Levelling up in pensions? Younger workers are playing on bumpier fields

It’s almost 10 years since rules came into force to automatically enrol workers into workplace pension schemes. It was one of the most positive moves to help protect the financial security of older people since the introduction of pensions themselves. Yet, as we rightly celebrate the milestone, we need to acknowledge that there’s still a long way to go to tackle pension inequalities for groups such as workers under 22 years of age. 

For workers under 22, even getting started on their savings journey can seem like a step too far.

The main issue for those under 22 is that they fall below the current age threshold for auto-enrolment, which means that while some may be offered membership of a pension scheme by their employer from age 18, most aren’t.

In our latest research, Legal & General looked at what’s happening in terms of workplace pension provision from the perspective of those who may be in a position to receive it¹ and we found some troubling trends among women and younger workers who disproportionately make up the lowest paid group of workers.

Understanding the rules – knowledge is (pensions) power

We found that around half (49%) of those under 22 knew that if you earned less than £10,000 a year, you didn’t qualify to be auto-enrolled into your employer’s workplace pension.

However, 62% of young workers didn’t realise they could ask to be enrolled if they earned less than £6,240, while most under 22s (56%) were not aware that employers wouldn’t have to make contributions on the first £6,240 of their income.

Once they know their entitlements, there is a significant appetite to join a pension. Overall, 29% of the under 22s said that if they’d known they could, they would have asked to join their workplace pension even if their employer did not contribute to it. And nearly 20% would have asked to join their workplace pension if they’d known that their employer would make contributions. Both statistics suggest that better education by pension providers and employers would make a difference to pension savings choices in those under 22.

Some of those we interviewed were surprised to hear that the employer and government paid into workplace schemes, as they thought that all contributions came from their wage packet alone.

For instance, one 21-year-old man changed his view about paying into a scheme after a moderator told him that his pension wouldn’t just be from money deducted from his salary. He shifted from saying: “It's not something I’m too intrigued by or too involved in. I just know some money that I get paid goes deducted and gets put toward the pension. That's not something I would see until obviously I get old …”, to commenting: “If I put in and the employer puts in, that’s fair. I might not opt out as soon as I hear about it, you know, so I might keep it running for a while.”²

And it isn’t just awareness of rules around auto-enrolment that might make a difference to retirement saving behaviour; it seems that there’s considerable confusion around pensions in general. As one of our female interviewees aged 30 put it: “You leave school and you're literally thrown into the world to do what you want. And you know, for the first few years of your working life you are literally earning money and spending it. And actually, you know, we should be more educated on things…like pensions and savings and investments”.³

More than half of younger workers (54%) believe that the amount they’d be saving would be so low that it wouldn’t be worth it. This indicates to us that there’s still a long way to go to ensure that people understand the mathematical basics of pensions, such as how compound interest works so that even small amounts can add up significantly over time, the importance of starting contributions as soon as possible, and the value of employer contributions.

Removing barriers and levelling up

Our interviewees showed strong support for removing the current barriers to saving. Young people couldn’t understand why they were being treated differently to older workers with 72% agreeing that employees aged under 22 should be treated the same as those aged 22 and over and be automatically enrolled into a pension.

Almost three-quarters (72%) of young workers would like to see a more progressive system that offers additional support to low earners, as is the case in Australia.

Other ideas that might tempt the under 22s, to pay into a workplace pension scheme included:

• being able to turn contributions on and off (77%)
• being able to access some of your pension to pay back later (70%)
• if contributions were paid on every pound of earnings (59%)
• if there was a tax break where the government matched your contributions up to a certain limit (75%)
• if your spouse could share some of their employer contributions with you (67%). Men were keener on this than women (72% versus 60%)
• if the pension could be accessed before retirement for emergencies/life events (79%)
• if their pension also worked like a lottery with the possibility of a windfall payment every month (69%)
• if there was reassurance from the government that other state benefits wouldn’t be impacted (80%)

At Legal & General, we support the recommendations in the government’s 2017 review of auto-enrolment to lower the age threshold from 22 to 18 and remove the lower limit of qualifying earnings.

We’d also like to see government, regulators and those of us in the financial services industry working even harder to promote pension benefits more clearly. And perhaps there’s an argument for examining the case for financial education in our schools.

Onwards and upwards for auto-enrolment

The success of auto-enrolment is reflected in the fact that nearly three-quarters (73%) of the workers we surveyed across different age, wage and gender categories, now have a workplace pension, and that nearly all of these (94%) are paying into it.

It’s also heartening to hear that once they understand the benefits, many workers are interested in signing up to a workplace pension.

So, despite the challenges for groups such as younger workers, there are signs that by developing the current auto-enrolment model to be more inclusive, and through re-doubling efforts to boost knowledge of pensions, we could extend the reach of this precious employee benefit to help improve the retirement prospects of older people after their years of hard work.

1. Research carried out in summer 2022 by Ignition House on behalf of Legal & General Investment Management (LGIM). The research sampled 5,259 people in the UK private sector workforce in groups split into three broad categories:

• Those employed aged under 22
• All those earning less than £10,000 a year
• All those earning over £10,000 a year with or without a DC pension and aged between age 22 and 65

2. Full quote: “I've heard people speak about pensions and stuff like that but they always mention that it won't really affect me until later on. It's not something I am too intrigued by or too involved in. I just know some money that I get paid goes deducted and gets put toward the pension. That's not something I would see until obviously I get old - or something like that.”

[Moderator reveals employer and the government also pay into pensions]

“If I put in and the employer puts in, that’s fair. I might not opt out as soon as I hear about it, you know, so I might keep it running for a while. Yeah. See if I can find out more about it from family and friends” Male aged 21.

3. Full quote: “You don't learn about it (having a pension) in school. My mum was always shouting when me and my brothers were in school that you should learn how to do banking and how to manage taxes and what national insurance is and all of that. That's what they should be teaching you in school, functional skills for life, knowing how to actually manage your money is something that we don't know about. You leave school and you're literally thrown into the world to do what you want. And you know, for the first few years of your working life you are literally earning money and spending it. And actually, you know, we should be more educated on things like this. Things like pensions and savings and investments.”  Female, aged 30.