Young adults too immature to engage with pension saving

Young adults are not mature enough to engage with pension saving, a new report published by the Pensions Policy Institute (PPI) has claimed.

The report, based on research carried out by Hayley James, a PhD student at The University of Manchester Institute for Collaborative Research on Ageing, has concluded that “threshold” adults — individuals aged between 25 and 39 years old — are not engaging with workplace pensions as they are still establishing themselves in adulthood.

James, whose PhD was sponsored by the PPI and the Economic and Social Research Council, says that people are taking longer to settle into adulthood, partly because traditional markets such as marriage and parenthood are occurring later on in many people’s lives, but also because the adolescence is carrying on for longer than before. According to James, life stage academics believe that adolescence only ends at the age of 24 in many cases.

The process of getting established as an adult often includes various financial and social factors such as income, home ownership and major life events.

“Considerations of income are highly subjective and mediated in relation to how threshold adults perceive their establishment as an adult,” writes James. “This relates to current income and expected incomes throughout their career. Income may not be a driver of engagement with workplace pension saving, but rather facilitates participation once an individual feels established enough to engage with it.”

Home ownership is also an important priority among threshold adults, according to the report, not just in financial terms but also because it contributes to a feeling of social stability, which may support participation in pension saving.

In addition, life-changing events such as marriage and having children are markers of establishment. James says that these provide a platform for thinking about and saving for the future.

The report argues that its findings raise important policy considerations. These include recognising the complex situations that “threshold” adults find themselves in and providing them with specific support to help them prepare for later life. Help could be delivered in better-targeted communications driven by touchpoints such as pay rises or having children.

James interviewed a number of employees aged 25 to 45 years old who have experienced automatic enrolment as part of the research and found other psychological barriers to engagement.

These were related to present bias, which leads people to prefer immediate benefits over future benefits, and myopia, which may lead to a preference for leisure or enjoyment in the short-term at the expense of long-term saving. The report adds that this reluctance to save may be coupled with optimism bias which can see “threshold” adults overestimating future financial resources, such as income or inheritance.

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