The pension schemes commonly enjoyed by older workers enjoy contributions more than five times higher than those enjoyed by younger workers. This shocking statistic means that, despite higher rates of workplace pension saving participation, today's younger workers are saving nowhere near enough for a comfortable retirement.
Britain's Office for National Statistics recently revealed that savings rates into so-called "defined benefit" or "final salary" pension schemes, are 22.7 per cent of salary, on average, against an average of just 4.2 per cent for "defined contribution" or "money purchase" schemes.
There is some good news - rates of enrolment into workplace pension schemes in the UK have risen dramatically in recent years. Some 39.2m individuals are now enrolled in a workplace pension. Indeed, the low rates of average contribution are related to the rise in participation. When the UK government introduced auto-enrolment (where the worker is automatically enrolled unless they opt-out), it deliberately started with low contribution rates - currently a combined 2 per cent minimum of salary from employer and employee. This is due to rise to a combined 8 per cent in 2019. Even this level, at four times today's minimum, is likely to leave younger workers without enough for a comfortable retirement.
Just as rates of flow into pensions are higher for older workers, so too is the stock of assets held by older age groups. Deloitte's analysis of a consumer survey shows that more than 60 per cent of the nation’s net financial wealth is held by those aged 55 and above. This figure excludes two major assets – pensions and property which, when added, make the skew greater still.
Unfortunately, it appears that young workers simply do not think about retirement. What's to be done?
The answer, we believe, lies in the tools suggested by the relatively new area of behavioural finance, as popularised by psychologists like Nobel laureate Daniel Kahneman.
In our recent report, The next frontier, offers seven potential solutions to the human biases that prevent us from saving enough for old age.
Three of the most important biases and their potential solutions are:
- Herding - tell people how their savings rates compare with peers
- Mental accounting 'jars' - a dashboard may show where pensions may be needed, rather than more accessible savings.
- Hyperbolic discounting, which leads people to value sums that they will receive in the near future over those in the distant future - could be tackled with interactive tools that demonstrate the effect of compounding.
Retirement saving levels have been labelled as "brutally not enough" despite work workplace pension participation today hitting an all-time high.