Back to the future?

What are millennials and Generation Z, the two generations born after 1980 and 1996 respectively, doing with their money? We know from the Financial Conduct Authority’s research, Financial Lives, published earlier this year, that Britons in their twenties and thirties have relatively small amounts of savings, particularly in assets other than cash. But official statistics also reveal that by 2020, these two groups will together account for more than half of the country’s working population.

In this context, a short interview given last week by Alex Denny, head of investment trusts at Fidelity, caught the eye. Speaking at Citywire’s Investment Trust awards, Denny urged his colleagues across the closed-ended funds sector to reach out to the tens of thousands of company pension schemes that have been launched in recent years under the auto-enrolment system.

Now that all employers have to offer their staff a pension, Denny pointed out, even cash-strapped younger people are building up pots of long-term savings. But very often this money is invested in the default funds offered by the pension provider their employer has contracted with. These vehicles are invariably over-cautious, particularly for younger savers, and rarely inspiring.

Investment companies, by contrast, offer the prospect of professional management, competitive charges, diversification and, above all, attractive long-term returns. We all know the caveats about what past performance doesn’t tell us about the future, but time and again studies have shown investment companies beating other types of fund, all other things being equal. The most recent research, published earlier this year by independent researchers at Cass Business School, reached the same conclusion once more.

In other words, investment companies have much to offer savers making regular contributions to a pot of cash that they one day hope will deliver them a decent retirement income.

Closed-ended funds already feature in many people’s pension planning of course, either where they have opened a pension plan with an investment company that offers such a wrapper around its funds or because they’ve bought investment company shares through a self-invested personal pension (Sipp).

By and large, however, occupational pension schemes have not been major investors in the investment companies sector. The long-established schemes of bigger employers might now offer access to investment companies by providing members with more flexible fund choices, but this is still unusual. And employers launching new schemes in recent years in order to comply with the auto-enrolment regulation are even less likely to offer any exposure to the sector.

Financial advisers have a role to play here. Many advisers offer strategic advice to corporates as well as individuals and should be supporting employers in offering more rewarding investment options through their pension schemes. Those who work solely with individuals should be raising the profile of investment companies with this audience too; in fairness, many are already doing so, with advisers’ purchases of open-ended funds having soared over the past five years.

The next generation deserves better from its pension investments. Auto-enrolment is a huge step forward, ensuring that millions of Britons who would otherwise have had no pension savings at all are now putting money by for the retirement. Millennials and Generation Z, in particular, are not likely to be making any other long-term savings. Still, if we continue to allow this money to be channelled automatically into mediocre investment vehicles, we will be missing a trick. Having found a way to get younger people in particular to save more – and secured a contribution from their employers – let’s make the money work as hard as possible.