Pension scheme design impacts timeline to first-time home ownership

Young people face a “financial trilemma”: Saving for retirement, building a house deposit and rising living costs

Pension scheme design can materially affect the timeline for first-time buyers to purchase a home, according to new research* from Hymans Robertson. The analysis, from the leading pensions and financial services consultancy, examined how different pension contribution structures affect the ability of young people to save for a house deposit, and retirement. Modelling a 25-year-old earning £30,000, the findings show the impacts that a range of different scheme designs can have on the timeline for younger employees to get onto the housing ladder and, on their broader pension and total wealth. It showed that under a matched-contribution structure, younger employees could potentially wait more than a decade to save for a deposit, while a fixed employer contribution structure could shorten that timeline by several years. The firm is calling on employers to look at their pension scheme design and contribution structure to help their employees reach their significant financial goals. 

The analysis also showed that employers can use the way they link contributions as a simple lever to support their members. By separating employer pension contributions from employee matching contributions, they’d allow younger employees to save for both a home and their retirement. Additionally, by paying a fixed contribution, employers can give members more flexibility early on, while still providing consistent pension support, enabling young people to build a deposit without abandoning pensions altogether. 

Speaking about how a more deliberate approach to pension scheme design can be significantly impactful on the younger generations’ ability to meet critical life milestones, Hannah English, Head of DC Corporate Consulting, Hymans Robertson, said:

“Young people are under financial strain from multiple angles. They have to contend with rising living costs, whilst building a pension pot and saving for a house deposit. What our research really shows is that the design of a pension scheme can make a genuine difference to how manageable big financial decisions can be for younger employees. The way contributions are set up doesn’t just shape retirement outcomes far in the future, it can also influence the timing and affordability of achieving other goals, like buying a first home.

“Different approaches lead to very different results. More generous matched contributions can be great for long term pension saving, but they can also mean it takes much longer to build up a deposit for a house. The maximum pension match level outlined in our analysis (8% + 8%) could lead to home ownership after around 14 years of contributions. Reducing contributions and increasing saving amounts for a deposit could shorten that to nine years. However, the trade-off of this may be less engagement in pensions and missing out on generous employer matches. 

“Approaches that allow a bit more flexibility at different stages of life can help people make progress on housing sooner, while still keeping them engaged with pension saving. Modelling for a fixed employer contribution (8%) allows for increased saving for a house deposit, with the timeline to a first home reduced to just seven years.

“This highlights how much influence employers can have through the decisions they make on scheme design. The structure of contributions can either force people into difficult trade offs or, give them more room to balance competing priorities early in their careers.

“For employers thinking about how best to support their employees and their financial wellbeing, this underlines the value of taking a step back and looking at pension contribution design more deliberately. Using modelling to understand how different strategies can influence member outcomes can aid decision-making in developing strategies that support both long term security and the real world pressures younger employees are facing today.”

*Read the paper here: Can pension scheme design help younger members onto the housing ladder?

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