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.
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.
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”.
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