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To Save, or Not to Save: The Question of Prioritising Pensions and Provision for Later Life

What do people think about their workplace pension and what motivates them to pay into it? Why do some people prioritise pension savings and others put it off – and what alternatives do people see for providing for themselves in later life. Hayley James’ research at the Manchester Institute for Collaborative Research on Ageing (MICRA) looks at our experience of pensions – and asks key questions around provision for later life.

Why is the economy of ageing an important area for research?

The economics of ageing is important for social reproduction in terms of maintaining our society, but it doesn’t always get attention, especially not academically, with some notable exceptions such as Robin Blackburn who wrote two books Banking on Death and Age Shock, which talk about the impact of the financialisation of the pensioner system.

On the whole, pensions have been treated as a political issue - the ‘demographic time bombs’ - and worries that pensioner numbers will increase so much that we aren’t going to be able to afford the pension system. But to some extent, these ideas are constructed or overblown for political purposes rather than really being about what is going on in these systems.

Now, there have been more recent academic research looking at the structural inequalities in pension systems, around things like gender, from research leaders such as Professor Debbie Price at the University of Manchester and Dr Jo Grady at the University of Sheffield.

Pensions have a heteronormative and patriarchal foundation and tend to privilege the male experience.

They tend to assume male patterns of life, so they don’t really make allowance for women taking childcare breaks, for example, or working part-time while they’re looking after children. And what those things result in is that women get lower pension entitlement, which is worrying.

All these more structural approaches highlight overall tendencies, but there is also a lot of variation in what people do within the system. For example, we know that young people tend to pay less into their pension, but there are also some who pay a lot into their pension, and we don’t really know what’s driving those sort of behaviours.

My research builds on the understanding that we have of the pension system but looks at how people actually think about their pension and rationalise it. Why do they think it’s a good thing, what does it mean for them, and what does that mean in terms of the action they take around it?

"It’s well-documented that young people don’t seem to be saving as much toward their pension as previous cohorts…but what I’ve seen in my research is that this is partly because they are focused on establishing themselves as an adult."

The idea of the “old age pensioner” is relatively new, historically – how does that affect the way we understand the system?

The way we understand pensions today has only really been about since the post-war period. The 1950s, with the start of the welfare state and the introduction of the state pension, was the first incidence of a mass entitlement pension in the UK.

However, pensions have quite rapidly become embedded in our social psyche as the way of providing for older age. Then obviously since that period, we’ve seen this move from defined benefit pensions, where you have a fixed entitlement after you retire, towards defined contribution pensions, where the amount you get when you retire is subject to the amount you pay in. Also, the way that has been invested and the returns on that as well, so it’s a lot riskier.

That change has come about significantly since the 1980s, but pretty much the vast majority of people nowadays, and going into the future, will be under this defined contribution regime. This means that people may need to be a lot more active in managing their pension than previous cohorts who relied on defined benefit pension schemes.

Is age a motivation in the way people approach their pension?

I found in my research that motivation is not so much age as subjective life positioning - how you feel about your age.

It’s well-documented that young people don’t seem to be saving as much as previous cohorts, or little to provide for their later life, given this change to state pensions and defined contribution pensions.

But what I’ve seen in my research is the reason young people don’t pay so much into a pension is that they are focused on establishing themselves as an adult.

I’ve been referring to these people as ‘threshold adults’, meaning people who are past adolescence but they don’t feel like they are like a fully fledged adult yet; they are still in the process of establishing themselves.

"The thing that surprised me the most was that pretty much everyone in my research hadn’t really thought about their future - what they want from later life - when making a decision about their pension."

They might say, “I want to buy a house,” or, “I want to get married”. And what they are saying is, “At the moment I just want to focus on these goals of establishment.” And these kind of things are taking longer because of instability in housing and job markets and people getting married later.

It’s easy to see how people are pushing pension thoughts back into their late 30s. I had participants of 40 years old still saying, “Well, I’m still young. I’ve got plenty of time” and “Once I’m established, then I’ll start thinking about a pension.”

So it’s not so much about your chronological age as much as how you feel in terms of establishment.

How impactful are intergenerational factors?

I interviewed people aged 25-45, and what I noticed clearly was the role of their parents in influencing decisions. They were encouraging their children to save, but often the kind of recommendations they were making were quite general; “as long as you’re paying into a pension, you’ll be fine.”

If you were born in the ‘50s and ‘60s, you are likely to kind of have a more defined welfarist and a benefit-oriented system where, as long as you paid in, you would be fine, you would be looked after. And that’s not the case now.

So sometimes I felt concerned that people had followed their parents’ advice, thinking they were doing the right thing, but actually knew little about what their pension system was likely to offer them in later life.

What motivates people to pay or not pay into a pension?

Two types of rationale kept coming up - the first way was what I called the moral rationale. These are people who thought pension saving was a responsible and sensible thing to do. They tended to be happy to be part of the workplace pension and felt that they would be okay in later life as long as they kept on participating.

Learn more about the work of MICRA Ageing Network HERE.

For more information on how to pay for care, check out our helpful guide The True Cost of Care.

The second was more market-based and focused on the returns involved in pension saving. Usually, these people felt the pension was positive because there was a good return associated with it, in the form of employer contributions and tax breaks.

So even if in the long term they couldn’t predict what would happen with their pension, how much it would be worth in say, 30 or 40 years, they knew in the short term those benefits made it worthwhile for them. And these people were much more individualistic about their pension.

They didn’t seem to be entirely confident that a workplace pension would deliver what they needed for later life, so they had other saving and investments alongside.

Both of these understandings make sense and clearly relate to a lot of the political discourses around pensions as well. But there are challenges with both of them.

In terms of the moralistic one, what if people do get to later life and haven’t got enough – then they are likely to feel really let down by the system they think that they have been doing the right thing by participating in.

Then in terms of the market approach - not everyone can afford to save extensively alongside the pension, so really, a pension system needs to pick up for people who can’t be quite so individualistic.

One thing that was very interesting is that there appeared to be a gender effect where women were more likely to rely on a moralistic rationale for their pension saving, while men tended to draw more strongly on the market rationale. This is something I’m investigating more, but it may link to the privileging of male patterns of behaviour and understanding in constructing pension systems.

Why did people opt out of workplace pensions, and what other solutions did they envisage supporting themselves in old age?

Some people who had opted out still intended on having a pension, they just didn’t want to pay into it yet. But there were other methods that came up: housing was by far the most popular alternative solution; people either saying they would downsize in later life or who wanted to own more than one property and rent that out.

Other things that were mentioned included investing in a business, saving through different financial products and investments in art and watches.

I would still encourage people to have a pension, but then again in a world where we are all exposed to significant market risk through defined contribution pensions, it should be okay if people decide they would rather face that risk in different ways. If they feel more confident that their artwork is going to provide for them in later life, and that means they worry less, then maybe it’s the right thing to do.

However, I do feel strongly that fundamentally our pensions should not be exposed to market risk to the extent they are currently, and that more should be done to provide some stability in later life for when markets let people down.

What is the biggest challenge to making decisions about a pension?

The thing that surprised me the most was that pretty much everyone in my research hadn’t really thought about their future - what they want from later life - when making a decision about their pension.

This could be defensive avoidance, but lots of people highlighted that is also just practically difficult to know what your life will be like 30 or 40 years in the future.

Society changes so rapidly and there are changing cultural expectations of retirement in later life, which means there isn’t one established path to follow, so people can’t really plan to any great extent what the future will be like.

So what I found is that their pension decision was much more engaged in the present context concerning what they could afford or what was appropriate given their current stage of life, rather than their imagining of the future.

PPI have published Hayley James’ report on workplace pension saving amongst people in the early stages of adulthood and is available to download HERE.

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