The essential guide to engaging younger workers with pensions

I have worked in pensions for longer than I care to remember and the biggest challenge still remains – how do employers get employees more engaged with their pension? And it’s a really important question; if employees don’t engage with their pension, there is literally no value to the employer for their pension spend.

It's true that employee engagement levels are low across the board, but they are particularly low among younger employees. Intuitively it makes sense – the nearer I am to retirement, the more I’m interested in how big my pot is and how I’m going to take it. The further away from retirement I am, especially with a minimum access age of 55, the least attention I’m going to give it. Why bother thinking about money that I’m only going to benefit from in 20, 30 or 40 years’ time?

And this is the crux of the issue – we’re asking younger employees to engage with an event that is just too far away and there are many other things that they need to focus on, way before retirement.

Why is engagement important?

It’s a good question and there is a school of thought that suggests that it’s not important at all. That we need to accept that younger employees don’t engage with pensions and just make sure that the default positions – namely contribution levels and investments – are fine.

I couldn’t disagree more with this thinking and for good reason.

Low engagement rates lead to low financial outcomes and it’s as simple as that. If I’m engaged, I’m likely to make good financial decisions that have the biggest impact on my eventual pension pot i.e. how much am I contributing. If I’m not engaged, I’m not going to make any decisions, and so the biggest positive impact I could potentially make on my eventual outcome is lost.

Auto enrolment has solved the problem of getting people into pensions, but it hasn’t solved the problem of getting people a decent retirement. Engagement is key and auto enrolment by its very nature is the antithesis of engagement – only those who don’t want to be in have to do anything. So, the majority of those that stay in do nothing and become passive participants.

So, how do we get younger employees engaged?

Well as bizarre as it sounds, stop talking about retirement! It’s just not resonating and no matter how well you think you’re communicating, it’s falling on deaf ears. At the risk of stating the obvious, communicating well about something that’s of no interest is not going to make anyone listen more or indeed act.

And turning up the volume by scaring me about the possibility of living in poverty is also not going to cut it. We know for certain that the carrot is much better at engaging than the stick!

What’s the carrot?

For older people, it’s the promise of a nearing accessible pension pot, and for younger people it’s the “what’s in it for me now?” drawcard. We know the drawcard is not about accessible cash, but that doesn’t mean my pension can’t help me with my immediate or more medium-term issues.

We just need to understand the financial needs and motivations of our younger colleagues, and the best way to gain this understanding is Maslow’s hierarchy of needs. Maslow’s approach enables us to look at pensions through a younger pair of eyes.

In its purist form, the hierarchy of needs suggest that for people to become the best that they can be (or as Maslow puts it, self-actualise), people need to have their basic needs met first. Then they can progress through a number of levels before finally reaching their full potential.

In financial terms, it suggests that unless people can have their more immediate financial needs met first, they can’t think about their longer-term financial needs. In other words, if I’m battling to buy my first home, I can’t begin to think about my retirement.

This is where pensions can be a really powerful thing but in a counterintuitive way.

There’s a growing concept called pension redirect which allows employees the choice of having some of their pension contributions, over and above the auto enrolment minimums, paid into a workplace ISA to help them save for other things. It doesn’t detract from the importance of pensions, but rather puts them into perspective – it allows employees to move through Maslow’s hierarchy of needs. The idea is that in helping younger employees meet their more immediate financial needs, you are allowing them the “head space” to think about their longer term needs i.e. it enables engagement.

Redirecting pension contributions to more accessible savings has the potential to increase engagement levels with pensions!

More than one carrot

Again, this might sound counterintuitive and a little “out there”, but it’s also possible to get pensions to help employees with being active in making the world what they want it to be. Or in other words, active in securing a world that’s worth retiring into!

The last bit might sound a bit melodramatic – but it’s true.

Aside from Covid-19, climate change has to be the number one challenge facing the world today, but it’s especially worrying for younger people. We’re talking about their future and their children’s future. Research tells us that the environment is one of their top concerns, so how does this play into increasing engagement with pensions?

By making pension investments more environmentally friendly, and surfacing these investments to younger people, they can see the good that their pension is doing. It’s the right thing to do but it also aligns pensions with people’s personal values. It’s helping to address an issue, albeit a wider issue, that they’re concerned about. Their pension becomes more than just a retirement funding vehicle, it becomes a powerful tool for change. It becomes something that people can be proud of. It brings value today, not just in 20, 30 or 40 years’ time.

It’s suddenly worth engaging with and paying more into.

Engagement encourages engagement

And once people see that their pension has the potential to become a powerful force for change, they want to get more involved. They want their pension to work harder for them and the wider world.

They want to have more of a say in what their pension investments are ultimately doing. And there’s a way to give them more say – through voting functionality.

Fund managers who look after all our pension investments are, in effect, shareholders of the underlying companies we are all invested in. They have the opportunity to vote on how these companies are doing business; how they are dealing with issues that affect us all like animal welfare, climate change and gender equality. But there’s now functionality, we introduced it earlier this year, where pension members can make their views known, which ultimately influences how the fund managers vote at shareholder meetings. They are able to have their voice heard and be active in ensuring that their pension investments are doing good things rather than bad.

Again, there’s a real reason to engage.

And in the end?

It’s a mistake to think that younger people are not interested in pensions. They’re just not interested in the same old rhetoric – you can’t engage a 20-year-old with visions of a dreadful retirement!

We need a new narrative and that’s one that incorporates all their other financial and existential needs!

The author is Steve Watson, head of proposition at Cushon.

This article is provided by Cushon.