This article was originally commissioned for the September 2018 edition of the Investment Life & Pensions Moneyfacts Magazine. Tom Murray says it's time the life and pensions sector started giving millennials what they want in order to increase their low uptake of financial products.
Millennials are truly a divergent generation. Their approach to life is poles apart from their parents’ generation. As such, any company that approaches marketing to millennials in the same way as they have marketed to previous generations is going to make itself irrelevant very quickly.
A recent article in the Financial Times illustrated this difference starkly. Asking a millennial and an older staff member to save money, the approaches taken were radically different. Both got tips from their friends and colleagues in their own circles, so the result was loosely reflective of the approach of their respective peer groups.
Whilst the older staff member took the approach of cycling to work and bringing in her packed lunch, the younger one continued to eat out and commute but used apps to find out where to eat cheaper and how to get cheaper fares. The approach of the younger one was to use technology to have the same or a least a similar lifestyle at a lower cost as opposed to sacrificing activities or conveniences.
This is fascinating as it seems to indicate that the standard approach of getting people to save by urging them to sacrifice now in order to have a comfortable lifestyle later is not one that is going to have much resonance with those in their twenties. But that does not mean that they are unaware of the need to provide for the future; it’s just that they are less likely to take a puritan approach to it. They want to keep living the same way and are in a position to do so, having realised that they can use technology to fund a lifestyle somewhat more lavish than their on-paper finances can sustain by ensuring that they are in a position to get major discounts on all that they do.
OMNICHANNEL RETAILING AGE
Interestingly, this chimes with current strategic marketing thinking that is based on the belief that younger people are less driven by possessions than by experiences and are far more likely to spend on an occasion than on a material thing. This trend could dramatically change the attitude of the whole business world as they shift their marketing paradigm to deal with the fact that millennials are tempted not so much by ownership as by the experience that ownership provides.
A report by EY in Japan on the emergence of what they describe as the omnichannel retailing age is very clear that the number one consumer trend is the prioritisation of experiential value. This has become the new vogue in retailing and huge efforts to create experiences rather than just sell products are being made by all major retailers such as Apple, Starbucks, and Virgin and the fact that these experiences are easily shared by the consumer via social media is paying big dividends.
THE ESSENCE OF EXPERIENCE
The question is in what way does this trend towards experiences relate to the financial services sector. The details of financial products are not stimulating but similarly the details of most products are difficult to get excited about. Technology products are a classic example. While there is a small section of the population that are nerdy enough to be able to recite the technical specifications of the smartphone or tablet that they are buying, the majority describe the purchase more in terms of how the product makes them feel and what they can do with it. This is the essence of the experiential approach and it is increasingly popular as producers find more and more ways to involve consumers in the creation of the product / experience directly, thereby giving them more ownership of it. In Japan, this was identified as a key driver two or three years ago and led to car advertising changing to focus on the experiences in Japan that you could drive to in a car, rather than on the car itself.
So, what can we do in the life and pensions sector to ensure that we tap into the psyche of millennials and get them to increase their low-level of financial products. Firstly, we must start to think about the staleness of the current approach. Lecturing people about how they must set aside a significant proportion of their income in order to prepare for a future time when their earnings are lower is a big turn-off for most people and rings hollow with the millennial group, especially as they are at the most expensive stage of their lives. A combination of trying to pay off student loans, lower earnings as they are at the early stages of their career and the desire to experience new things, all the while having the huge issue of trying to afford somewhere to live means that this stage of their life, means that most millennials would believe they have no spare cash to accumulate.
The other interesting thing that leaped out of the FT’s article is the automatic reliance of the millennials to use their smartphones in order to make their money go further. This combined with their preference for lifestyle over possessions means that they have a completely different approach to being retailed to, which is at odds to the way the life and pensions industry tends to operate. For far too many years, the idea that life assurance is sold, not bought, has held sway in the industry. To some extent it is correct, but it has led to an absence of drive to work on the attractiveness of financial products and services in order to pull people in, instead relying on the idea of pushing product out.
However, underlying this trend is a need, which can speak to millennials. If the focus of those in their twenties is on lifestyle, then protecting that lifestyle is a far more important proposition to put to them, rather than just trying to lure them with the idea of accumulating money. Of course, the purpose of having savings and investments is to protect oneself against the swings and arrows of outrageous fortune and yet surely, for the millennials with so many outgoings, actual protection products are far better value to achieve that end than savings.
There has been some recognition of this with the advent of lifestyle protection products. Ingeniously, these have been designed to deliberately target the younger generation by basing it on income protection but reducing the benefits to cost-effectively provide the type of protection they need. Young people are far less likely to have incidents where they can never work again but accidents that cause temporary inability to work, such as a broken limb say, are still going to make life difficult, particularly for the many operating in the gig economy. And this type of work is more frequently indulged in by the young as it fits well with the mores of the lifestyle generation, giving them the flexibility and freedom to work whenever they choose.
However, reality, in the form of rent and utility bills, never goes away completely. A recent report by the respected Resolution Foundation reckoned that of the current batch of approximately 14 million 20-35 year olds in the UK, 50% would still be renting in their forties and a third could still be doing so on the day they claim their pension. This means that there is no end to their need to pay rent and this will be an ongoing process throughout their life. Protection of their ability to pay this rent is key to protecting their lifestyle through the ups and downs of whatever life has to throw at them. By offering to provide income support of short periods of time, the product chimes with the needs of the “experience” generation far better and is also far more affordable for them.
Given the intermittency of work in the gig economy, building up large enough savings to protect individuals against misfortune is almost impossible and yet that is where government policy is currently directed. Of course, promoting savings is a good idea, but surely it should be widened to consider better forms of achieving the same end. A temporary spell out of work will soon wipe out any ISA savings, for example, that have been accumulated by the average worker but if they had spent just some of that money on protection, they would be protected and in a much better financial position when they re-entered the workforce.
The benefits of the lifestyle protection products are that they are focused on providing limited amounts of support for short periods and defined events, for example 12 months support in any 5-year period. Flexible policies allow multiple claims as long as the threshold isn’t exceeded. Other areas covered can be expense protection, payment protection or specific life events e.g. a lump sum in the event of marriage or having a baby. The flexibility of these type of products and the ability to choose suitable cover based on supporting one’s own lifestyle make them the perfect fit for the millennial world.
WORTH OF TAXPAYER SUPPORT
Considering this, one has to wonder if some of the Government incentivising of savings shouldn’t be re-directed towards the protection market. If the kind of support that is currently being given to the auto-enrolment process was redirected to focus on lifestyle protection type products, the millennials would be much better served, and society would benefit enormously, as there would be far less likelihood of having to pay for housing or other benefits to support the individuals who have been temporarily removed from the workplace.
Given the relative youth of millennials and the lack of likelihood that they would require support, these policies can be provided relatively cheaply and would seem worthy of support by the Government in order to bring more stability to the live of the individuals and society in general. Indeed, it could be far more effective than having to provide welfare to those whose need suddenly grows great due to illness or accident.
The question is are we getting the best deal by pushing those on lower incomes to save, or even those on middle incomes but who have a lot of commitments? The original premise of life assurance was the underwriting of risk by a large group to ensure that the burden could be shared. A push back towards increasing the use of this effective approach to providing against disaster might deliver more for the UK than the equivalent in savings.
And, given the success of auto-enrolment, with over 80% of millennials not opting out, it is clear that we are knocking on an open door. Devising suitable, flexible, products and services and making them available easily to the millennial market should be on the top of every life and pension companies’ to-do list.