Gov’t could introduce compulsory saving, CPS
The UK is on course to fall into a a savings crisis in the next 20 years as the population ages if auto-enrolment fails to make people save, Michael Johnson, research fellow at the Centre for Policy Studies, told FTAdviser.
He said that the UK is due to follow a similar path to Japan, which this year will sink into negative saving levels. According to Mr Johnson, the failure by a population to save has an adverse effect on the availability of capital for businesses to invest.
The key year will be 2017, when the government will evaluate the success of auto-enrolment and the effectiveness of the National Employment Savings Trust Corporation.
Mr Johnson believes there are two possible solutions: either the savings industry “completely reforms itself and cuts costs and pays itself less so you don’t get this erosion of savings through high costs”, or the government imposes a compulsory savings policy on individuals.
In the 1970s and early 1980s, Japan was “renowned for its legendary high savings ratio” of nearly 20 per cent. However, it has since experienced a steady decline and is this year due to finally swing from positive to negative savings.
This is due to the economic load of an ageing population combined with economic stagnation and the arrival of a “live for today” culture, particularly among under-40s, Mr Johnson said. In addition, the introduction of higher state pensions and public long-term care insurance has reduced people’s anxiety about financing their retirement.
Mr Johnson said: “Japan is the vanguard among developed economies seeking to head off the adverse economic consequences of an ageing population.
“The UK is perhaps 20 years behind, demographically speaking, but on a similar path.
“Consequently, we should note the effectiveness or - otherwise - of Japanese policy initiatives aimed at addressing their emerging predicament.”
These finding are included in a paper being reviewed by members of the House of Lords, which also proposes scrapping the sector classifications given to funds by the Investment Management Association.