There was a Dilbert cartoon many years ago in which a new “bungee” boss started. In the second frame, the new boss dropped in with elastic around his waist, tried to change the strategy, but was yanked back out by the bungee rope before he has time to complete his sentence, leaving Dilbert and co. murmuring sarcastically about his impact and the difference he had made.
Whilst we can all appreciate the joke about the effect of over-frequent reorganisations in large firms, it isn’t always as funny when you are on the receiving end. To that extent, we can but pity the staff of the Department of Work and Pensions who are now onto their sixth minister in under four years. The previous five Secretaries of State have lasted an average of a mere eight months each. Given the unwieldiness of the department and the issue of Brexit overhanging all Government departments, they have had difficulty in having much of an impact on any of the department’s areas of responsibility, in particular the pensions sector.
With Government ministers coming and going like tube trains at rush hour, civil servants are back at square one each time, with every initiative having to be re-introduced to the new minister and his or her advisers. This may be fine for the day-to-day management of the department’s responsibilities, but it is difficult to come up with effective long-term strategies under these circumstances.
Contrast this with the situation two government’s back, when both the Secretary of State for the DWP and the pension’s minister were in place for the entire five-year lifetime of the government. The effect was that irrespective of what was happening elsewhere in government, the department was an oasis of stability and, as a result, it was able to usher in striking policies that impacted the financial services sector hugely. An example of this is auto-enrolment, which showed how the general public could be nudged into long-term saving by a well-designed approach. Similar stability at the Treasury and its agency the Financial Services Authority, lead to the introduction of the Retail Distribution Review, radically changing the way that advice services are delivered.
These were truly game-changing events that had a significant disruptive effect on the market. Whether one agrees with the strategy or not, at least one was in place and those working in the industry could both see the direction of travel and have input into the process surrounding the devising and implementing of these new approaches.
Charting a steady course
Without getting into the details of why there is such turbulence in the government ranks, it is to be hoped that the whole process will move into calmer waters soon. Lacking stability, we cannot successfully review existing strategies; build on successes and ameliorate any downsides which may have emerged. In particular, the two major achievements of the 2010 – 2015 government in the field of financial services, auto-enrolment and the Retail Distribution Review - need to be evaluated and built on to ensure that we do not lose momentum.
Firstly, looking at auto-enrolment, the happy result has been a huge increase in the number of people saving for their retirement and with far lower levels of opting out than were originally feared. The approach of nudging people into long-term saving has been a major success.
However, the amounts being saved are still nowhere near enough to have a significant impact on the long-term financial security of employees. The government and the industry have to address how to recognise the individual’s success in starting to put a shape on their financial affairs and then work with them to make sure that they are protecting their financial future by holistic financial planning for the long term.
Financial planning for the future is not something that is instinctive for the mass of lower earners, as until now, many did not have any long-term savings at all. Now that they have broken their duck in starting to save for their pensions, it should be easier to energise them to make further improvements in the way they manage their finances.
The biggest obstacle to this is the fact that the world of finances is a complex one for those who haven’t engaged with it before. Help is needed in the form of financial advice, but this isn’t cheap. This brings us to the second improvement. Whilst RDR has been successful in ensuring unbiased financial advice is given to customers, it has had the significant side effect of making savers and investors wary of getting advice due to the cost. The effect of RDR has been not to make advice expensive - it always was - but to make it clear to the consumer just how expensive it is.
An obvious solution would be to involve the employer in some way in trying to reduce the cost and get financial advice to more people. Employers provide the easiest way to access employees and they are already involved in their employees’ initial foray into long-term savings via the employer contribution to the auto enrolled pension. However, there are difficulties for employers in encouraging saving, as anything that smacks of the provision of financial advice is forbidden. Employers are not qualified to advise people on their personal finances, so, policies are needed to help employers be part of the solution to the advice gap without making them responsible in any way for outcomes.
Talk isn’t cheap…
The ultimate effect of RDR has to been to reveal the cost of advice on savings and investment, the very area that the government has focused on in the auto-enrolment process. If we are to help people to save more based on the success of introducing them to the concept of financial management through the auto-enrolment process, then we need to be able to give them the opportunity to get advice in some manner.
Some attempts have been made to dale with this; viz. the pensions advice allowance. The take-up however has been very low, as could have been predicted. The problem is that for most people, it is not the ability to access the £500 to have an advice session that causes the problem – it is the poor value it appears to be to get £500’s worth of advice when your pension pot is only £30,000. This problem of value has been ignored by the regulators and industry in favour of resolving the less present issue of access.
The lack of advice being received by those with lower levels of savings is a big issue and needs to be tackled head-on. It is time to revisit the possibility of providing vouchers for financial advice for people at key moments in their lives, such as when starting work, or just at retirement. This would mean that full professional advice could be given to each saver funded by the taxpayer. Whilst this may sound expensive, the department should be working out whether it would be better value than the current approach, which may leave many people making poor decisions about their investments and ultimately falling back on the state for support in their later life.
Scammers flocking in
Another key problem that is crying out for a strategic solution is the whole area of financial education. A good base education would not only mean that there would be less of a requirement for financial advice, but it would also make it harder for people to be ripped off.
There have been many cases of financial scamming of people who are on the verge of retirement and who have been convinced or coerced into investing in risky schemes at the behest of scammers on the phone and who, as a result, have lost some or all of their life savings. It has been thought, up to now, that the most risk was with the elderly, but it now appears that millennials are even more at risk.
Recent research has shown that they are the most likely to fall victim to financial scammers, with Millennials much more at risk than baby-boomers. This is perhaps because of their lack of suspicion of offers coming at them over the phone or via email or social media site. Researchers with Truecaller, a phone identity software provider, found that approximately 38 percent of men between the ages of 18 and 34 lost significant amounts of money to phone scammers in 2015, while roughly 17 percent of women suffered the same fate. Norton, a major cybersecurity company, conducted a study and determined that up to 44 percent of millennials were victimized by online crime, such as identity theft or fraud, in 2015. Meanwhile, just 16 percent of “baby boomers” (those born between 1946 and 1964) reported being victims of online crime last year.
Although one might think that a generation that spends a great deal of time on their phones and using computers might be able to avoid online scams, the reality is that the use of technology by so many young people has probably made them less apt to question an Internet email or a text message on their cell phone.
Education, education, education
Clearly, there is a lot of work to be done in the field of education to help people become more aware of financial issues and to allow them access the kind of support that will help them to avoid becoming victims of scams like these. Financial education is not something that can be put into place overnight. It requires curriculum changes in schools and other ways to update financial education throughout one’s life, in order to be effective. Once again, programmes that involve both schools and later workplaces seem like the ideal starting place for this kind of education.
But wider provision of advice and the improvement of levels of financial education across the population are long-term strategies requiring national roll-out and to make progress in these areas, the government need to have stable teams devising and implementing solutions. A constant whirl of the carousel of responsibility within government works against the idea of long-term coherent planning.
Focus on long-term stability
These are just a couple of the issues that need addressing at the moment, but with the best will in the world, it is hard to see how this could be addressed when new ministers keep arriving and priorities keep changing.
The achievements of ministers with stable tenure has been remarkably better than those whose time spent there is not sufficient to truly develop and understanding of the issues involved. Long-term saving requires a stable environment underpinned by long-term government strategies to encourage and support it. Perhaps the goal of ministerial longevity should be recognised for the benefits it brings and should be seen as a primary goal of all administrations in the future.
Reshuffles don’t promote good long-term planning and, whilst stability in government might be boring for the media, in terms of the benefits that it brings to overall government strategy, and of the benefits it brings to the citizenry, perhaps it should be regarded as a key goal in the future. At the very least, both the life and pensions industry and the ultimate consumers of financial products would benefit from being able to plan in a stable environment.
“This article was originally commissioned for the October 2019 edition of the Investment Life & Pensions Moneyfacts Magazine.”