Increasing pension engagement with young adults
YOUNG adults have strong ethical concerns. They are worried about environmental damage, animal testing and plastic wastes. They want to use their money in ways that fit with those ethical concerns – and that is as true of their pension savings as it is about their retail choices. Research demonstrates – perhaps surprisingly – that younger adult workers would invest significantly more in their pensions if those investments matched their ethical concerns.
A growing proportion of people in the workforce have defined contribution pensions – they are ‘Generation DC', aged between 22 and 38. A large scale survey (of 2,700 people in this age group) which analysed respondents' emotions found that a mere 22 per cent feel their pension investments are aligned with their values. More than half want their pension investments to reflect their values and almost half would increase their pension contributions if they were.
With a serious society-wide problem of under-investment for retirement, the use of responsible investment (RI) criteria for pensions offers an important opportunity to make progress.
Analysis of young workers' emotional responses – published in the report ‘Responsible Investment as a Motivator for Generation DC' (published jointly by investment advisers Franklin Templeton and Adoreboard) - finds that the use of RI would lead to a near 20 per cent rise in pension investment in this age group. This represents £1.2bn a year extra, boosting both retirement incomes in the long term and extra investment in responsible and sustainable business activities in the short and medium term.
We should not be surprised that young adults would convert their principles into pension investment action. Harvard Professor Gerald Zaltman has pointed out (in his book ‘How Customers Think') that 95 per cent of purchase decisions are driven by emotion. But it is time for the pension industry to recognise the significance of this for their leadership of the sector.
By examining emotional responses the survey found that despite the common narrative that people regard pensions as boring, the reality is that pension investment decisions actually drive intense feelings – especially when workers believe their money is being used in ways that conflict with their personal values.
Generation DC does not accept that it should be faced with a choice between values and financial returns – it demands both. But those values create important opportunities for the pensions industry to increase engagement with their customers. This requires a recognition of the overlap between the values held by Generation DC and the principles of responsible investment. In turn, this creates a catalyst for employees to increase pension investments.
While resentment exists about pensions, the most common cause is workers believing their employers should contribute more. In instances where employees feel their bosses are being generous with contributions, they are much more positive about that employer. More information about existing pension schemes' role in responsible investment also generates positive responses and a stronger feeling of engagement and trust. It may also be worth scheme providers offering members an ethical investment option.
Pension schemes should provide clear information on the values embraced and how much employers contribute. But employees also want greater transparency about the size of their own contributions and the rate of return achieved. A clear majority – 78 per cent - of Generation DC say they would engage more with their pension scheme if it included information on responsible investment, while more than half – 58 per cent - want to be able to access this pension information through an app.
The innovative Adoreboard methodology provides a summary metric of survey participants' emotions, improving understanding of survey results. This assists an organisation such as report commissioners Franklin Templeton to produce conclusions and takeaways that increase transparency and market analysis. It will hopefully lead to increased pension contributions and better retirements for what are today our younger workers.