How would you describe young people’s attitudes to financial products? Financially adventurous? Risk-loving? More likely to take a chance?
If you already have clients between 22 to 30, then maybe the above do apply. I imagine these people are likely to be professionals earning at or above average salaries and who already have some savings. They probably want and can pay for professional financial guidance in developing investment portfolios that match their more robust appetite for risk.
But it may be unlikely that your younger clients are in Nest’s target market – younger people earning on average £16-18,000 a year who have not saved in a pension scheme before. It is these young people, and the rest of our target market, who are at the heart of the investment strategy we recently shared.
Our research shows that, on balance, our target group is more risk-averse than risk- seeking, with a large proportion (37 per cent) of the target group favouring taking no risk whatsoever with retirement savings. Our research shows people in our target market have some of the strongest reactions to (even hypothetical) short-term investment loss, including disappointment, anger, surprise and incredulity. Loss aversion was observed most strongly among the young (who often described themselves as risk-seeking) and those on low incomes.
This research has helped to define our investment approach, which is rather different from current default strategies and which has attracted both support and some more critical comments.
I would say that after years of research and consultation, we are confident we know the characteristics, attitudes and potential behaviour of our likely membership pretty well – we also know some of our members will have different characteristics and aspirations so we have made sure they are provided for with a range of fund choices beyond the default.
We are committed to getting our approach right for all our members, even if that may seem to be at odds with what some people would expect of a typical pension scheme today.
So, the sorts of words we would attach to our members – based on extensive research – might include much less racy terms than one might ascribe to younger clients in existing pension schemes.
How about “less able or willing to absorb financial loss than those currently saving”, “less seeking of investment risk and less likely to be aware of inflation risk” and “sensitive to volatility and loss and the most likely to act adversely in the face of such volatility” (by this, read: stop saving).
This may not sound like a membership that warrants an investment strategy aiming to shoot the lights out in the early years and you would be right. The most important thing is to get these members into the savings habit and keep them saving in those initial few years.
How do we do this is the earliest years of their saving career? We do it by reducing the probability of younger members who are brand new to investing seeing repeated negative returns or big losses in their early years.
We achieve this by sub-dividing the time over which members build up their pots in Nest retirement funds into phases, starting with the foundation phase – of about three to seven years – where we have an objective to achieve returns that match the consumer price index. The balance between return and income-seeking assets is likely to be more in the 50-50 region for this phase.
But rest assured they do not stay here for long. We fully understand and appreciate the need to expose our members to a high proportion of carefully risk-managed return-seeking assets for the lion’s share of a member’s career where they join us at a younger age.
After three years of being in the foundation phase we will start moving members into the higher-risk growth phase portfolio. By 30 at the latest, they will be fully in the growth phase with an objective of delivering CPI plus 3 per cent after charges. This will be delivered through a bigger allocation to return-seeking assets such as global equities, property and emerging market and corporate debt.
Our younger members will spend the vast majority of their time with Nest in the growth phase but only after we have gradually introduced them to higher levels of investment risk.
It is also likely that what is being paid into their pot will be relatively small – our target market in the age group we are talking about will only be earning, on average, about £16,500. This is 25 per cent less than those at the same age who are already saving and nearly half the average earnings of everyone currently saving in a pension scheme and, perhaps lower than what even your youngest clients typically earn.
In part because of the size of their pots in the early years, investment returns in this phase of these members’ savings career will have limited impact on their ultimate retirement income, because there is less capital at risk.
We are confident that the investment strategy we have developed based on our research is right for our members. You can have a look at the evidence base in more detail at www.nestpensions.org.uk