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Nudge, nudge, save some more

David Thompson, managing director of wealth investments & distribution, Axa Wealth, says a generation facing a later state retirement age need to have their choices set out by making lower-cost advice available to the mass market

This Government is committed to removing the default retirement age and is looking to bring forward significantly the rise in state pension age to 66 from the original target of 2026. It is possible it could also bring forward further increases in state pension age.

I started thinking recently about how the industry could translate these changes into stronger messages to encourage people to take more personal responsibility for saving, especially as the Nest reforms, if implemented, will introduce millions of people to the long-term savings market for the first time through pseudo-compulsory state provision.

On the current timetable, set by the previous Government in 2007, the state pension age is due to rise to 66 by 2026, to 67 by 2036 and to 68 by 2046.

But the demographic and economic situation have changed since these figures were set in legislation and the Government is desperately looking at ways to cut its overall benefits bill while still having regard to the principles of fairness and equality.

When the first contributory pension was introduced in 1926, the men receiving it lived, on average, until 76. Today, men are expected to live until 86.

For women, the increase is from 78 in 1926 to 89. This increased longevity is projected to continue rising. Figures from the Department for Work and Pensions show the number of people over 65 will be half as many again in 2030, and will have doubled by 2060 compared with today.

Longevity is continuing to play its tricks on fiscal projections too. Since the last Government set its timetable for increasing state pension age to 66 in 2026, the Government Actuary’s Department’s prediction for the average length of time that someone is expected to be in receipt of the state pension has already increased by a further 1.5 years for men and 1.6 years for women.

The Government has a clear need to persuade people to work for longer. The resulting increases in tax revenue, reductions in benefits and deferral of state spending on pensions are all positive fiscal outcomes from this cultural shift but there could be unintended consequences.
In a poll of large employers operating pension schemes with Axa, human resources directors expressed a clear preference to maintain a default retirement age – not because of any deep-rooted belief that older people are not as capable of performing as well as younger people but because of the fact that knowing you will be asking employees to retire at a specific date provides a degree of certainty.

That certainty helps in succession planning and in encouraging people to think about how they will fund their retirement.

This adds an interesting dimension to financial planning. We know that the current economic participation of employees in the workplace is closely linked to state retirement age.

In a poll previously conducted by Axa, employees confirmed that the single biggest factor which was likely to persuade them to take more personal action to save would be an increase in the state retirement age but behavioural economics present us with a different picture.

Faced with the removal of a default retirement age, employers being encouraged to retain staff for longer or face possible legal action and increasing longevity being accompanied by improve-ments in health across the population, the question I would like to pose is will people really be spurred into saving more because of this?

I think the answer is largely dependent on what is popularly becoming known as the nudge principle. People know they need to save more than they do but they do not because of a number of factors ranging from lack of surplus income to a belief they will be able to carry on working well into their old age or bail out via downsizing in later life.

The truth is that people enjoy spending more than saving and try as you might that is not a cultural attitude that will be shifted through polite messages or short-lived campaigns which are impersonal and do not directly target the concerns and attitudes of specific individuals.

I believe individuals retiring in 2026 and beyond do not have the same values regarding long-term savings that their parents did.

Exposure to decades of easy credit and unprecedented levels of unsecured borrowing, which are now among the highest in Europe, have culminated in a belief that living for today can always be paid for by working tomorrow.

As a concept, this may well work for many and the Government will be quids in if it does. An indebted populace with little long-term savings or means of funding retirement other than by continuing in work fits directly with Government objectives of encouraging people to work longer, increasing tax revenues and reducing that benefit bill.

But this is a highly risky strategy. It relies on a number of assumptions which will come under significant challenge as UK plc continues to compete in a global market with lower-waged overseas competition on the increase.

Ask individuals the following questions and the wisdom of working tomorrow to pay for today will begin to become a questionable strategy at best, and disastrous at worst.

What if you do not remain well enough to continue in full-time employment? In particular, a considerable number of people in heavier manual occupations are physically unable to continue in work up to current retirement age, necessitating early retirement or a change of employment.

This is not only the domain of manual workers. It is increasingly seen that professional employees seek early exit due to stressrelated conditions as longer hours and higher demands take their toll.

What if you want to retire at 66 but have not saved sufficiently to do so? Will you want to continue in work or risk taking a substantial drop in income?

What if you have to settle long-term debt or unsecured borrowing much later in life? Will that eat into funds that you had earmarked for retirement planning, etc?

These questions will get to the heart of concerns that many individuals have but which have been put to the back of their minds unless prompted to address them.

Many individuals have access to financial advice, and these are the sorts of questions which help people to develop a long-term plan, call it lifetime cashflow planning if you like. Currently, such advice is largely the domain of the very wealthy or those who regularly receive financial advice.

I believe that the only way the nudge will become effective is if we can find a way to make advice more accessible at lower cost for a larger part of the population.

Long-term savings will become a more demanding discipline, with the requirement to balance accessible funds in wrappers such as Isas and investment bonds playing equal roles to traditional retirement vehicles such as pensions.

The ability for consumers to understand their total net worth when viewed against the background of property assets and any loans or borrowing will also play an important part in developing the right strategy.

At the moment, access to such advice remains the domain of the few. But it is clear that without measures to make access to advice more easily available to a bigger part of the population, we are unlikely to see the cultural shift needed to ensure that people are in control of when they retire and not merely at the mercy of a timetable which will see the retirement age moving further away into the future.

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