How Millennial Savers Have it Better - and Worse

BlackRock's Claire Felgate says the change in workplace pension provision has disadvantaged millennials - but there are ways to maximise retirement savings 

Emma Wall 11 May, 2018 | 9:59AM
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Emma Wall: Hello and welcome to the Morningstar Series "Ask the Expert". I'm Emma Wall and I'm joined today BlackRock's Claire Felgate to talk about the difference between millennials and baby boomers.

Hi Claire.

Claire Felgate: Hi Emma.

Wall: So, I thought today we could focus on retirement, because we could spend hours talking about the differences between millennials and baby boomers when it comes to financial health. What are the biggest differences between these two generations. Is the type of workplace pension they are likely to be provided with, how does that work?

Felgate: So, if you have a baby boomer and you are thinking about those two generations actually often are doing things simultaneously, but at other ends of the spectrum. The baby boomers typically have retired on what a lot of people would consider very comfortable retirement. So, they will have to find benefit pensions that are provided by their companies and typically also quite a good state pension.

Whereas your millennials are very unlikely to have any DB provisions so there is no guarantee from the company around their pension. We could see the state pension becoming less and less we have certainly seen the pension age rising recently.

So, I think there is big differences in the type of guarantee that you get around your pension. But also confidence, I don’t think that in the research that we’ve done millennials don’t seem very confident on how they should be saving for the retirement.

Wall: I suppose it's very difficult to get foresight when it comes to DC. Because as you say DB you can work out also just the journey I mean baby boomers are around 60 something now. But even at 40 something they had a good idea of what they would be provided for or with in retirement. Whereas with DC it's dependent on what you put in, but it's also dependent so much on investment performance which for a lot of people is difficult to comprehend. But it's also less secure.

Felgate: And also, as human beings. It's very hard for us to take savings today then fast forward it in our minds with investment returns into a lumpsum. So even if you can do that and you think I need for example £200,000 when I retire. It's extremely hard for people then to turn that £200,000 into what your kind of monthly income would be in the future particularly. So, its hard enough turning it into an income but thinking in 20 years-time, how much does a pint of milk cost. So, I think that that’s very hard for millennials.

Whereas baby boomers they didn’t have as much choice or control. But typically a DB pension would often say you would get two-thirds of your final salary. So, if your final salary was £30,000 you would get two thirds of that sort of with inflation paid into perpetuity. So it was much easier for them to understand what they would be getting in retirement.

Wall: So that sounds like the baby boomers are better off when it comes to the actual type of scheme. One benefit that millennials do have though is auto-enrollment. When we surveyed millennials lot of them are surprised at their knowledge base surrounding this.

Because typically for baby boomers it would have had to have been a nudge from a boss, or someone tapping your shoulder, a salesman saying, hey, get into this pension scheme, which happened later at a seismic event getting married, having children, changing jobs...

Whereas millennials arguably have a much longer path and much longer savings period before they get to retirement. Because they've been auto-enrolled from that very first job.

Felgate: Exactly, I think auto-enrollment I think has been one of the best things to happen to millennials. And we are all human, you have a list of the things that you should be doing I should exercise every day, and I should eat healthily and I should do this and that. And actually, human behavior is that if you harness inertia and you help people on their way it's much more successful.

So, we've seen I think the statistics now sort of around 9 million additional individuals saved into or saving into pension plans that wouldn’t be saving before and that’s been particularly positive for millennials. I mean I find it quite frightening before auto enrollment how many of even my friends, I'm a little bit too old to be millennial were working for relatively small companies and had no pension savings. So, I think auto enrollment has been fantastic and the auto escalation that we've been through this year and will go through next year is another fantastic step towards helping people have a comfortable retirement.

Wall: It's not a catch-all though, is it? Because the other thing about millennials is they are more likely to be self-employed, they are more likely to change careers and jobs more often, building up tiny parts, or not even crossing the threshold the £10,000 annual income threshold to kick start that auto enrollment. So that’s a concern isn’t it?

Felgate: That’s definitely a concern. If you think about a millennial may have a couple of different jobs and if each job is below the £10,000 then they are not being auto enrolled into those pension schemes. And I think that’s very tricky and there is also the fragmentation of your part. So typically, baby boomers would have maybe one or two jobs for life.

I certainly know my father if there hadn’t been an issue with his company he would have worked for one company literally his entire career. Whereas I have already had four different roles and I am not a millennial, but millennials typically will have many more jobs.

So, I think there is difficulty around managing those fragmented parts. But the pensions dashboard that’s – is due to come in will really help with that. But I think we do have to get the message out is two-fold.

The message to people that are self-employed or have multiple jobs is really get yourself into a pension, get saving even if it’s a little bit. And then those people that are saving I think you know that 8% that we are going to reach next year quite frankly just not enough. You need to get to about to 15% at least as a rule of thumb saving for retirement.

So, I think kind of the two messages we'd like people to take is start saving towards your retirement and if you are already saving then think about 15% as your long-term goal.

Wall: Claire thank you very much.

Felgate: Absolute pleasure. Thank you Emma.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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