In general, pension funds and young people do not mix, right?
Right. The problem is that my generation, the millennials, are arguably the worst retirement planners ever. As a millennial myself, I won’t take offence at this. I know what we’re like.
We’ve been branded as narcissistic (#selfie) and we have short attention spans. But we’re also well-educated, technologically savvy and possess a strong sense of social morality.
Many of my peers have chosen to work abroad, or taken time out, or haven’t started any kind of career plan yet, because they can’t decide what to do. This has resulted in us starting work later and having more debt, while at the same time being subjected to lower wages and higher rent costs.
This is reportedly going to cause us massive problems when we retire in 40 years’ time. So, what can be done about it? Can anything encourage our generation to start long-term financial planning?
BNY Mellon produced a report last year which asked this very question. Here are some of the key findings and my millennial take on them:
1) Financial services providers should engage with social finance organisations and fintech start-ups to develop their social investment credentials.
100% yes. For an industry that struggles to connect with young people, a great place to start improving is tech. Initiatives such as micro-investing encapsulate this idea. This practice involves rounding up regular purchases with your smartphone to the nearest pound, with the difference being automatically added into an investment fund. For example, if you buy a sandwich and it costs £2.60, the user could then opt to make it £3 and the remaining 40 pence would be transferred into their fund account. UK-based firm True Potential has already launched this scheme and Acorn, the California-based start-up which pioneered the idea, claim to have over one million existing subscribers.
For me, this idea really carries weight. First of all, the convenience factor is huge. And that is something which would really resonate with the millennial demographic. Secondly, because it involves such small amounts of money, I believe we would be much more likely to engage with it, as it would remove the trepidation factor surrounding larger-sum traditional investments. The maths suggests saving up £2.50 every couple of days will equate to £500 a year. Okay, this probably won’t equate to massive savings. But it is a start – it will encourage saving, and it is likely to lead to good saving habits in the future. Besides, I could imagine rounding a £5 Uber up to £10 when stumbling out the car on the way home from a night out. So you never know, I could probably save a lot more than you think.
Another company leading the way in fintech is London-based Nutmeg. Nutmeg is a wealth management company based completely online. Its whole business looks geared towards millennials. The website has an attractive interface, it’s easy to use and it’s completely jargon free. The key message they preach is transparency; you can log-in at any time to see how your investment fund or pension is performing. And Nutmeg claims its fees are lower because they aren’t ‘charging for the illusion of a personal relationship’.
Like any start-up, Nutmeg has experienced its share of challenges. But to my mind, this model has substantial millennial appeal, and its ease of use is something I think traditional pension companies will aspire to copy in the future.
2) Financial services providers should make it easy for millennials to allocate a percentage of their retirement savings to social finance investments.
Social finance investment ties in with the growing rise of ESG standards. Pension funds are increasingly screening investments based on a firm’s environmental, social and governmental (ESG) policies. Fuelled by the recent financial turmoil and the continued threat of global warming, pension funds are becoming increasingly keen to invest in ethical, sustainable companies. It is believed that this new practice helps align with the millennial ideology of being globally conscious, and would resonate with the demographic. A survey by Morgan Stanley concluded that millennials are twice as likely to invest in funds which target specific environmental or social results.
Certainly, if ESG criteria can help increase long-term fund value, then investors will be happy, regardless of what generation they were born in. I agree that our generation will feel more comfortable investing in such funds instead of more traditional ones. Bear in mind that, in 2008, at a very impressionable age, we witnessed the damage that corporate excess can cause. So yes, in order to attract millennials as they start to invest, fund managers may have to adapt their traditional models and provide more focus within this area.
3) Financial services providers need to do more to promote financial education by partnering with grassroots financial education providers, engaging with schools and universities and lobbying national governments for change.
According to BNY Mellon’s research, 46% of millennials do not get any information on financial matters through their workplace or educational establishment. I’ve had four jobs and spent four years at university since the age of sixteen, and the only pension advice I’ve received came in the form of two leaflets.
One company that has started to address this problem is Nationwide. They recently launched a YouTube channel called “Money Stuff”, which is targeted at 14-18 year olds and aims to educate them on all things money related. They cover several topics ranging from the origins of money itself to corporation tax. It’s all presented in a highly visualised, easy-to-understand way. The company recruited a series of high-profile vloggers to a) be the face of the videos, and b) help with promotion. The content – some of which has gained more than one million views – is aimed at people setting up their own current account, but there’s no reason to suggest the series couldn’t grow and cover more advanced topics, like that of pensions.
As well as the channel, Nationwide recently entered the Snapchat arena. To coincide with A-level results and promote its first ever student account, Nationwide launched a lens on the social media platform. Snapchat boasts 100 million daily users and reaches 41% of all 18-34-year-olds in the US daily. Businesses of all kinds have started to tap into its marketing potential, and if you want to reach millennials, Snapchat is currently the place to be. Of course, the challenge for the financial industry is how to make content which is engaging for the audience. The reason Nationwide’s filter worked well was because they took advantage of an event relevant to the demographic. Maybe pension providers could use a similar train of thought to connect with slightly older millennials. Graduation ceremonies for example?!
4) Retirement savings products that give access for life events need to be developed.
The report also discovered that 63% of millennials would save more if their pension allowed multiple withdrawals. This is essentially saying millennials want a pension for more than just retirement. Most of us are not in a position to pay off student debt, pay rent, save for a house and make pension deposits all at the same time. So when it comes to sacrificing one, it’s usually the pension that takes the hit. If there was a mechanism in place that would allow us to delve into our pension fund for a couple of key life events, then I think that would encourage pension savings, as it would remove the quandary of having to choose which element of your life to save for. Unfortunately, none of the major financial services providers seem to have developed such a product yet. Product development executives, it’s over to you…