Emma Wall: Hello and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and here with me today is Tony Stenning, Head of Retail U.K. for BlackRock.
Tony Stenning: Morning, Emma.
Wall: Hi, Tony. So you're here today on behalf of TSIP, perhaps you can quickly explain who they are.
Stenning: Yeah, what is TSIP? TSIP is the savings and investment policy project. This is an unprecedented coalition of 50 entities from right across the financial services spectrum. So retail banks through to building societies, asset manages through to IFAs, and we also have insurance companies represented as well. But more importantly than that, we've also got the main trade associations and crucially the consumer groups.
Wall: So in a nutshell, everyone you'd want to be involved to make a change in the investment industry if it was going to be done.
Stenning: Absolutely. For once we've got them around the table, we have a problem and that problem is if we don't adjust our way of investing, our mindset, that around 2035 we're going to reach a tipping point where a generation is going to retire worth of than the previous one, the first time that's happened for 100 years since basically the creation of the welfare state.
Wall: One of the things you're focusing on is this barrier to entry, which is the complexity of the investment world, starting with the language which, you know, even those of us who have worked in it for a while, still find baffling.
Stenning: It's almost an impenetrable jungle, isn't it? And that manifests itself in terms of those challenges that we see. If people are saving, our own Investor Pulse survey suggested they are saving in cash. That is not satisfying their long-term needs, because much more than that we have a whole raft of people that despite the massive improvements that we've seen over last few years in financial education, they still don't really understand.
One in six doesn't understand the balance from their bank accounts. 50% of the population doesn't understand simple percentages and yet as an industry, we talk consistently around our quartile rankings or our percentage of this or your interest rate of Y. So it is a real challenge for people to understand where they invest, how they invest and where best to get the bank for that particular bucket.
Wall: So we have identified the problem. The challenge obviously with that is what is the solution? What have all your heads come up with?
Stenning: Right. So together we came up with 96 ideas. You'd be delighted I'm not going to go through those with you today. We pulled it down to seven. Well I'm very pleased that actually, one of which has already been implemented, which is sort of intergenerational transfer of wealth.
So the pensions will, if you like, which George Osborne introduced last year, is not exactly what we proposed, but it's very close to and more importantly for me, we've won the debate in terms of getting wealth inter-generationally transferred.
So from those that generally have it to those that are trying to build it. So we've won that debate, much more to do on that and we'll come back and revisit that on this ongoing process. But that one I'm very pleased that we achieved last year.
That leaves us with six and it's nice we're left with six because that's three for the industry and three for the Government. And those for the industry around making saving much easier, so digital passport, how can we at your point of contact with financial services make it much easier for you to be on-boarded, for you to look at all of your assets in one place, for you to have the ability to transfer if you wish ultimately, but initially can we make it much easier to get your AML and KYC documentation sorted out for you.
Then it's around guidance and education. As I said earlier, a huge amount is being done in education, but as the Money Advice Service themselves pointed out, over 130 entities in the country is so far at the moment devoted to education. Can we have some sort of consistency and an application from both government and industry around that? And then at the point of contact with us, can we equip people with the knowledge and tools to manage their money much easier? We think we can.
And then you go to the government, what are we asking for from the government? Well, we know that pension tax relief is under consideration by all of the main political parties. We would like to engage with all of them, we would like to ensure that there is an enduring settlement for those lower and middle income families to save more.
Because they are the people that are really challenged, they are not saving, but at the same time maintaining the benefits for the higher rate taxpayers for pension saving and we thing there is a lovely matching required PCs that you can say to people. We can put it into their own language and engage them in a much simpler way. We'd also like to build on the success of auto-enrolment with auto-escalation. You may have heard of it from the U.S.'s Save More Tomorrow schemes.
As the economy continues to improve, as people get pay increases, can you elect to put a little bit of that the way each time you get that pay increase into your pension pot. What we are seeing in the U.S. is that takes you way above the contribution levels of 8%, those being suggested under auto-enrollment.
And it also, we think, can negate this cliff edge that we are going to face in September 2017 to October 2017 where auto-enrollment contributions, they may go from 0.8% from an individual's perspective to 4%. That's quite a substantial increase; auto rate so far being very low, I'm very concerned that could massively increase them.
Wall: Because it is an arbitrary increase?
Stenning: Completely, and also anyone then coming into the workplace is coming in at 4%, not 0.8% and gradually working up. We think it will be much better for everybody is it starts at a low rate, gradually Save More Tomorrow each time. So that by the time you reach 30 or 30-plus, you actually are at contribution rates way in excess of that 4% or 5%. Then if we can align those with some of the simplifications that we were talking around in terms of pension incentivisation, we think you can get to contribution rates around the 14%, 15% of the DWP one.
And the final thing is, let's get someone to own it in the middle of the government, have an applicant, have a champion. This is so important, but we don't have someone that owns it from that proverbial cradle to the grave from an individual's perspective, not just pensions, your medium and long-term savings as well, your housing needs, your long-term care needs, which at the moment sit within the Department of Health, let's get someone who owns all of this. Let's ensure that there aren't any unintended consequences from government legislation to a Savings Minister.
Wall: So the general theme running through all those sort of three for industry, three for government is simplification.
Stenning: Absolutely.
Wall: Making things accessible and approachable; the government has tried to do this before. About five years ago, they introduced this concept of kite marking. They were going to start with savings accounts; then they were going to move across to life insurance policies. And indeed to some investment products. It was launched with a huge fanfare and then it died down and no one ever spoke of it again. I mean, what's to make this successful where that clearly has failed?
Stenning: So I think on a number of levels. Firstly, making it easy for people to use financial services. I think with client marking, it was around product. It was product specific. I'm going to come back to client markings, because we do think they do fill a good useful space here, but if we can make it very simple for people to access financial services.
Even when you go to fill out your contact details ones, you haven't got to go and get your passport certified by your bank, provide two, maybe even three copies of your utility bills, and we will bank online now. We will try and get everything sent to us digitally, is there a way of us digitising that and making it much simpler.
In India, 60% of the adult population have these digital passports. It's a huge success there. We can leverage some of these points from around the world to make it, I think, a success here, too. But client marking, to answer your question specifically, we'd like to turn it on its head and that should make the client mark more around kind of general guidance criteria rather than making it product specific. You want to save, you think about how much do I need to save to meet my needs.
There must be some very simple, almost rules of thumb there I say that will relate to 90%, 95% of the population. It might not be for everybody and if you're not one of these 5% or 10%, you can go elsewhere and get some proper guide and proper advice from financial adviser.
But at least it gives you that sort of initial steps what might you need to have as an emergency fund, where might you go to get some of these things, what also should you be thinking about. So at least you are forewarned and forearmed before you have those more broader debates with those financial advisors.
Wall: Tony, thank you very much.
Stenning: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
