Millennials* represent 50% of existing pension funds’ membership base, yet they make up a mere 5% of retirement fund trustees. This statistic from the Sanlam Benchmark Survey 2018 is indicative of why Millennials commonly feel disengaged from the retirement planning process and overlooked by the retirement industry.
Millennials have a different set of attitudes and values, and these may not have been incorporated into their cradle-to-grave retirement journey. A recent report by the National Institute on Retirement Security, based in the US, found that only one third of US Millennials have retirement savings. This statistic is likely to be worse in South Africa, with its high unemployment rate, high levels of indebtedness and low savings levels.
How can the retirement industry address this? How can we engage with Millennials and find ways to encourage and entrench a culture of savings and investment?
Engaging this demographic will help the retirement industry adapt to meet Millennial needs. Millennial members are likely to respond better when they feel that they are being guided by financial advisors and boards of trustees who understand their needs. Fellow-Millennials are therefore more likely to influence the investment and savings behaviour of this generation. At a minimum, pension funds should look at whether their boards of trustees are a fair representation of their membership base.
Preservation is paramount
Millennials are likely to change jobs more frequently than previous generations, and are more likely to cash out their pension fund savings when doing so (Sanlam Benchmark Survey 2018, Deloitte Global Millennial Survey 2019). This is perhaps the most critical issue the retirement industry needs to address. Pension fund trustees need to ensure that members understand the long-term implications of their decisions. Although Millennials may be highly educated, they often have low levels of financial literacy with regard to savings, investments, managing debt, and budgeting. In short, they often lack the toolkit to make sensible and empowered savings decisions.
Retirement benefits counselling can help at the point of retirement. Recent amendments to the Pension Funds Act recognise this important decision node. The amendments make it mandatory for retirement funds to ensure that their members receive retirement benefits counselling before making a decisions on their post retirement options. Members, however, would also benefit from ongoing counselling throughout their retirement journey. It is crucial that Millennials’ voices be incorporated in the design and implementation of this type of financial education.
Address the trust gap
This generation has lived through the fall-out of the Global Financial Crisis. They are generally mistrustful of financial institutions, including traditional pension fund solution providers, financial advisors and consultants. A 2019 Millennials survey by Deloitte found that 83% of respondents in South Africa believe business is driven by profit, not by considerations of what is good for society. When attempting to engage Millennials, who are motivated by a strong social conscience, this is an important consideration in engendering trust. Some 29% of respondents in the Deloitte survey indicated that climate change, environmental protection, and mitigating against natural disasters were important considerations in deciding how to invest. In South Africa, 53% of respondents indicated that companies needed to address inequality. Social issues matter to this generation, and they are more likely to invest with a company when they believe it behaves ethically and responsibly
Re-think retirement solutions
Millennials are perhaps more open to what has traditionally been viewed as ‘alternative’ investments. Niche and focused products, which are aligned with their preference for ESG factors, are more palatable to Millennials. They are also more accepting of new technology, including the use of Artificial Intelligence, Machine Learning and robo advisors alongside human knowledge to structure and implement their investment portfolios. A further important consideration is that Millennials, much as the generations preceding them, do not wish to be faced by multiple decision nodes and complex solutions. The move toward default options and toward in-fund annuities is therefore a step in the right direction, but the design of these options needs to take heed of the Millennial voice.
Millennials are expected to have longer retirement years, as medical advances and lifestyle changes continue to prolong our lives. If we can’t convince this generation to start saving, the state faces a significant burden in supporting an ever-growing generation of retirees with longer life spans. Millennials who receive retirement benefits counselling and investment advice in relatable, easily digestible and contemporary form, can make informed decisions about their money. This will allow them to better preserve their pension pot, so that it truly travels with them for their full retirement journey.
Fran Troskie is an investment research analyst at RisCura.