Documente Academic
Documente Profesional
Documente Cultură
Foreword
David Nish, Standard Life Chief Executive
The UK consumer is placed precariously in the eye of a perfect financial and demographic storm. It is universally accepted that many consumers continue to chronically under save for a future which will see them living longer and enjoying healthier lives. Our latest research shows that only 51% of adults are actively saving, with a further 28% choosing not to save. The generations retiring in the future will also not be able to bank on a guaranteed income in the form of a final salary pension provided by their employer, unlike that enjoyed by their parents and grandparents generations. It is with this social, behavioural and economic backdrop in mind that this perfect storm presents us with a once in a generation opportunity for all interested parties to work together to address the fundamentals of this complex problem and transform our savings culture in the UK. This will require long-term commitment from government, the financial services industry, employers and others to support a cultural and attitudinal change in the way people approach financial planning and long-term saving. People need to be better equipped to make confident and well informed choices regarding their long-term financial needs. This means sustained investment by the public and private sectors in improving financial literacy at all levels of society, but particularly the young, empowering them to make well informed decisions over their finances.
Standard Life
The barriers to savings inertia need to be identified and removed. The recent step to introduce a 50,000 annual limit for pension savings is very welcome and provides a solid framework to introduce further measures to simplify the tax treatment of the long-term savings market. NEST and auto enrolment will not only create a new generation of savers, but presents us with an opportunity to achieve cultural change in behaviour and attitudes towards saving. This change is vital if people are to recognise that they need to take responsibility to save the required amount to provide an adequate income in retirement. But to help the consumer do this, we need to develop products around the customer, not the provider, recognising that a one size fits all approach will not work. We need to ensure we provide simplicity and consistency at both the savings and spending stages of the savings cycle. Allied to this, a focus on improving financial education will help to ensure more people make appropriate provision for the future while benefitting the economy and country as a whole. We need to acknowledge the work of the new Consumer Financial Education Body, which with the introduction of the annual financial healthcheck, will play a pivotal role in encouraging families to manage their finances better. This report provides a stimulus for policy makers, opinion formers, the financial services industry and any interested parties to continue to engage in the savings debate. I am delighted that Standard Life is supporting this report from Alan Pickering and Life Academy; it acknowledges the scale of the issues and challenges facing the UK in tackling the savings deficit, while making important and practical recommendations. This report deserves to be widely read and makes an important contribution to the vital task of getting the UK saving again.
Standard Life
Contents
Building a better society Creating a savings culture Consumer perspective
Summary
5 9 10
18
Creating a financial life plan for each life stage We all have a role to play
How can specialist intervention help? Role of the voluntary sector Alan Pickering view Standard Lifes view
23 26
30 30 31 33
35 36
Standard Life
Standard Life
Although we think it is important to have the individual as our focus, we must accept that individuals cannot do it all. There is a role for government, employers, the financial services industry and charities such as Life Academy. What is more, there is no single silver bullet that can be fired by anyone within these sectors. Our case studies show that different people will require different interventions if they are to fulfil their potential and play their part in making Britain an even better place in which to live. Understandably, there is a debate about the role of government in contemporary society. Some believe that government is too big. Whilst this might be true in general, there are still some things which the tax payer and government can still do best. A case in point is the provision of a guarantee against absolute poverty in old age. This is affordable so long as politicians retain the right to redefine absolute and old in the light of changing circumstances. The best way of providing this guarantee is through a simple state pension which is set at a level high enough to ensure that, for the vast majority of our citizens, it will always pay to save. This will make it a lot easier for employers and the financial services industry to restore the savings culture, confident in the knowledge that they will not be charged with mis-selling. Of even more importance, a decent state pension can provide an element of cohesion within generations and between generations. Pension provision inevitably involves some inter-generational transfers. The generations will only tolerate such transfers if they know that there is something in it for them as well. The current debate about welfare reform may become polarised around the merits of targeting and universality. A decent state pension can be both targeted and universal provided that it is aimed at the old and not the retired. If the state pension remains taxable, those who are quite well off in their old age will play their part as tax payers. Achieving our objectives in a way which involves the well off paying tax in old age is much more cost effective and socially inclusive than using the meanstested system to top up the benefits of those who are finding it hard to make ends meet in later life. Employers have three roles to play. First, they should play their part in creating a labour market which is blind to age. Second, they should, wherever possible, use the workplace as an environment in which we can regularly top up our skills. Some of these skills will be vocational in nature while others will focus on life planning and financial literacy. Third, employers can use the workplace as an environment in which financial products can be tailor-made to meet the needs of particular groups of employees. Sometimes these products will be an employee benefit while on other occasions the employer will be acting as an introducer to the provider of such products. Again, there are three things which our financial services industry can do. First, the twin principles of knowing your client and treating customers fairly must influence behaviour at every level. We do not need complicated rule books. Behaviour must be measured pragmatically with each course of action being judged against these two tenets of good behaviour. Second, the financial services industry should develop products which are simple and customer focused. Products should be marketed in the hope that they will develop long-term relationships with customers and not intended to generate a fast buck. Third, financial service companies should play their part in increasing financial literacy. An informed customer will be a good customer. A satisfied customer will be a friend for life. It is in all our interests that we have a financial services industry that can be the pride of our nation. Life Academy has a vision. This vision and the philosophy on which it is built has been shaped by helping people from a wide range of backgrounds get their life planning and financial planning ducks in a row. While most
6 Standard Life
of us need all of these ducks, some of us may be able to secure them simultaneously; while others may have to buy them one at a time. Thus, while pensions are important, they are not the be all and end all when it comes to saving in general or saving for retirement in particular. There will always be a need for an employee benefit or financial product whose overriding aim is to provide us with an income stream in later life. One of the heartening aspects of the contemporary debate is that we are once again adopting a holistic approach to savings. In recent years, this debate has been too pensions-centric. It is not being disloyal to the concept of pensions by putting them in their place. Again, we need to weigh the needs of people at various points on the income spectrum and at various stages in their life-long journey. Life Academy is a charity whose day has truly dawned. We look forward to playing our part in building a better society. Such a society need not be ravaged by the damage caused by social exclusion. We show in this report how financial inclusion and social inclusion go hand in hand. Our case studies show this graphically. Our plan for all ages will help our fellow citizens get their minds and finances in order. Provided that government, employers and the financial services industry undertake the interventions that we have highlighted, we can then set the people free to get on with it. Lets go for it, we will never get such a good opportunity again.
Standard Life
Standard Life
Standard Life
Consumer perspective
Connie Marshall
A traditional ethos of scrimping and saving that has passed through the generations of her family. Widow Connie Marshall (85) is proud of her Post Office savings habit and still has an eye for a bargain. Her latest purchase, a gas stove and mobility trolley, were found on the internet.
Connies story
One of six, Connie left school at 14 and worked throughout the Blitz in a factory in Londons East End. She remembers her mum and dad bringing up their family through the worst years of the Depression. On a Friday night they used to put their money into a money box and then give me and my siblings 3d pocket money. Connie and her late husband (a metal polisher) saved up for everything they needed to furnish their rental home. Her husband worked piece work. On weeks when he was given fewer hours, it was a struggle because the employer would always take the superannuation out at source and we would be left short. We learned to budget carefully, says Connie and made sure we put something into all the pots to cover the bills. We did not buy anything until we could afford it. Connie always kept 10 shillings under the lino for emergencies. Connie brought up her own three daughters, all now retired, the same way and is pleased her five grandchildren, in their early 40s, and great granddaughter (16) are in professions, financially savvy and secure.
10
Standard Life
Derek Green
Old school approach to financial planning some saving, some doing without, and some retirement planning. Derek Green is a 69-year-old man who prides himself on being careful with money. It is hardly surprising: he spent years as an insurance agent and is now treasurer of his local bowling club.
Dereks story
Derek lives with his wife Irene, aged 68, in a two-bedroom bungalow in Boston, Lincolnshire. They enjoy nothing better than family life and barbeques with their three sons, daughter and six grandchildren. He describes himself as financially comfortable able to get by and enjoy a holiday every year. The savings habit he has passed on to his family started when he was young. He started saving for life when an insurance agent used to visit his parents to collect premiums. Now Derek feels it is important that older people pass on money and savings advice to the younger generation who he feels may not have the same cautious views as him. He has passed on his views: his youngest grandson opened a savings account at 15!
Standard Life
11
Mike Wort
Financial values of saving and intelligent investing. Mike Worts story is a classic tale of a baby boomer: born to working class parents, going to university and then enjoying a long career in the pharmaceutical industry.
Mikes story
Mike (60) lives with his wife, a maths lecturer, has four grown-up children and a grandchild. Now independently wealthy, he is in the happy position of not having to work for financial reasons, but choosing to do so for challenge and personal satisfaction. He was brought up with strong financial values about not spending unless one had the means, because money was scarce. Things had to be saved for. He recognises he was lucky to have ridden the crest of a generational wave. He benefited from grant-aided tuition and maintenance fees at university, and joined the pharmaceutical world at a boom time for jobs. His career has taken him around the world. Mike views money as a tool to be used for two things: to de-risk current circumstances so everything is covered; and then what is left over is risk money to do things with. Mikes risk money has been spread over a portfolio comprising property, investments and setting up companies.
12
Standard Life
Deborah Gaudin
Beneficiary of the property boom and a lifetime of hard work coupled with a healthy ethic of saving. 52-year-old Deborah Gaudin is fortunate to have a husband and a brother-in-law who have dealt with the financial side of her life, including her business.
Deborahs story
Raising a son and daughter (now both in their 20s), Deborah felt she was lucky to have had sufficient day-to-day money to get by. Thanks to a husband always having a second job there was money to pay for the childrens clothes and school trips out of everyday funds. They have not led an extravagant lifestyle. They run a works van, while Deborah does not drive. They have only had two foreign holidays in 30 years of marriage. Deborah has taken on a wholefoods shop in her Shropshire home town, after 20 years experience running a local restaurant. Money was not discussed during her childhood, but her parents watched the pennies. Her late father invested in pensions and savings, which have been to the benefit of her mother. At 72, Deborahs mother enjoys a comfortable retirement and owns her own home.
Standard Life
13
Sue Gould
Struggling to get by, but acutely aware of the need to plan for the future. Sue Gould, who is 40, admits that she and her husband only have enough to get by.
Sues story
She is the mother of lively young boys and married to a self-employed lorry driver Brian (48). They live in a three-bedroom terraced house in a village outside Evesham. The cost of childcare means she only works part time 15 hours a week mixing tour-guiding with office work. Brians work fluctuates and he also has to pay for children from previous marriages through the Child Support Agency (CSA). The couple rely heavily on Working and Child Tax Credits. They drive old cars, buy second-hand where necessary and run a tight ship when it comes to budgeting for Christmas, birthdays and holidays, spreading the costs across the year. The internet is a boon for getting the best deals. A credit card is for emergency use only.
14
Standard Life
Laura Cheal
Retirement planning is a long way off as short-term priorities are more urgent and important. Life is about achieving dreams at the moment for 31-year-old Communications Consultant Laura Cheal. She has made the leap into self-employment and was married in September 2010.
Lauras story
Laura and her two siblings had a comfortable upbringing. Her parents shared her easy-going approach to money, but in recent years have looked to property abroad to fund retirement. Laura thinks this opportunity will not be available for her generation. She feels she is in the same situation as many of her friends and thinks more could have been done in school on financial planning. Facing the financial uncertainties of self-employment is a new challenge. However, since she was 18, London-based Laura has worked for a number of companies, and this gave her the confidence to branch out on her own. She has admitted that it has been frighteningly easy to get money: over the last 10 years she built up tens of thousands of pounds of credit card debt. I was consistently offered new cards and even when I consolidated my debt it was easy to exceed my limits. I did not have enough knowledge or access to advice from older people to guide me. I lived for the day. Luckily for Laura, her disposable income has grown with her career. As a result, she has been able to pay off her debts. She saved hard for her wedding. Sacrificing some of her day-to-day spending for this target, she found it good to save.
Standard Life
15
Ben Kirby
This recent graduate may be well-qualified and well-educated, but is still out of touch with managing personal finances. A degree in Economics and an MSc in International Business Management might have taught me how to manage the countrys finances but not a lot about personal finance, says 24-year-old London based Ben Kirby.
Bens story
Ben shares a flat with friends and works casually in promotions while he explores his career options. Since the banking crisis, Ben has been prioritising career satisfaction and lifestyle over earnings potential. Ben graduated with 12,000 of student debt, a sum he considers modest by current standards. He intends to repay this once his career takes off. He maximises his money through finding discounts and internet shopping, as well as carefully budgeting; skills he developed as a student. As a result, Ben feels he is able to balance his day-to-day needs and leisure time. Ben has taken most advice about financial planning from parents and family. He also feels that more should have been taught in school. Ben banks on the high street and has no credit cards. As far as savings are concerned, he is wary of the low interest rates, commission charges and potential biases attached to high street financial institutions. He prefers to use his internet skills to carry out his own research. Ben sees his biggest financial challenge in the medium term as funding a 20% deposit on his own home, given the high prices of property in and around London.
16
Standard Life
John
A track record of mis-managing money makes John sceptical about his ability to live a normal life with stable finances. John is an ex-offender in his 40s and admits that he hasnt always made good decisions.
Johns story
When he was younger, John used to save. He had his heart set on a particular motorbike as a young boy; he wanted it so much he did five part-time jobs and saved and saved. However, gambling and alcohol took their toll. He wasted a 1,000 windfall, and on another occasion took out a 1,500 loan from his bank and spent it without any real means of repayment. While Johns case was adjourned and he waited for the sentence, he was convinced he was going to prison, so he gave up his job. He was sentenced to a Community Order, so is now left unemployed and having to apply for benefits. Now John rarely has enough to live on, he buys out of sell-by-date food, and has little spare money. Today his debts include utility bills and court fines that have built up over time. If he has any spare money left in his account, he worries that creditors or the bank will take it.
Standard Life
17
Summary
These real-life experiences clearly illustrate how dealing with money issues and the degree of choice available has become more complex. They also show how much society has changed in its values towards savings and taking personal responsibility for long-term financial security. The older generation, such as Connie and Derek, passed through life with little access to credit or sophisticated financial products. The need for sophisticated financial planning was more minimal. Their financial opportunities were restricted by todays standards, but their scope for error was also lower. They gained their financial competence on the job: with a weekly budget to meet a modest lifestyle; the need to save before making purchases; and frequently with a weekly visit from their industrial insurance agent to reinforce good financial disciplines and collect their weekly insurance payments. Society valued thriftiness. In older age, their retirement expectations are still for modest comfort, and they will not be affected by changes that are in the pipeline.
In future, financial life plans for people approaching middle age will need to be more diverse.
18
Standard Life
Families on lower incomes like Sue have a tougher task to put money aside for their longer-term planning. The modern lifestyle means that it is not as easy as in Connies times to go without until you have saved. Young families need access to technology for their education; white goods are essentials rather than luxuries; while day-to-day budgeting skills are crucial. Being able to put aside enough savings to produce a meaningful income in the longer term is a big stretch.
Some form of state pension must remain an essential element for large sectors in the population.
Individuals such as John, who are marginalised from mainstream financial tools, need access to specialist help. The younger generation, like Laura and Ben, has known nothing but the consumer society: a buy now attitude; easy credit; ready acceptance of debt; no obvious external role models to encourage financial understanding; and short term horizons.
The benefit of long-term savings has to be positively demonstrated if this generation is to be persuaded to save.
Connie and Derek both acknowledge that despite their relative hardship, access to workplace pensions and a strong savings ethic have given them security in their retirement. All of the respondents express anxiety that in the current climate, even if they save through a company pension, there will no longer be such guarantees. Workplace pension schemes are felt to be at risk; even for individuals who have contributed for many years into schemes previously viewed as rock solid. Uncertainty surrounds the state provision, too, and regulatory change seems unending. In this climate, baby boomers like Deborah are uncertain that their safety nets are going to be sufficient. Younger generations like Ben, Sue and Laura are confused as to how they can take action with any degree of confidence. And all of them struggle to understand how to find objective help.
Standard Life
19
Summarising both the interviews and survey findings, Stuart Royston suggests: They reflect the uncertainty arising from flux in the financial sector as well as uncertainty in ones life course. The penalty for failure to properly develop and execute a life and financial plan is not always immediately recognised; whereas failure in the consumer society - no latest gadget, overseas holiday or shiny new car on the drive is all too immediately apparent.
20
Standard Life
Stuart continues: Individuals have busy lives with competing priorities. Education no longer ceases on leaving school or university; marriage is no longer a guarantee of a lifelong relationship; broken and new relationships with extended families are increasing and usually require some repair to individual and family finances; and work is more uncertain. The only certainty seems to be that we are living longer and need to factor longevity into our plans. At the same time, individuals have to get to grips with a financial services industry which has changed dramatically: with increased competition, a vast range of services and products available (some relevant and some not for a particular individual), and the whole question of who to trust, high in the minds of many consumers. Life planning and financial planning go hand in hand. A financial plan and budget are essential ingredients of life planning. The evidence of the failure to adopt and execute a financial plan and balance the benefits of long-term financial planning against the short-term delights of consumption are there for all to see. However, they are also obvious in the failure of so many to provide for an adequate income in later life, in order to replace their income from employment. Half of UK adults are not putting aside any funds into a pension. Under 30-year-olds see many financial challenges. Starting a pension is well down their list of priorities; only one in three is putting anything into a pension scheme. More surprisingly, 45% of 41-to-60 year olds are not paying into a pension scheme. Even when an employer provides a scheme and makes a contribution, participation rates are often disappointingly low. Women are particularly vulnerable to inadequate pension savings. The implications of this lack of financial planning and engagement are not recognised by individuals. For many people access to a workplace pension of any kind remains a distant dream. But even in a world in which generous final salary pension schemes are closing in favour of defined contribution schemes (which require the individual to take responsibility and carry the risk), individuals remain confident they will live a comfortable retirement. We wish their confidence was soundly based and accompanied by the necessary planning and actions.
Standard Life
21
22
Standard Life
The chart on pages 24 and 25 illustrates how such a plan might look.
Standard Life
23
Young adulthood
My needs I need to have a mix of easy access money and longer-term savings to cover me for: student loan repayment funding career start up self-employment house purchase starting a family What do I need to think about? To develop good housekeeping skills for myself To manage my debts Insure against risks: loss of job loss of home illness relationship breakdown Start or boost my longer-term savings What do I need to do? Create a budget with which I manage my money Control my credit cards Have a rainy day fund Consider advantages of buying or renting Take out relevant insurance policies (eg buildings and contents, travel, car) Consider medium-term savings strategies and wealth creation: equities longer-term savings plans longer-term investment plans Start a retirement strategy: join workplace pension scheme start a private scheme Take independent advice What do I need to know? Using tools and calculators Understand financial jargon Understand costs of debt and how to manage and repay it, eg credit cards, student loans, mortgage Understand insurance and other forms of protection Understand difference between savings and investment Understand issues around retirement planning Who needs to help me? Family/friends Financial Services Industry Financial Adviser Government Employer Specialists
Teens
Birth to teens
My needs Other people need to start a long-term savings fund for me to help me In the short term: buy toys and gadgets In the long term: pay for higher education pay for travel help buy a home What do I need to think about? I need to have savings accounts opened in my name What do I need to do? Grandparents/parents/family members to pay into my savings accounts My family to pay my Child Benefit into the account if the money is not needed for day-to-day needs Parents take tax advice if appropriate What do I need to know? Parents need to understand savings accounts and simple tax issues I have some money that will grow, and some will be for spending, and some to save Who needs to help me? Parents Family School
My needs I need to develop a savings habit for myself to help me pay for things like: driving test mobile phone hobbies travelling What do I need to think about? I need to have a simple savings account with easy access Take part-time work to help me save What do I need to do? Be encouraged to save by family and school Take advice on which products are suitable Explore the market and open simple accounts What do I need to know? Basic financial planning sources of savings accounts types of savings account role of interest short-, medium- and long-term savings basic budgeting basic taxation sources of information and advice Who needs to help me? Parents Family School Financial Services Industry
24
Standard Life
Middle adulthood
My needs I need to be maximising my financial wellbeing to meet: Family needs: Returning children Elderly parents Higher educational demands Career changes Redundancy Separation/divorce Moving house Be a role model for children What do I need to think about? Regularly review my financial picture How I would cope with risk: home loss job loss illness What plans do I have for the longer term? How is my financial plan supporting other plans for my life? Embed good financial values and habits What do I need to do? Review mortgage/pay off debts Have appropriate insurance protection Maximise pension contributions and other retirement savings plans Obtain pension forecast for state entitlement (women especially should review their pension position) Top up any NI, pension or long-term savings deficiencies if appropriate Ensure diversity in savings arrangements Tax efficiency Estate planning: make a will power of attorney inheritance plans Take independent advice where appropriate Open savings accounts for children and help to educate them What do I need to know? Using tools and calculators Understand all options around longer-term wealth and retirement planning Explore pension top up/salary sacrifice Understand difference in tax treatment of savings versus pensions: capital gains tax breaks between partners inheritance tax corporation tax Understand risk in financial terms: types of investment time periods Understand basic estate planning Who needs to help me? Financial Services Industry Financial Adviser Employer Specialists
Standard Life
25
26
Standard Life
They must be communicated in a language appropriate to the target audience. This should include good-quality, generic advice, including the basics of personal finance, concepts such as risk and compound interest (in the context of short-term savings and long-term investment). Cheseldine agrees with auto enrolment and feels it should be made hard to opt out. If schemes are flexible and customised to the workplace then they make themselves attractive for employees to join and promote a savings culture. Dennis Bell and Roz Starck of Logica UK, a global technology and business services company, have first-hand experience of implementing a large employee benefits scheme along the lines described above. In 2008, as part of a brand relaunch, which included an increased focus on employee value, Logica began to consider the long-term viability of its existing pension schemes and the value being delivered to employees. Of particular importance was member engagement and support in both investment and retirement planning. One of the outcomes was the launch of its new Savings and Retirement Programme. Logica believes its vision was leading edge: to create, under the mantle of a holistic communications and engagement model, a single compensation structure encompassing pension (Group SIPP), comprehensive flexible benefits (including home purchase), other core benefits and ongoing commitment to financial education. The new programme replaced traditional final salary and money purchase pensions and a separate flexible benefits package. With Logica now able to communicate directly across the whole of its compensation package (and no longer involving third party trustees), Dennis says the company can target the content and style of their communications and appeal to all staff: We can explain in a meaningful way, how the companys spending on pensions and other benefits brings value to them personally. Dennis believes this is especially appropriate in relation to pensions. Often people know of the different elements and options, but dont appreciate what they really mean, so people get to retirement and only then realise they have a problem. According to Roz, rolling out the new programme has been a mammoth communications task. Staff work from home, on site and at client sites. To reach everyone, they used a range of targeted media: online, webcast, podcasts, face-to-face, telephone help lines and one-to-one advice sessions. They also worked with our people managers and staff communications council to ensure they bought into the change and understood what it meant for their people. Dennis believes this sort of scheme can work across a variety of business models. Dennis acknowledges some aspects of the new scheme are inevitably less favourable than old-style, paternalistic pensions. However, feedback from staff satisfaction surveys shows employees have appreciated the companys decision to plough the administrative cost savings from the new arrangement into increased contribution opportunities, financial education and communication. There has been a latent demand for financial education, and we want to use the resources of Standard Life to address this, says Dennis.
Standard Life
27
Logica favours carrots over sticks such as auto enrolment, and believes firmly in encouraging younger employees to save into their pensions. Company contributions rise if employees choose to make higher contributions themselves. In the longer term, they are considering other enticements including offering company contributions to savings modules such as an ISA, provided the employee also makes a minimum contribution to their pension. Take-up rates of 80% and high levels of satisfaction ratings from in-house market research prove its success. Recruitment for employee-representative places on the newly formed governance committee was over subscribed, with 60 applicants for 4 positions, unheard of in the past. Ongoing other measures of success will be: levels of staff choosing their own funds; whether contribution rates rise; and increased use of salary sacrifice into the pension. Critically, Dennis believes that success will not be measured just by the numbers, but by whether they are successful at educating people to save. Many people in the population of course do not have access to the kind of comprehensive pension and financial literacy schemes provided by Logica. They are employed by the thousands of small or micro businesses in the UK who employ less than 50 staff. For these businesses, providing workplace pensions or other benefit packages to their employees is not just a question of cost but of resources, knowledge and appropriate guidance. The government has confirmed it will introduce the National Employment Savings Trust (NEST) from 2012 to help address the needs of employees working for smaller employers who currently do not offer workplace based savings. Coupled with the introduction of auto enrolment, many more employees will be encouraged to start saving. Alastair McCapra, Director General of The Landscape Institute speaks from experience, employing a small group of 15 people, mostly aged under 40 years. The institute offers staff a benefits package which includes a workplace pension, but the pressure of running a small organisation is such that the HR function is covered part time by his PA. Any issues relating to pension have to be outsourced to the pension provider. Consequently, Alastair feels that he lacks both time and access to quality, independent advice to help him fully assess the benefits of his scheme. In particular he thinks it is difficult for small companies to fully understand the myriad of pension schemes available especially in terms of how they impact on the costs and mechanics of running small companies, particularly partnerships. It is hard to determine, he says, how well their scheme performs in relation to the marketplace and to communicate its true value to his employees. He feels that his uncertainty with pension literacy is typical of most of the small companies in his trade association. As the trade body, he would see a benefit in being able to source independent, quality one-to-one or telephone advice at a competitive rate. Alastair feels that the complexity surrounding pensions creates a degree of cynicism. Amongst his mainly younger staff he feels there is low expectation of their pension and take-up rates are low. This is partly due to priority (as many of them are engaged with paying off student debt or their mortgages, while retirement at aged 70 is seen as too distant an event to worry about). Also, they have seen at first hand how the rules surrounding pension have been changed so frequently, so they are therefore more cautious about paying for something over the long term, which is subject to such
28 Standard Life
volatility and legislative change. Speaking from a personal perspective, Alastair suggests he is typical of many of his own generation who have paid into a pension for over 20 years. But in an industry where it is usual to move between companies frequently for career progression, the lack of portability between schemes means he has built up a series of small and relatively worthless pots which has made his own long-term planning more risky. However, Alastair also suggested, that in the light of this uncertainty, many employees would regard having the offer of bi-annual personal financial planning sessions as a feature of their benefits package to be a positive. This would help them create their own financial plans. Many of Alastairs sentiments are echoed by Shaun Bent of Community Inspirations Ltd, a recent business start up. Shaun has invested his redundancy money in setting up his own company, with partner David. Fuelled by a passion to help ethnic young people combat alcohol and drug abuse, and with success working on various drug rehabilitation services in the private sector, Shaun now uses his expertise to provide coaching and workshops to local authorities, the prison service and other private special needs services. However, in the current climate, with intense competition for funding and budget cuts, the funding plug could be pulled at short notice. This uncertainty means at a personal level he has had to sacrifice the security of his previous workplace pension arrangements. In his business, too, his need to minimise overheads means he can only offer employment on a contract basis. As a result, Shaun uses freelance graduates keen to work in the community, and mature work returnees who can use their experience to great effect. But he says, while it is easy to access the advice of accountancy professionals and others about the mechanics of running a business, it is much harder to find help with understanding the financial issues of employing people and the implications of providing them with benefits and pensions. He thinks this lack of simplicity on retirement benefits inhibits many smaller employers from taking people on. Nonetheless, Shauns vision remains to build a business where he can afford to offer such benefits. He hopes to recruit employees to train and who will share his desire to build viable communities within the socially disadvantaged areas where he works. Of course not everyone will have access to financial help and guidance through their workplace. For people like ex-offender John, and others caught in the most challenging web of financial difficulties and debt, access to help and support from outreach services and the voluntary sector proves a lifeline. Doug Hook, Partnership and Commissioning Manager of Hertfordshire Probation Trust, describes an innovative and successful project based around financial support for ex-offenders. Categorising offenders runs the risk of stereotype. Some offenders have addictive, behavioural or attitude problems that present a potential to offend irrespective of other issues. In any Offender Managers caseload, there will be a spectrum of ages and socio-economic groups. But according to Doug, the majority of offenders are unemployed males in their late 20s, with lower levels of thinking and problem-solving skills. Around a quarter of offenders do so as a result of
Standard Life 29
difficulty in handling money. Lack of money, insurmountable debt, the inability to deal effectively with tax, benefits or housing systems can all play their part. Add to this a lack of resilience, and sometimes a lack of faith in a system that might have failed on previous occasions, the potential to make the wrong choice can escalate.
Critically offenders were empowered to take action for themselves. With support ranging from help with filling in forms, completing applications and interview technique, through to professional advocacy and making legal challenges, offenders were given a direct helping hand. The overall service added skills to those held by the Probation Service frontline staff with excellent results. This provision falls outside the main services required for the Probation Service and the Trust continues to explore opportunities to support offenders accessing financial advice and guidance from private and third sector providers.
30
Standard Life
Much of the time, CAB volunteers are faced with helping clients whose financial problems have reached a severe point where their options are more limited. For this reason, Teresa says a key part of the charitys strategy in recent years has been to adopt a more preventive approach. The charity is directly involved in providing financial education. For example, it works with partners on initiatives such as working with lone parents looking to return to work, and with low-income consumers on how to save safely for Christmas. But the charity also uses its expertise to provide training. In the last year, the charity provided financial literacy training to a quarter of a million frontline staff working for housing associations, social, care, and youth services. The CAB has given them better tools and skills for dealing with their clients. However, Teresa acknowledges that the CAB, like all charities, does not have the resources to offer a national financial capability service. For this reason, the charity is a strong supporter of the newly established Consumer Financial Education Body (CFEB). Teresa feels this is a service that is long overdue: there is a vital need for a service that catches people early, can offer an holistic view of their personal finances, look at all the options available, help them search out the best deals and put together a financial plan. Such a service, Teresa believes, will make a real difference to people who cannot afford financial advice or need sound money guidance. Financial literacy is the keystone, says Teresa. In a similar vein, she is a strong advocate for catching people early in life though financial literacy provision in schools. The work of the charity Personal Financial Education Group in schools has shown it is possible to engage with young people on money issues. Results of recent research would indicate that younger people are opening bank accounts and adopting a saving habit. Younger generations will have to take more responsibility for their own personal financial wellbeing than previous generations and will live much longer to feel the effects of their planning. Teresa is hopeful that these young people will be better prepared than those before them. However much effort the private and voluntary sector put in, it is the role adopted by Government and the financial services industry that underpins success in changing an individuals propensity and ability to save and take responsibility for themselves.
Standard Life
31
Government needs to make it easier for people to save for the long term by equipping them with the skills to make well-informed choices about how and when to save and breaking down the barriers between pensions and saving. Government needs to go further in reforming the state pension. Actions could include: reform the current complex system of savings products and tax structures, a sustained and co-ordinated investment by public and private sectors in improving levels of financial literacy, and maximising the extent of non regulated advice (short of product sales recommendations) that is available, and setting up a working group to investigate ways in which the market for funding longevity can be strengthened.
There have been some welcome developments including the move to fee-based advice, confirmation of the new Governments commitment to auto enrolment and a national generic advice service through the Consumer Financial Education Body. With the impact of the credit crunch still very much in mind, the time is ripe to reverse the trend to complexity in state pensions and welfare benefits; to provide the leadership necessary to change the culture and behaviour patterns of our citizens; and make fair reforms to encourage savings and work. And finally Alan Pickering suggests that the financial services industry needs to play its part. Critically Alan Pickering says the industry needs to: offer products that are easy to understand and communicated in plain English so that the targeted audience can understand them provide guidance and information to people about the importance of savings and make access to this information easy to obtain and understand communicate effectively the impact of not saving and encourage people to make saving a priority in their lives help customers appreciate that some levels and types of debt are not appropriate and are likely to spiral out of control
The exhortations for simple products, greater transparency, and clarity of communication are not new, but the Life Academy experience is that from the eyes of the customer little has changed. There is too much paperwork that is there to protect the supplier or adviser; too much of the information and guidance may or may not be relevant to that particular individual; products are sold that do not meet the needs of the customer even if they perform as advertised; and the change to money purchase pension schemes provides ample opportunity for performance disappointment. The industry and the customer has benefited from advances in technology, but the industry does not always make intelligent use of the data it holds on customers even for sales and marketing purposes. The industry has a difficult enough job delivering services and satisfactory outcomes to a huge number of individuals over long periods in an uncertain and changing economic and legislative environment and in a competitive market. Those that will prosper will focus on the basics of: making the customer the focal point of everything that they do creating trust and striving for long-term relationships so that loyalty is generated supporting and educating their customers so that they are equipped to take control of their financial position and become better customers because they make informed choices and value the products and services on offer
32
Standard Life
There is a unique opportunity for the industry to play its part and benefit from the creation of a savings culture. However, the central issues of trust, support and education for the customer need a new approach. They need to rise up the agenda and be considered separately from the point of sale and the sales strategy although ultimately they will provide ongoing sales and loyalty. Just as companies have a sales and marketing strategy that embraces channels to market and partners, so they should develop education and support strategies with channels to their customers and where necessary partners to assist. One obvious partner is the employer who automatically raises the level of trust. How nice it would be if it was common to see one dimension of competition as the quality of education, advice and trust available to customers that is not motivated by the short-term need to sell.
The first step is a complete overhaul of our complex system of savings products and tax structures, as our insight shows excessive complexity is one of the key reasons people are not saving enough. For example, ISAs and pensions operate under entirely separate rules, despite many savers using them both for their long-term financial needs. This complexity needs to be removed to provide a simpler savings framework for all savers. Some of the building blocks to encourage more saving are already in place. From 2012, employers will have to automatically enrol workers in a pension scheme and make a contribution for those who remain members. Auto enrolment means people become a member of their employers pension scheme unless they actively choose to opt out, which will encourage greater saving. Standard Life strongly supports auto enrolment; it offers a tremendous opportunity to put in place an affordable and sustainable pension system which meets the needs of generations to come. But any solution has to meet the needs of all of our society, irrespective of their age or income. Where people clearly benefit from saving, auto enrolment should be introduced without delay. But some lower earners do not benefit from long-term saving so the interaction between private saving and state benefits needs to be changed. Once lower earners know they will benefit from long-term saving, auto enrolment can be extended.
Standard Life
33
Auto enrolment will see payments - from individuals, their employers and through tax relief gradually increase to 8% of pay. While 8% is a good starting point, people should be encouraged to save more, as only by doing so will they achieve a decent level of income in retirement. Over time, we believe contributions should gradually be increased to a total of 12% of pay. This would increase the payments made on behalf of everyone, and have a particularly beneficial impact for the lower paid. However, some low earners will still choose not to save within pensions exercising their right to opt out, as has happened in New Zealand under the KiwiSaver scheme. Allowing people the choice of saving through a pension or an ISA would make long-term saving acceptable for a segment of the population who may otherwise prove resistant to auto enrolment. This will be particularly relevant to the under 35 age group. Financial education is also crucial. People need to be better equipped to make confident and well informed choices. This means a sustained and co-ordinated investment aimed at improving levels of financial literacy at all echelons of society so they are empowered to make well informed life decisions over their finances. The pensions industry has a major role to play in helping people save for their future. As well as being a key player in providing financial education, the industry needs to explore new ways of helping people meet their retirement needs. Attitudes to retirement are changing and, put simply, people do not grow old like they used to. Generation by generation we are living longer and the over 65s will be healthier with greater ambitions for their future than ever before. The industry needs to deliver new, flexible solutions which help people approaching retirement meet their complex financial goals. While more financial education in schools is required, we cant afford to ignore the current generation, which is why employers also have a big part to play. People generally trust their employer and, over time, many employers may be willing to provide access to a range of short-term and long-term savings options. In addition, as technology develops and intranet sites become commonplace, employers may facilitate access in the workplace to educational material and tools. This will help people decide when and where to save, and how to invest their savings in a way that suits their individual circumstances. It will also encourage them to discuss savings with their colleagues and family in a more informed manner. There is great potential to get the UK back into the savings habit. But there is much work to be done to shape the new environment, particularly in ensuring we maximise the savings that can be achieved for all. Success will mean far more people building adequate savings for their future.
34
Standard Life
Conclusion
David Nish started this report by observing that individuals are in the eye of a perfect financial and demographic storm. The case studies illustrate how, within two generations, attitudes to finance and planning for the future have totally changed. There has been much debate about the need to help individuals meet the financial challenges of contemporary society by containing levels of personal debt, encouraging a savings culture, and rebalancing short-term consumer desires with long-term prudence. But survey after survey has shown that consumers have not heeded the messages. Now, however, we detect a new political will, a fresh desire for an inclusive society, a general acceptance that the issue of savings for older age and pensions needs to be grasped. There is also an increased understanding by individuals of the implications of longevity, a recognition that the macro economic and financial crisis mean things cannot continue as they were, and a sensitivity about inter generational conflict. These factors all combine to make this the perfect time to address the financial and demographic storm. Pickering summarises: We have challenged the view that there is a silver bullet solution that can be fired from Whitehall or Westminster. Through our case studies we have deliberately adopted a bottom up approach to view the world through a diverse group of individuals. The Government must now create the framework and provide leadership to bring about the change of culture. Men and women must be given the vision, realities, competence, and confidence to play their part in designing and implementing their life and financial plan; and employers, the financial service industry, and those in the voluntary and education sectors who provide trusted interventions must play their part. People in all walks of life and at different life stages will need help and the cornerstone of the help we can provide must be based on simplicity, trust, stability and the belief in individuals that it will pay to plan and save. The use of our financial life plan will not only improve individual outcomes, but have an exponential impact on the nations financial health and sense of social cohesion. Hopefully the case studies in this report will offer inspiration and the financial life plan will provide a journey planner for those who have been inspired.
Standard Life
35
Contributors details
David Nish Chief Executive Standard Life
David Nish was appointed Chief Executive of Standard Life on 1 January 2010, having been Group Finance Director since November 2006 when he was appointed to the Board. He is also a nonexecutive director of Northern Foods plc and a board member of the Association of British Insurers. David was previously a partner with Price Waterhouse, and subsequently Group Finance Director and then Executive Director, Infrastructure Division at ScottishPower plc.
Life Academy
Life Academy is a charity that enables people to learn about managing the changes in their lives through life and retirement planning and also financial education. We achieve this through Life and Retirement Planning courses, Financial Literacy education, qualifications in Life and Retirement Planning and Partnerships to reach individuals and to develop innovative approaches for learning. We focus on the vital subjects that remain outside traditional education, such as increasing financial awareness, mid-life changes and departure from full-time work. We also offer opportunities for those wishing to further their academic studies or to train for a new career through on site and distance learning professional and postgraduate programmes. Life Academy provides the only UK postgraduate programme in Life and Retirement Planning for professionals and this ensures that our short courses and materials are relevant, accessible and highly effective, providing the leading thinking in this field. www.life-academy.co.uk info@life-academy.co.uk Tel: 01483 301170
36
Standard Life
www.standardlife.co.uk
Standard Life Assurance Limited, registered in Scotland (SC286833), Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH, authorised and regulated by the Financial Services Authority. 0131 225 2552. Calls may be recorded/monitored. www.standardlife.co.uk
MM0248 10 2010 Standard Life