By impacting so many people in such an unprecedented way, the Covid crisis puts a spotlight on some of Britain's underlying savings challenges.
Whether it’s a case of a subconscious herd mentality, peer pressure or trust in Government, through this Covid crisis the vast majority of British people have clearly demonstrated a readiness to comply with direction from Government. Closer to home we have observed the same effect in financial services, where the vast majority of employees have demonstrated their readiness to accept the direction from Government through Auto Enrolment, with over 90% remaining enrolled, and with very few employees opting up, down or away from the default contributions and default fund in each scheme.
In Britain we face a number of savings challenges which have been brought firmly into focus through the current crisis.
A recent publication from the Office of National Statistics highlighted that almost half of British households could not withstand an income shock lasting just 3 months. The current crisis means those who had savings will see them diminished and many with no savings will increase their level of indebtedness. We need to rebuild the resilience of the nation.
2019 was the first year in which research conducted by the Department for Work and Pension found that over half of all new born children were born into rented accommodation, with many born into circumstances which were described in that report as ‘precarious’. The precarious nature of renting was highlighted again in the current crisis with unprecedented Government intervention to protect renters in the short term. A recent paper from the Pensions Policy Institute highlights that renters are on average worse off during their working lives and also worse of in retirement, relative to those who pay down a mortgage and own their home when they retire.
Auto Enrolment has executed successfully the first steps in addressing the retirement savings gap and the Government’s unprecedented furloughing scheme to protect workers income also protected their retirement income by including employer pension contributions. However, more needs to be done. Auto Enrolment excludes low earners, younger workers, the self-employed and many woman who leave employment for long periods to undertake caring duties. We also know that 8% isn’t enough, and when people have to opt out due to reasons of financial hardship their employer’s pension contribution can be confiscated to compound hardship today into hardship in retirement.
I am a firm supporter of education, engagement, guidance and advice as key building blocks to improving the nation’s financial wellbeing. At present however, the number of complex choices and decisions which people need to make means that the level of the education, the complexity of the guidance and the cost of the advice will always be beyond the reach of many in our society.
If we defaulted people into a savings framework which built financial resilience, helped young people secure a deposit for their home and ensured financial security in retirement, the evidence suggests that the British people would trust the framework set out by Government and stick with it. This should be directive and not mandatory, with those people who wish to deviate from the default position being able to do so. The level of education, guidance and advice required to deviate from a strong default position should be significantly less than is the case today and far fewer people will require support in making complex decisions.
In my view, a default lifetime savings framework is best underpinned by a single, simple lifetime savings product, with good governance, strong consumer protection and with flexibility appropriate for the 21st century.