Martin Tilley: Missing the mark on financial education

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Extended mortality is no longer a phrase thrown around just in actuarial circles. The problems it creates – most notably financial – are becoming more widely understood, both among the older generations to whom it directly applies and those who work with and advise on its effects.

The Government is also acutely aware of the issues, which has resulted in the continual tinkering of the state scheme benefits, arriving at the current single-tier structure to which we are all now resigned. However, this extended mortality is as much a problem for the Government as it is for the electorate.

So much so that the recent consultation, which closed at the end of last month, focused precisely on the issue of incentivising people to save for their retirement and the sustainability of the cost to the Treasury of the tax relief that can be seen to subsidise it.

The Government paper focuses heavily on the tax relief, which is of course its burden, albeit one that has reduced in recent years as a proportion of total Treasury tax-take, primarily as a result of cuts in the annual and lifetime allowances.

It cannot be denied that the knowledge tax is being saved on pension contributions is an incentive. This has been drummed home in the recent high profile example of workplace pensions which, along with the similarly high profile relaxations of accessibility of benefits at retirement, has enthused more to save into pensions.

However, notwithstanding the tax reliefs, there are two other crucial aspects that must be present to incentivise pension savings: trust and understanding. Trust for the individual in that a vehicle will deliver benefits at a time and in a format that was expected at outset, and understanding in that the individual has a full working knowledge of the tax, investment and benefit features of a long-term pension savings plan.

The former can only be provided by the Government undertaking to remain with the current pension framework, irrespective of some of its flaws. The latter already has a framework to be supplied by commercial entities, such as financial advisers.

However, the availability of the latter, because of the demand and commerciality, results in an advice gap for the lower-net worth or younger individuals to whom the need to save is perhaps greatest.

We have long been advocates of education at an early stage and so it was interesting to see MP and Treasury select committee member Mark Garnier speaking at the Conservative party conference this month on the topic.

His idea that commercial providers of financial products should act as a resource to boost financial knowledge of young people has met with some criticism, however. The idea this would benefit both providers and the country as a whole has its merits but it is open to some key questions about its delivery.

Most importantly, his suggestion the private sector could work in their local areas would potentially mean there is no coordinated approach across the country. A firm specialising in one area of financial products could emphasise the importance of that product to a greater degree than products in which it was not operating. This, without intent, could also be regarded as pseudo- advice, simply by name awareness of the tutoring company.

For education to be introduced to the younger generation it must be at curriculum level and standardised across the country. What is more, it must be delivered in an unbiased way. This might be through advisers but, again, their availability and the commerciality may not make this viable.

Most probably it could be undertaken by specialists trained in education and financial acumen. Where the latter is required, it seems logical it should be state funded.

While this has an upfront cost, is it not in itself an investment for the long term, along the same lines as the one the Government is asking the electorate to make?

Martin Tilley is director of technical services at Dentons Pension Management