View more on these topics

Mind the savings gap

Earlier this autumn, Oliver Wyman & Co published a report, The future regulation of UK savings and investment. This was the outcome of a study sponsored by the ABI and it included interesting conclusions on the importance of advice and the ways of delivering it to different consumer groups. The report also included a wide range of statistics on savings in the UK and the UK market that are worthy of close examination.

According to the report, total household assets in

the UK amount to £4,782bn. The biggest items are home equity (24 per cent) and occupational pensions (23 per cent). Personal pensions account

for a further 9 per cent. So houses and pensions represent more than half of UK household financial assets. Not too surprising (if anything, it is

perhaps surprising that it is

not a higher proportion).

The report also shows that the split of household financial assets between pre-retirement and post-retirement is two to one. This split is very much dependent on the demographics of the population and again is not surprising.

Despite the working population (18 million households in the UK) holding £3,232bn of assets, the report concludes there is a savings gap which is, in many circumstances, significant. The estimate of the additional savings required to generate an acceptable retirement income is £27bn a year.

Analysed by income the savings shortfall, as a percentage of income, reduces as income level increases. By age, the position is more erratic. Overall, half the working households in the UK were deemed to have a savings shortfall in 2000 greater than 10 per cent of their current income – a frightening thought but a major opportunity for providers and advisers.

An interesting conclusion that the report reaches is that UK savers could close the savings gap by £12bn a year by saving smarter without saving more. The biggest contribution to this amount is the £5bn a year which could be saved by efficient use of existing debt. That is, repaying debt rather than saving. A further £3bn could be saved by utilising pensions tax relief and £2.6bn by reducing “rainy day” investment levels and increasing saving in equity-type investments.

The final area for potential savings is £1.4bn a year arising from using providers with lower charges. This is an area of ongoing debate but this study found little evidence that higher charges could be justified by better performance.

Whether the savings gap could be closed by more than 40 per cent by just improving “efficiency” is also a matter of debate but the challenge to see the value in amending current arrangements rather than just saving more is valid.

It may also be that this opportunity window is closing. The report highlights that the UK savings and investment industry became significantly more cost effective during the 1990s with expenses rising much more slowly than sales.

The view expounded in the report is that these productivity improvements led to reductions in charges to consumers rather than increased profitability for providers.

This is believed by the authors to be largely as the result of a competitive market in the UK. If there is this competitive pressure, it is presumably reasonable to assume that the element of the gap which may be closed by efficiency

is declining.

The measure of competitiveness used in the report is the Herfindahl index. The worst score on this index is 10,000 and any score exceeding 1,000 is generally taken as evidence of over concentration. During the 1990s, the score for UK investment and savings increased from 230 to 280 but is still the most competitive in Europe. This is a reflection of the wide choice available to UK consumers and advisers.

The report concludes that although the savings gap

can be partially closed via efficiency, further work is required. The view is that advice

is needed to encourage savings (and the report concludes that there is a casual link between access to advice and the amount saved).

It also proposes, however, that “advice” can mean different things to different sections of the population. In some cases (generally at the lower-income end), the need, it suggests, is for encouragement

to save rather than spend. In

others it is to help select the most appropriate investment.

The report also proposes changes to the regulatory regime in the UK. The challenge to UK Government, providers and advisers is to find a mutually acceptable outcome which results in a significant closure in the savings gap. Ron Sandler has picked this up as a key element of his review.

Recommended

Ruth Kelly statement in full

Economic secretary Ruth Kelly has set out the reasons for statutory regulation of mortgage and general insurance intermediaries and advice.”Buying a mortgage is the biggest financial decision of most people&#39s lives, they need to get it right and high quality understandable advice is crucial. Regulation will ensure a high standard of advice is available across […]

Industry&#39s anger over FSA bonuses warning

The FSA is warning life offices to use prudence when determining annual bonus returns in what is seen by the industry as a bid to prevent another Equitable Life debacle.In a statement released this week, FSA managing director John Tiner said: “Companies should set bonus rates at levels that do not jeopardise payments to policyholders […]

Dazed and confused

Since the Chancellor&#39s pre-Budget statement, domestic political attention has been focused on the NHS. Almost unnoticed in his report was a new commitment to massively increase means-tested welfare spending on pensioners – by £2bn in 2004/05 and successively larger amounts in the future.This, however, increases the complexity in an already opaque system, which has implications […]

Clerical fears Skandia deal is part of wider trend

Clerical Medical fears Skandia&#39s bid for Bankhall is part of a wider trend which could see a handful of providers controlling most of the IFA distribution. Clerical&#39s head of strategic marketing David Shelton says deals such as Skandia&#39s could lead the public to call into question the integrity of the advice they receive from provider-owned […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com