How can the financial services industry fill the savings policy vacuum?
When asked if they wanted to buy a house or a car, most people would happily answer a resounding yes. But would people respond as eagerly when asked if they wanted to buy a pension? The sad answer is “no” according to Matt Ward, communications director at AKG Financial Analytics, who chaired a recent Financial Services Forum event on the issues surrounding long-term savings.
Pensions, he said, have been long regarded as obscure, not to mention unappealing. For this reason, among many others, concerns are running high about how to fund an increasingly aging society’s needs and wants − UK consumers are only too happy to borrow (and spend) but reluctant to save.
How big is the policy vacuum?
Not all the panellists were entirely convinced there is a complete policy vacuum. The government and the Financial Conduct Authority have taken some steps to bridge the savings gap – auto enrolment being an example.
This has brought in 8 million new savers and has led to more demand for investment products by pension schemes. The fact that opt-out rates are very low is encouraging for the industry according to panellist Chris Curry, the director of the Pensions Policy Institute.
But Curry stated that there are almost the same number of employees outside the scheme who do not qualify. The auto enrolment review focused on whether the right people are being covered. While the spread of auto enrolment may benefit asset managers as pension schemes hunt for more and more avenues to invest in, there are also some risks involved.
First, if the current economic gloom prevails, then the question may arise of whether the slowdown is partly attributable to increased savings via more auto-enrolment. This, according to panellist Tony Langham, chief executive of Lansons, may discourage future politicians from taking the policy seriously in future.
Can the financial services industry do what the government can’t?
The panellists were unanimous in their view that the government needs to develop a long-term savings policy.
But this is unlikely to take off overnight. Panellist Rob Yuille – head of retirement policy at ABI – likened pensions policy in the UK to a slow meandering river.
While the industry can play a role in influencing the policy debate, in the short-term, according to Ward and Langham, the turbulence around Brexit and domestic politics means that developing policy to encourage people to save for retirement is unlikely to be the government’s top priority. Moreover, the Department of Work & Pensions currently has a lot on its plate and is focused on cutting spending, so new policy ideas are likely to be thin on the ground.
Panellist Tom McPhail, who heads pension research at Hargreaves Lansdown, said that while most people can save, they don’t choose to. “The country needs a cultural shift towards more savings,” he said. While this scale of change would require some government action, the financial services industry can also do its part in encouraging people to value sensible long-term investments above the instant gratification that comes from spending.
The trust factor
While the financial services industry is very well regulated and competitive, it is still not doing enough to encourage people to save and invest for the future, according to McPhail. Curry said that one challenge for marketers is to break down inertia. Despite the thick regulatory safety net, people lack trust in the industry overall, and in pensions in particular. This, said Yuille, is partly due to the issues surrounding the increase in the pension age and BHS-style scandals.
The industry needs to work on gaining investors’ trust and encouraging them to do more than just invest in their workplace pension schemes. One way to achieve this is for the industry to focus on giving customers the solutions they are looking for. All the panellists were firmly of the view that more effective customer engagement is the key to this.
A central element of increased customer engagement involves providing more information. When it comes to pensions, ignorance certainly is not bliss. One of the reasons for the country’s savings shortfall, according to Langham, is that people aren’t getting the advice and guidance they need. “A lot of people simply have no idea how money is saved up in their pension pot; when they find out at retirement, they regard it as a windfall rather than investing it”. This means the financial services industry needs to work on engaging with customers before this mindset sets in.
When it comes to proving more information, quality is as important as quantity. According to a recent article by Copylab’s Ross Hunter, the industry needs to work on communicating more clearly and effectively with customers.
Simplicity is the key
In today’s fast-paced world, people have little time and inclination to spend time thinking about pensions. Hence, Curry emphasised that the industry needs to work on making things more simple for customers. Both Langham and McPhail agreed that customers are generally averse to making decisions. In his article, Ross Hunter pointed out that customers feel so disengaged with pension planning that the majority simply go by their employer’s choice of a pension fund rather than thinking through the process and picking a fund for themselves.
So, less may indeed be more – in practice, this means the industry will need to tread a fine line between providing more information and overloading customers with choices. “The industry must accept there are likely to be limits on the amount of customer engagement that it will be possible to achieve”.
Another aspect of simplicity involves making things more accessible. More technology can play a key role here, according to McPhail. Again, the FCA has been somewhat shy in taking the lead. Consequently, most automated solutions are largely ISA-focused. The area around online guidance needs more progress, McPhail said, but app-based simplification is definitely the direction of travel. Thus, financial services firms at the forefront of investing in technological solutions might have a headstart in making their products more accessible for those interested in saving for the long term. While this may mean more competition, one of the final messages from the panel emphasised the idea that the industry needs to be united when it comes to tackling the savings vacuum.
The Financial Services Forum would like to thank Nandini Rao of Copylab for her event summary. Please feel free to download and share the PDF document.