How can financial resilience enable social cohesion?
Pension auto-enrolment has been a success, but major questions remain
Britain’s savings rate as a nation has been in decline for many years and at the lower end of the income scale, millions have little or no financial cushion against hard times. A recent survey by the Money Advice Service suggested that 16m adults in the UK have less than £100 in savings, and that in five regions more than one in two are in this situation.
The effort to address this widespread lack of financial resilience has numerous strands, ranging from the drive to promote workplace pension saving; new financial products such as ISAs that qualify for government top-ups; growing emphasis on financial education; the use of simpler language to explain products; and a re-examination of the rules on what exactly constitutes regulated financial advice so that people can gain easier – and especially cheaper – access to help when they need it.
In a pair of wide-ranging discussions at the Conservative and Scottish National Party conferences, organised in partnership with L&G, Prospect brought together expert panellists to explore these issues and suggest ways to plug the gaps in the UK’s efforts to encourage and enable greater saving.
One of the commonly acknowledged successes of recent years is the auto-enrolment system for workplace pensions, which is still being rolled out but already includes more than 6m people – “the most successful IT scheme you’ve never heard of”, according to Jackie Noakes, Managing Director of Mature Savings at L&G. The impetus to save that eligible workers received by being automatically opted into the system had encouraged a very high percentage of them to stay inside – opt-outs were very low, which showed how the scheme had “harnessed their inertia”, said Jane Vass, Director of Policy and Research at Age UK.
However, in spite of the success of pension auto-enrolment, major questions remain. David Willetts, Executive Chairman of the Resolution Foundation, pointed out that to date only larger employers had joined the scheme: “A lot of the tough implementation battles are still to come,” he said. “It’s this year when the smaller companies, the newsagents and fish and chip shops, introduce it. So far we’ve done the easier bit.” Jo Cumbo, Pensions Correspondent of the Financial Times, said that for all its success, coverage remained a serious weakness of the system, with millions excluded either because they are under 22 or because they earn less than £10,000 a year. John Glen MP, Parliamentary Private Secretary to Chancellor Philip Hammond, argued that the employee’s initial contribution rate is too low to build up a meaningful fund and would have to go up significantly, at which point people’s willingness to stay opted-in would be put to the test.
Much of the discussion at both events explored the balance between measures such as auto-enrolment that are based on “nudges” – default options that most people will not opt to change but that stop just short of outright compulsion – and on the other hand the need to provide better financial education and greater access to high quality help and guidance, so that people can take a more active role in ensuring their own wellbeing and exercise choice more confidently.
Professor Robert Wright of Strathclyde University echoed John Glen’s strong emphasis on financial education and said his research into financial literacy had focused on three central concepts: the principle of compound interest, the difference between nominal and “real” (after-inflation) returns, and the benefits of risk diversification. His findings suggested that levels of financial literacy in the UK were similar to other countries but were nonetheless very low. This had to be addressed in schools, he argued: “There’s a clear message from the research – you can’t fix this when people are adults… It looks like the roots of financial understanding are formed even before they get to secondary school. Early intervention is critical.”
However, for people past school age who were struggling to manage their finances, other approaches were needed. Part of the solution would be to tighten the legal definition of financial advice so that trusted organisations such as employers, financial charities and the new guidance service created by the planned combination of Pension Wise, the Pension Advisory Service and the Money Advice Service could go further in the individual help and guidance they were able to give people.
Ted Hart, Head of Public Affairs and Policy at L&G, welcomed this. “If I were to say to you, ‘it’s a great idea to save into a pension because the government will put some money in, your employer will put some money in, and as a rule of thumb saving for the future is a good idea’, some market participants might be worried that I’ve just breached the Financial Services and Markets Act,” he said. “To me, that doesn’t feel like advice. It feels like information and I think the government’s looking to address that, which is good because many tell me they are finding it very difficult to have honest conversations with customers without having to refer them somewhere else for full advice.”
He also argued that the “plumbing” created by the auto-enrolment pension system for making regular deductions from the payroll could be used to provide other products such as the insurance-based “rainy day guarantee” that L&G has advocated. The company believed that for about £11 a month in insurance premiums, it could guarantee to replace about half the income of people on average earnings who lost their job or were unable to work. This was almost double the level of replacement income guaranteed by the welfare system
Similarly, Jane Vass believed that the automatic opt-in system now used for workplace pension saving should be extended so that people who reached retirement could automatically transfer their fund into a default product that would provide a retirement income without the need to shop around and become experts in financial planning.
However, beyond attempts to learn from the experience of pension auto-enrolment and apply the lessons more broadly, the speakers agreed that one quick way to encourage more pension saving and direct the state’s support where it was most needed would be to abolish higher-rates of tax relief on pension contributions and replace them with a single, flat-rate government top up worth 20%-25% of whatever the individual put in. This would tilt the state’s support much more firmly towards lower earners who needed the most help and encouragement to save.
John Glen supported this idea: “Given the new Prime Minister’s emphasis on a society that works for everyone, I think there needs to be some serious examination of how we can rebalance incentives towards the lower income strata of our society because unless we do, how are we evidencing a serious intention to meet that goal?”
Better savings products and wider access to financial guidance would do much to address the nationwide shortfall in financial understanding and resilience, agreed George Kerevan MP. But the underlying issue was inextricably linked to Britain’s problems with low and stagnant wages. “Above all, real incomes are not rising and how can you save if your real income isn’t going up?” he asked. “So we really have to resolve the income issue, because if we get incomes rising again we can address the savings problem.”
With the support of Legal & General, Prospect hosted a series of events on financial resilience at the 2016 Conservative party conference and the 2016 SNP party conference. Andy Davis, Prospect’s Finance Editor, chaired the discussions. Speakers included: John Glen MP, PPS to the Chancellor of the Exchequer; George Kerevan MP, member of the Treasury Select Committee; Dr Paul Monaghan MP, Vice Chair of the APPG on Debt and Personal Finance; Jackie Noakes, Managing Director of Savings, Legal and General; Ted Hart, Head of Public Affairs and Policy; Josephine Cumbo, Pensions Correspondent, Financial Times; Sharon Bell, Head of StepChange Debt Charity Scotland; Jane Vass, Director of Policy and Research, Age UK; David Willetts, Executive Chair, Resolution Foundation; and Yvonne MacDermid OBE, Chief Executive of MoneyAdvice Scotland.
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