As with all such dilemmas, it comes down to striking a balance, in this case between freedom and paternalism. And while (as FCA chief executive Martin Wheatley has admitted) it may take time, we can be confident we will get a workable outcome.
Notwithstanding, the difference between where we find ourselves on mortgages compared to pensions is marked. The state is now going to grill us on whether we can afford a mortgage. Yet, by comparison, our leaders seem much less bothered about whether we can afford our old age.
Given we can all choose whether we have a mortgage, but not whether we have an old age, it is a head scratcher.
One of the explanations might be timescale, the more urgent being given priority over the more important. Pensions (to include the wider problems of an ageing population and healthcare) tend to be spoken of as a matter for the future, thus giving a lengthy road down which to kick the can. While pensions is indeed a long-term issue, this does not mean we can be relaxed about building a solution. Quite the reverse, ‘long term’ actually means it is going to take a generation or so to construct a solution.
Right now, we are off the pace. We should have done more, earlier and we almost certainly have to make up a lot of ground if we are to avoid some far-reaching social, political and economic consequences. German chancellor Angela Merkel recently gave some statistics on the proportion of GDP spent on welfare in the EU compared to the rest of the world. The EU accounts for about half of the world’s total spend on welfare - ouch!. Knowing that, you would have thought the European Commission would have, at the very least, started a debate about the implications.
By contrast, the Japanese are engaged on the issue. Among other initiatives, I hear they are trying out ‘time banking’, where citizens do voluntary work for the elderly in return for units of time, which they then bank. Those citizens can then spend the units on similar services from successor volunteers in the future, when they can no longer do everything for themselves. Whatever you think of that initiative, at least they are addressing the issue.
In the UK, recent figures suggest the NHS costs alone will go from the current £95bn a year to more than £130bn by 2020, with much of the increase being care for the elderly.
The challenge is massive. And we need to get going on a strategy to meet it. We need a complete re-engineering of our approach to pensions and retirement. If, right now, we can not get a consensus on radical solutions like compulsion, we should begin with initiatives where there is enough agreement.
Starting with the least contentious, the government should run a sustained, high-profile information campaign aimed at changing perceptions of pensions. Look at the success of the anti-smoking campaign. Public perceptions can be changed.
We should also supercharge the financial capability programme. Teaching our children about personal finance should be done very carefully. But in principle, what reasonable objection can anyone have to informing children about money.
Staff members of one well-known challenger bank are known to run modules on money in local schools and I understand they are tremendously well received. Information about finance should also be taken to those in further education (as part of all apprenticeships and vocational programmes) and to adults via every available medium.
A few tens of millions of pounds is nowhere near enough to fund the scale of sustained educational effort we need. We should spend hundreds of millions on financial capability. It would repay us in billions – and to add a little melodrama, it might even save society as we know it. The threat of the ‘demographic time bomb’ is not overstated.
Towards the other end of the continuum of contention, we need to transform the pension proposition. It needs to be made much more attractive.
Imagine this: your financial adviser comes to see you about an investment proposition. Here is the core of his presentation: “I have a new long-term investment product. You can invest either a lump sum or regular premiums. In order to incentivise you to take up my proposition, I will rebate a proportion of my fee, which will be added to the amount invested. (Yes, I am going to give you back some of your own money). However, as I am concerned you will not keep the investment for the agreed term and/or you will spend the proceeds unwisely when you do get access to them, I want you to give me overall control of the investment. I get to set the rules and have the freedom to alter them. And should my management of my own financial services practice result in me not achieving the P&L I desire, I may raid your investment.”
This (which we might call, The Lifetime Allowance presentation) is symptomatic of an outlook that is plainly not going to get the job done. We have to change – and radically.
For the benefit of all, the chancellor George Osborne must arrange it so taxation incentivises saving for life not for retirement. The latter will soon be an obsolete concept anyway. With each passing decade, more and more of us will not ‘retire’. We will merely alter the pattern and perhaps the nature of our economic activity.
Those who might have ideological objections to tax breaks of this kind should bear in mind that any strategy that fails to include incentivising those who are able to do more for themselves will not help those who cannot. Once again, it is a question of balance.
Closer to home, we in financial services have both responsibility and opportunity regarding this grand project. As a commercial sector, no one has more to lose. Equally, no one has more to gain. We need to play our part at every level, not least in creating value-for-money products that truly match consumer needs, complementing them with a variety of distribution media.
Nowhere is the opportunity greater than for intermediated distribution. The nation desperately needs what only we, at our best, can offer.
We have fretted for some time about attrition among intermediaries. This and the low amount of new, younger entrants has led to an adviser population with a high average age. Now, no one should see this seniority as anything other than an asset.
The Budget changes will place even greater emphasis on the need for advice ‘at retirement’. In addition, in future it will not just be a question of what to do at the point of ‘retirement’, but also about how best to manage the relevant assets through, on average, two or three decades when inflation will, undoubtedly, have its say. Those in this vast and affluent market will need constant help to retain adequate spending power at a time when, for them, personal finance will be more complex (with the consequences of getting it wrong more onerous) and thereby, more challenging.
We, in the intermediary community, are about to be in demand like never before.
Keith Carby is chief executive of Caerus Capital Group. The views expressed are his own.
Key points
There appears to be a paradox in the government’s relaxed approach to pensions and rigid rules over mortgages.
There needs to be a complete re-engineering of the approach to pensions and retirement
The government must provide taxation incentivises saving for life not just for retirement.
