension, 43% say they are not doing so because they are simply unable to due to a lack of disposable income.
Unless young people can see the tangible benefits of saving for a pension, as opposed to a car, a holiday or a wedding, young people will find it difficult to make pensions a priority. We are, after all, the generation that wants personal fulfillment and instant gratification. We need to see the fruits of our efforts. So if we want to see any real growth in the market through greater investment and long term saving, young people’s attitudes to pensions need to change drastically, and incentives must be offered.
What should be done?
Demystifying – There has long been talk of demystifying pensions and the language associated with them – a previous MRM Young Money Report revealed that young people were more likely to recognize a French, Spanish or German word than they were to understand what an annuity is, which paints a gloomy picture of the financial literacy levels of young people. In fact, a fifth (20%) of Generation A makes zero pension contributions simply because they are confused about how pensions work. This is partly because pensions seem like a very dull and depressing topic. We put off thinking about the future, and put off learning about things that are uninteresting. “Engagement in financial education is key”, says Rohan Sivajoti –financial advisor at Evestor. People don’t have the education to understand pensions, and hence are not engaged with it. Sivajoti argues that the school curriculum needs to change; while the Pythagorean Theorem is extremely useful in solving geometry problems, it simply does not go farther than the sixth form, and is not useful when calculating tax returns or interest rate savings. Delivering financial education which focuses on financial planning and retirement, as a core part of the curriculum, will help to improve the financial literacy of young people, and will induce financially responsible behaviour from early age.
Rebranding – To inspire and empower Generation A to save for the future, the whole image of pensions and how the concept is communicated needs to be rethought and rebranded. One reason why people are so disengaged with pensions is because the rules change every year. People don’t understand how they are going to access pension money, or what will happen to it. The industry hasn’t served its customers as well as it could, and there is a problem of trust and confidence. It’s almost like pensions is a damaged brand. This needs to change.
Communicating – There needs to be better communication – be it directly from the government, or through the third sector or the education system – so that young people understand what they are dealing with. This won’t be possible until people communicate to and target young people directly. No one will want to stress over trying to understand what all the acronyms and financial terms mean, so the jargon needs to be simplified, and key stakeholders need to communicate with young people in more effective ways. Research shows that young people are aware of the products and services out there, and want to interact with the financial industry, but there isn’t enough engagement from financial services to support us to think about these options and plan accordingly. Coupled with the fact that the constantly evolving financial jargon is incomprehensible even to the most financially savvy graduate, it is difficult for us to wrap our brains around the pension scheme, stocks, assets and investments while at the same time trying to juggle budgeting and everyday life.
“We need to get the message across that saving more, earlier, means saving less for the same outcome – let investment growth do more of the work for you” says Darren Philp.
While the above mentioned measures may induce financial responsibility amongst youth, in the end it is up to us to realize that we are responsible for our own future. How young people see themselves in relation to finance now will be a big contributor to their outcomes in later life. The responsibility of the government and all interested parties should be to ensure that the right policies are in place and that young people can access appropriate products, advice, and information at the right time. However, new government policies and educational messaging will offer the greatest benefits once young people feel that their financial futures are within their control.
Young people are heading towards their future with the mentality that they are going to be worse off, and this needs to change. Like Jason Butler says, the mantra should be “I can. I must. I will. Be good with money”.
*MRM communications is a financial services public relations consultancy, providing award winning communications solutions for organizations and individuals in the financial sector.