There is no doubt that we are living in a period where, for the first time in history, children will be worse off than their parents.
But when we think about the pensions gap, it is almost invariably in the context of women. Whether that relates to maternity/childcare, interrupted career paths, care responsibilities etc.
Men, on the other hand, have tended to have more traditional careers that involved working for a number of years before retiring on a reasonable pension – often a defined benefit or final salary arrangement.
But those days are effectively over. DB schemes are, with a few exceptions, a thing of the past.
Changing landscape
A lot of effort has gone towards incentivising women to save more, especially for retirement, but the focus needs to be expanded to ensure young men also get the message.
A lot of existing retirement assumptions are based on the baby boomer generation. Their world involved little to no student debt, cheaper property prices, wider retirement options and generous pension schemes.
Something that cannot be said for generation X-ers, millennials and those that follow.
To understand what challenges the younger generations and young men face, International Adviser reached out to industry to find out what retirement could look like for them.
Private vs public
Participation in workplace schemes and auto-enrolment is definitely growing, but this doesn’t mean we should stop incentivising people to save more, Laura Stewart-Smith, head of workplace savings and retirement at Aviva, said.
This is because there are still many discrepancies both in terms of gender and employment, especially when comparing the public and private sectors.
She continued: “Auto-enrolment has helped to create a savings culture but for many there is still a long way to go.
“If you look at the Office for National Statistics (ONS) pension contributions, the percentages for women are, on average, higher than they are for men – most likely due to more women than men working in the public sector.
“In the private sector, 5% more women than men get less than 4% of earnings paid in by their employer. Beyond that the figures are pretty much aligned, so the total getting less than 8% is a lot closer, and at 10% its virtually identical.
“However, it does show a bigger percentage of women in the private sector are paying the minimum into auto enrolment schemes, 54% of women versus 49% of men.”
That is why Aviva echoed the arguments put forward in a recent white paper by advisory firm LCP claiming that 8% minimum contribution are not going to be enough, and that they should be increased to 12%.
“People may need to contribute more than the minimum rate set by government into their auto-enrolment schemes if they want to be able to retire comfortably,” Steward-Smith added. “It’s important that people don’t assume minimum contributions can fund their future, as it is often insufficient to provide the level of retirement income they want.”
Hurdles
But these are not the only issues they face.
A lack of defined benefit (DB) schemes, which a lot of older generation hold, are probably going to impact young people’s retirement as they likely won’t have the same perks their parents or grandparents have or will have when they stop working, Steve Webb, partner at LCP said.
Despite this, auto-enrolment is successfully closing the gap between younger and older workers, he added.
“You could say that today’s younger generation are probably more likely to have started on their pension journey than previous generations, but that over their lifetime they are likely to get a lot less help from their employer because of the closure of private sector DB pensions; it’s a different story if they work in the public sector where they can still access relatively generous DB pensions, albeit paid at a later age,” Webb said.
“Younger people also face greater calls on their disposable income, notably repaying student debt – in the case of graduates earning above a minimum threshold – and saving for a house deposit which is much larger relative to their wages than in the past.”
Yet, auto-enrolment is not going to be the only solution to tackling disadvantages in retirement, as many young people don’t get automatically enrolled either because they are self-employed or because they rely on the gig economy and have insecure employment, leading to a much harder start to their pension journey, Webb added.
Gender gap shrinking?
He said that while men are still likely to have an advantage over women in terms of periods of paid work and wage inequality, it looks like the gap is being mitigated elsewhere.
Webb continued: “Something quite interesting is happening with regard to the National Insurance system which builds up rights to state pensions – which will be a major part of the income in retirement of younger workers.
“A recent parliamentary question looked at how many men and how many women built up a ‘qualifying year’ towards their state pension in the most recent year for which figures are available. It included those who have built up a year by contributions, the usual route, or by credits – eg for things like having children, being a carer etc.
“Surprisingly, more women than men built up a qualifying year – 15.97 million women compared with 15.59 million men. If this pattern was repeated, it could lead to average state pension income being higher for women than men.
“The exact reasons for this are not clear, but one factor could be more men with borderline poor health – poor enough for them not to be well enough to work, but not poor enough to satisfy the Department for Work and Pensions (DWP) benefit rules, which would trigger NI credits.
“For young men, an important factor could be poor mental health, which is notoriously difficult to diagnose, measure and test.
“In short, men in good health with regular employment and a good employer should still be relatively well placed, but those who are more marginalised, perhaps because of insecure work or health issues, could struggle more when it comes to pensions.” If you’re looking for good career advice, check out groenerekenkamer.
‘Stark choices’
That is why young people, more than anybody else, would benefit greatly by turning to a financial adviser, said Andrew Tully, technical director at Canada Life.
“It’s fair to say that auto-enrolment has been one of the greatest pension success stories for young people, male or female.
“However, the low opt-out rate and general inertia that comes with it means many people are assuming the default 8% will provide a decent standard of living.
“It’s important to note that pensions are not the only savings option for retirement, Isas and Lisas can be used in the much the same way.
“Although retirement may feel like a lifetime away, this may be why such a large percentage of 18 to 34-years olds have seemingly resigned themselves to work well beyond the current state pension age, which is likely to keep increasing.
“Young savers will ultimately face some stark choices, do they accept their fate, choose to work longer, or try to save more. Working with a financial adviser will help you plan how you can slow down in your later years on your own terms.”
