At the FSA's open meeting on polarisation, it was argued that regulation focusing on making the existing market work is missing the point. The greatest gains, it was claimed, will be achieved by raising the level of retirement savings and this should be one of the primary objectives of regulation. This is plausible but is it right and what should be done about it?
I would like to take you back to the four fundamental reasons why people are not saving as much as the ABI and the Government think they should.
First, some people are well aware of what they need to save for retirement but nonetheless choose to spend their money, invest it in non-financial assets or use it to fund their children's education. The authorities may not like this but, since these people are making an informed decision, economics suggests they will have to lump it.
Second, some people are not saving because taxes and market conditions cut the returns to artificially low levels. There is a clear call for policy remedies here and part of the motive for Cat standards and stakeholder pensions has been to cut costs in the hope of raising returns for savers.
But the tax and benefit systems can have far more powerful effects on the savings decision. Some low-income households, for example, find that the minimum income guarantee means that any saving they do for retirement simply cuts back the benefits they would have received from Government. Faced with a significant “tax rate” on savings, such people are better off spending their money now.
Until the distortion is removed, it would not only be impractical but also undesirable to force them to save more.
The third group of people present a harder call – these are the considerable group who believe that the Government will provide adequately for them in their old age. They may believe they are making a rational decision based on the information they possess but, sadly, are likely to find they have made a mistake.
Here, the paramount need is for the Government to come clean about just how mean UK state pensions are compared with those in the rest of Europe.
Finally, there is a group of people who want to save for retirement but are not actually saving enough and will regret this when they get to retirement age. Encouraging them to cultivate a savings habit is the right thing to do and an important public policy goal. But how many of them are there and how can they be encouraged effectively?
Raising retirement incomes is more complex than just encouraging people to save. The reason they are not saving affects the sorts of policies needed to tackle the problem. But policies aimed at solving one problem can have unexpected effects elsewhere in the market.
One obvious way to increase retirement savings is to make contribution compulsory. This would benefit those who have mistaken beliefs about state provision and those who are not saving. But, for the rest, forcing them to save more in this way will simply not work. They will mainly find ways to draw down their existing savings, realise assets or borrow to finance the desired level of expenditure.
Those on very low incomes, whose entire income is required to fund basic needs, are the least likely to be able to borrow from conventional sources and could face the very high rates of interest charged by informal or other disreputable providers.
Before the Government can act, the industry needs to find out how large these various groups are and think through what the best future policy is for each. Only then can it affect the policy process to unambiguously good effect.
Tim Wilsdon is principal of Charles River Associates