Graham Bentley: Getting people to kick the no-savings habit

Saving can be difficult but the industry needs to help people take action before it is too late

Last year’s collapse in net fund sales and the particularly punishing haemorrhaging of assets in the UK All Companies sector hides a deeper malaise – most people aren’t saving.

Office for National Statistics figures tell us the Household UK Savings Ratio – the percentage of disposable income that is saved – hit an all-time low in Q4 2017 at less than 2 per cent. In 2016, the Money Advice Service suggested that 16m people had less than £100 saved. Last year, a survey by Skipton Building Society found over 60 per cent of 25 to 34-year-olds have no savings.

Furthermore, one in four people – one in 10 over age 55 – have yet to start saving.

Saving is difficult, while spending is gratifying – delayed compensation versus instant gratification. Spending has a goal, but savings ambitions are often abstract. Even retirement is a nebulous, over-the-horizon concept for many.

Graham Bentley: A message to the fund buy-list naysayers

We know that abstract objectives are difficult to plan for without a target. Without a savings “habit” people will prioritise near-term goals and put off long-term investment, until it’s too late.

Spending is expedited by historic low interest rates – borrowing is cheap, encouraging a “buy now, pay later” mindset. According to the statistics portal Statista, the average millennial has around £3,000 of debt, even before counting student loans and mortgages.

Moreover, saving can appear pointless given such low rates. People grossly underestimate the potential for capital accumulation over 40 years due to an ignorance of the effects of compounding annual returns. This leads to an underestimation of the “cost of waiting”, allowing putting off saving to appear innocuous.

Experiments have demonstrated that highlighting the exponential growth of savings motivates young people and employees to save more for retirement. In 1977, when inflation was running at an annual rate of 16 per cent, the building society recommended deposit rate was 8 per cent, while the mortgage rate was over 12 per cent.

Nominally, saving made sense versus borrowing. To beat inflation, it had to be focussed on “real- assets”, according to the salesmen who were persuading baby boomers to commit 5-10 per cent of their income to monthly savings via a relatively new idea – unit-linked savings plans. Opportunities to invest in equities, gilts and commercial property previously confined to the rich became democratised.

According to illustrations at the time, a 23-year-old saving £25 a month could expect to have over £160,000 by age 65 – then the equivalent purchasing power of over £1.1m today. Of course, we now know that the spending power of that £160,000 has turned out to be, well, £160,000.

However, increased earnings and employers’ pension contributions fuelled a savings ratio that approached 16 per cent by the early 1990s. The original 10 per cent illustration has turned out to be conservative for global equity investors, with more like 12 per cent being the overall compounding rate over 40-odd years.

Here’s the magic of compounding – a 2 per cent increase in the rate of annual returns would have increased the projected total by almost 90 per cent.

Workplace pensions have the opportunity to strengthen the savings habit. Making employees aware of the advantage exponential growth delivers before they decide how much to save would be of even greater benefit. 

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Workplace pensions aside, our industry has avoided making much of an effort to offer the mass market opportunities to get on the real-asset investment ladder. Post-RDR it has returned to servicing the already-wealthy and has little interest in those who might aspire to be so. It is argued that the mass of less-wealthy adults would be better able to help themselves if only the education system armed schoolchildren with an understanding of financial management and related products. This has indeed been on the school curriculum since 2002 as an element of the National Curriculum Key Stage 3 and 4 citizenship studies.

Since 2013, Stage 4 has included study on income and expenditure, credit and debt, insurance, savings and pensions, financial products and services, and how public money is raised and spent. However, academies do not have to follow the National Curriculum, and as the Association for Citizenship Teaching told a Parliamentary select committee, some schools “have stopped teaching the subject”.

Financial education creates five-fold return on investment, study finds

In asset management, the pursuit of existing wealth dominates business models and remuneration packages. Marketing should be about delivering on expectations, at a price point that feels right. It is time managers thought laterally.

Does the average long-term investor need instant access, i.e daily dealing? Savers are used to term deposits; if you want people to stay in the market rather than panic, offer quarterly withdrawals instead of daily, with a cheaper share-class.

While fund managers (and salespeople) earn hundreds of thousands of pounds a year, and schools ignore their responsibilities to prepare kids for financial pressures, the savings privilege gap will get wider. To hark back to 1977, in the words of The Stranglers, Something Better Change.

Graham Bentley is managing director of gbi2


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I just don’t buy the financial education making a difference point.

    Saving is not a natural thing to do so people need an incentive or they need to be lead. It’s probably not a coincidence that the highest savings rates occurred at the same time as tax relief on investments and the most active periods of sales forces – but there are No More Heroes…

  2. It might help were the government to curb today’s endemic buy now, pay later culture by imposing a limit of, say, three times nett monthly income on unsecured borrowing. But, because such a measure would slow consumer spending (all too often on stuff people don’t really need and can’t afford), the chances of that happening are sadly slight, so the personal debt bubble continues to increase relentlessly.

    FWIW, I think financial education WOULD make a difference and is an initiative that should at least be tried. What kind of retirement do you want? One in which you struggle to make ends meet from one month to the next or one in which you won’t be forever worrying about being able to pay your bills and you’ll be able to take a couple of holidays every year? Who in their right mind would choose anything other than the latter?

    Okay, if that’s what you want, YOU need to start laying plans, sooner rather than later, to get there and, if you don’t know how to go about it, seek advice. There are no quick and easy fixes.

    But, when all is said and done, whilst you can lead a horse to water, you can’t make him drink and, for those who absolutely refuse to drink, there’s nothing we can do.

    Penury is one of the most common fears of old age, so why don’t more people take action to avoid it? The answers HAVE to be lack of education, an over-complicated retirement savings framework (which the government is doing nothing to address), fear of the unknown and reluctance to engage with the process of financial planning. Education could make massive strides to tackle those societal malaises.

  3. I am with Grey area on this ..

    I don’t subscribe to the financial education point at solving the issues

    Saving is largely inherited….grand parents, parents, pass on their savings skills children and their children’s children…we may knock the large sales forces from the past, but they served a purpose from the early 1900’s and a large chunk of the wealth I deal with today is the result of that.

    “Always the sun” is more like “Golden Brown”

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