FT ‘Personal View’ article questioning the inadequacy of Government policy to encourage savings
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
I met an economics undergraduate last week who was mystified by UK pensions and savings policy. He wanted to know why, after countless consultations and several new Government policies to encourage savings, the savings ratio has hit an all-time low, borrowing levels are at record highs and a pensions crisis has developed. How could policies designed to encourage saving by ‘Middle Britain’ have gone so badly wrong that they have the opposite effect to that apparently intended?
He wondered whether it could be that, while paying lip service to the desire to increase savings among middle income groups, the Treasury is actually determined to ensure that only the top earners (who would save anyway) are encouraged to do so.
He suggested a potentially dangerous short-term scenario and, I must say, I found his analysis hard to fault. He believes the Chancellor is desperate to preside over a strong economy, so the last thing he wants is for people to suddenly start saving. The UK economy’s remarkable recent performance has been supported by a housing boom and Government spending on job creation in the public sector. Is this all part of the Treasury’s plan? Rising house prices have a positive wealth effect, increase consumer spending on housing related items and fuel sharp rises in borrowing, all adding to short-term economic strength. The Treasury also seems unusually keen to prolong the property boom. Almost immediately after the Bank of England Governor warned of the risk of falling property prices, the Treasury rushed to reassure investors. In fact, the student points out that the latest pension reforms will encourage even more investment in property, allowing residential housing to be held in personal pensions.
He suggests that policy may be driven by a ‘growth at all costs’ agenda. If the Chancellor’s aim is to keep the economy strong, as long as he is Chancellor, then policy will continue to encourage unsustainably high consumer spending and borrowing and discourage saving among middle-income groups. This will continue until someone else takes over the keys to Number 11 and Gordon Brown can go down in history as having presided over a period of superb economic growth. However, the inevitable unwinding of accumulated debt, will be painful indeed in the longer term.
The undergraduate’s analysis of recent history provides further evidence. In particular, on savings policy, he asks what the Government has actually done to encourage savings? The introduction of stakeholder pensions, for example, ostensibly designed to get average earners contributing more to pensions, has only really been good news for top income groups. Wealthy grandparents saving for their grandchildren and high earners providing tax sheltered saving for their non-working spouses. Charges across all pension products have fallen, but the price cap has locked middle income investors out of the advice process, because advisers will not advise them within the 1% charge. This, of course, means that the target group will be highly unlikely to save.
The student is also puzzled by the latest measures to increase the stakeholder charge cap to 1.5%– including the new safe ‘Sandler’ products. Especially if accompanied by a simplified advice process, this is great news for advisers and providers, who can make more money out of helping the top income groups, but it could actually make things worse for the target group. Middle earners will not get any advice, and will also have no comeback if they buy the wrong product. Yet, he points out, the Government has already designed simple products, which would be ideal ‘safe’ Sandler stakeholder products – National Savings. They have no charges at all, can be either bond-like, or equity-like, and have a Treasury-backed moneyback guarantee, which no financial company can match. The notion of risk, for this group, is whether or not they will lose money, not outperforming the competition or an index. National Savings products are ideal for such investors. Why, then, is the Government not using these to start encouraging savings, if it really wants to do so?
If the Government is really serious about getting more people to save, he argues, where are the new incentives? There have been plenty of policies to improve ‘supply’ – encouraging cheaper, simpler products – but where are the policies that will actually increase demand? If people do not want to save, or have lost confidence in the savings industry – because of market falls and constant scandals – they need encouraging and incentivising. The only incentive is tax relief which is fine for high earners, but nowhere near enough for the other 90% of the population. There have been no new incentives to encourage employers to contribute more to pensions (other than their own!) Even the limit on ISA’s has been cut, as have the tax breaks on both ISA’s and pensions.
The most damaging of this Government’s policies, he thinks, is the Pension Credit. The Government said it launched this policy, to ensure ‘it always pays to save’. However, in reality, this is simply not true. Pension Credit actually undermines pension saving for the majority of the population. About 80% of future pensioners will be entitled to Pension Credit, rendering pensions ‘unsuitable’ for most people, since they risk losing at least 40% of their pension income in the means test when they retire. In fact, the way the policy works, those not entitled to full Basic State Pension (which is most women) will lose all the first part of their savings, pound for pound. No financial adviser can safely encourage the target group to put money into a pension. So much for encouraging pensions!
This poor student is left utterly confused about UK savings policy. He is eagerly searching for someone to explain to him why his analysis of the Chancellor’s possible personal desire to keep growth strong at all costs as long as he remains Chancellor is wrong and how this Government’s policies will really increase saving for middle income groups, rather than just for top earners. I’m afraid I couldn’t help him. Any ideas?