Financial Adviser article reviewing Treasury Select Committee report on long term savings
by Dr. Ros Altmann
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The Treasury Committee Report on restoring confidence in long-term savings, highlights some very important issues and raises some valid criticisms of financial services industry practices and the role of advisers. However, its recommendations fall far short of the radical overhaul of savings and Government policy that are required, if people are to start saving again.
The report offers useful suggestions about raising standards in financial advice and improving the attitude of providers to customer needs. Anything that can make the presentation of information about financial products easier for the man in the street to understand, has to be useful and removing all the jargon, standardising terminology and forms would be a major help. The Committee’s challenge to providers to design a summary box of vital information is a really good idea. I hope it can be achieved in a way that gives meaningful information for the consumer. Incentive fees and rewards for investment success are long overdue, but the removal of trail commission may have downsides too. If there is no trail commission, advisers will quickly have a significant incentive to encourage customers to ‘churn’ their portfolios too often, switching to new products which provide the initial commission every year. I think it might be better to offer some of the rewards to the adviser after a period of five or ten years, dependent on performance of the product.
However, the biggest failing of the report is that it does not focus on some of the most important issues which face long term savers in the UK. The bottom line, at the moment, is that most investors believe that the risks and difficulties of saving are greater than the risks and difficulties of not saving. The Report talks at length of the need to satisfy the customer, but has not really outlined what it is that the customer wants. In my view, there are two crucial elements missing. Firstly, most people need help with financial planning, not just selecting a product, (for example, ‘Should I save or not?’ and ‘How much should I save?’) and secondly, most investors are unhappy with long term savings because they have lost money or heard of scandals where other people have lost money. It’s as simple as that. The average private investors’ idea of risk is ‘Will I get my money back?’ In the past, advisers and companies relied on the notion that equity markets always go up over the long term and this is far too simplistic a view. There was never enough focus on the downside risks.
Products with some kind of capital protection are an obvious choice for encouraging people, who are afraid of the losses in the past being repeated, back into the market. This may not be the most sensible approach from a long term professional investors’ point of view, but people need time to get back into the savings mind-set. In order to deliver these types of products, two elements could be considered, which are not touched on by the report. The first is to look seriously at National Savings, which offer a money-back guarantee from the Treasury itself. The second is to consider developing a medium term savings product range, to fit in between the instant access of ISA’s and the ‘locked away for decades’ pension. A product designed with a 5 or 10 year life, with a level of taxpayer-funded incentive (but lower than for pensions) would be a possible way of making long term savings seem less frightening than relying on pensions. I have called for the development of a medium term ISA, as part of the framework of a lifetime savings account. This account could take care of all a person’s financial needs, potentially right from birth, including some advice and progressing through to old age, retirement and post retirement too.
I don’t think the Report has taken a broad enough view of all the issues which have destroyed confidence. In particular, it has not focussed on the role of Government policy and the major disincentives that this has put in place, nor on the absence of proper incentives for everyone who does not pay higher rate tax. It fails to really highlight the significant disincentive of the Government’s Pension Credit policy, which has now, in my view, made pensions unsuitable investments for the majority of the population. Confidence in long term savings does require change on the part of the financial services providers and advisers, but in the context of current Government policy, pension savings have been undermined. Given the failure of occupational pension schemes, the move towards defined contribution provision and the penalties imposed by the means test on pension savings, it is impossible to see how confidence can be restored without a change in the State pension system and it is vital that policy moves beyond simply looking at supply side issues (giving people cheaper products and clearer leaflets). It needs to address the demand for savings. In particular, fairer and clearer savings incentives are needed from Government to encourage individuals to part with their money for long periods. Giving everyone higher rate tax relief, but phrasing it in terms of a matching incentive – the Government will give you £2 for every £3 you put into your pension – would help people understand what is on offer.
Reducing the extent of means testing is a necessary condition for restoring confidence in pensions, but it is not, of course, a sufficient condition. In its remarks about financial advice, the Report seems to have followed standard industry practice of focussing on product selection, but has not looked at the need for financial planning help or how to deliver better help to the mass market. The Report seems to accept that only the higher net worth investors will have access to full independent advice, because it is so expensive to deliver advice in the current regulatory environment. It does not really address the fact that individuals need advice and help, in order to encourage them to save. If the advice is too expensive to deliver to the mass market, then just letting people manage without advice and try to make these important financial decisions on their own is not the answer. It is essential to find ways of delivering the advice more cheaply. For example using the economies of scale in workplace advice, would be much more useful for individuals than just doing away with advice and relying on generic materials. If you went to the doctor for help, you would not be satisfied if he just gave you some leaflets on diseases and medicines which fit your general symptoms and told you to go to the chemist and select what you want from the pharmacist!
There is also no mention of the after-retirement market, which reflects an enormous part of the wealth in this country. There is, intriguingly, no discussion of annuities –products which suffer from enormous lack of trust, which the Government forces people to buy and which they can never change if they buy the wrong one. Nor is there any discussion of income drawdown and other post-retirement investments, which have often let investors down. Those who are retired have huge amounts of wealth and they often invest for 20 or 30 years.
In summary, the Treasury Select Committee has not looked at the issues affecting confidence in a sufficiently comprehensive manner and does not seem to show an in-depth understanding of what consumers really want and need. Much more radical change is needed, both in Government policy and from the industry. Consumers do not just need advice on products, they need help with financial planning, how much to save, where to save, what risks they can take when and so on. The omission of the after retirement market is disappointing, as is the lack of attention to the demand side of the market, but the weakness of the criticism of means testing is a major disappointment to anyone involved in trying to encourage more people to put money into pensions. In my view, until pension credit is changed, pensions confidence cannot be restored.