‘Growing old has been the greatest surprise of my life.’ Online, versions of this quote are attributed to, among others, Tolstoy, Trotsky, James Thurber and Billy Graham. (This brings to mind the meme: ‘Don’t believe everything you read on the internet’ – Abraham Lincoln).
Nonetheless, as someone who is now quite a heavy stone’s throw from retirement, I completely agree with the sentiment. When I was in my teens and early 20s, people in their 30s seemed ancient and people aged over 60 seemed like members of a different species, if not beings from another planet. Perhaps I exaggerate. All the same, somehow it never occurred to me that I’d get old simply by not dying. I had no notion of saving for the future. I’d hit 40 before the prospect of retirement was near enough for me to start planning for it. This was very late and it was not wise.
Before auto-enrolment there was no requirement for employers to pay into a workplace pension at all, let alone one that fulfilled the Pensions Regulator’s ‘value for money’ criterion. Now that all eligible jobholders must be automatically enrolled into a qualifying workplace pension scheme, the number of people saving for life after work has increased dramatically.
Auto-enrolment is not perfect but it’s a big step in the right direction and has been largely successful so far. According to the Department of Work & Pensions (DWP), the average opt-out rate across all employers stands at about 9%. This is significantly lower than many pundits predicted and represents a promising start. The soft compulsion, or negative affirmation, methodology is undoubtedly a big factor in auto-enrolment’s initial success. People have to make an active decision to cease scheme membership, so numbers are boosted by simple inertia. However, under-saving is still a huge issue, and we wait to see the impact of the first set of minimum contribution increases that were implemented in April.
In December 2017, the DWP presented to Parliament the outcome of their statutory review of auto-enrolment. Among other things, the review recommended that the age threshold should be dropped from 22 to 18. We wholeheartedly agree with this. Undeniably, the earlier you start to save, and cultivate the habit of saving, the better.
When planning and delivering workplace financial education programmes, there is often a natural tendency to concentrate on older employees, as their needs are more pressing. However, educating the younger generations is also crucial – and the only way to bring about a genuine shift in behaviour. Soft compulsion is all very well, but we mustn’t forget that even employees many years away from retirement need to understand key issues such as:
Helping people to understand the huge advantages of compounding, particularly when coupled with the tax-efficiency of pensions, can be a powerful message when encouraging saving amongst younger generations.
Accessing an online calculator via Google as I write, shows that £1,000 invested over 10 years, with an evened-out and fairly conservative net return of 5%, compounded monthly, will grow to £1,647. Over 40 years it will grow to £7,358. Over 50 years — not an unrealistic investment horizon nowadays — it becomes £12,119.
This is a powerful message. You don’t have to understand the maths, just the principle. Without, I hope, underestimating their other financial commitments, this can help us to counteract the YOLO effect among millennials and the first representatives of Generation Z entering the workforce. Sure, you only live once — but you may well live a long time.
This article was first published with REBA on 16 July 2018