The Financial Conduct Authority this month announced a ban on so-called contingent charging on defined benefit pension transfers. The move effectively stops advisers being able to charge clients more for moving money out of gold-plated final salary pension schemes.
The ban has once more stimulated the discussion around pensions and the best ways to ensure a fair deal for savers. But while these rules are aimed at protecting those who already have valuable pension benefits, there are plenty more low earners who are struggling to even save consistently into defined contribution schemes, let alone build a pot that will see them through retirement.
Covid-19 could prove yet another barrier to long-term savings, although the full impact is not yet clear. Historically, savings ratios (the proportion of our salary we save) tend to go up during recessions, such as following the global financial crisis when consumer confidence fell and credit was harder to access.
During the current crisis, some households may be able to save more – perhaps those who have job security, no commuting costs, lower discretionary spending, and their mortgages have become cheaper with the base rate at rock bottom. However, other households will not be able to afford to save now as their income drops, and some will be using up existing savings to cover day-to-day expenses.
Low Financial Resilience
“We did not go into this crisis in a strong financial wellbeing position in the UK,” said Jo Phillips, director of research and innovation at Nest, the government-run workplace pension scheme. Speaking at a Personal Investment Management & Financial Advice Association (Pimfa) virtual conference he said: “Levels of financial resilience were already low before Covid-19.”
She pointed to statistics from the Money and Pensions Services showing that 50% of the UK adult population were squeezed or struggling financially before the crisis. Of these groups, almost half had less than £500 in savings, and a quarter had less than £100. The absence of a savings buffer makes them more vulnerable to problem debt. Already last year, debt charity StepChange was contacted by a new client every 49 seconds.
“The majority of households have been impacted and have reported reduced income [during the pandemic], and one in ten are saying they are in serious financial difficulty,” said Phillips. Women, ethnic minorities, the lowest paid, younger people and the self-employed have been worst hit. But there is still saving happening even as people are facing uncertainty right now.
She added: “How long will that increased savings ratio last and how can those new habits be embedded so they stick this time instead of falling away as we have seen in previous recessions?”
While some people might be considering a pension holiday, Nest is working on a few possible solutions to keep people saving, especially into auto-enrolment pensions. It also wants to find ways to bring in those who may be outside the auto-enrolment system altogether, such as the self-employed, or those at risk within it, such as carers, gig economy workers or people with mental health issues.
1. Use Nudges
One idea is that of "timely intervention", nudging people to get them to pre-commit any spare or unexpected money into savings before they receive it. “We know that as humans we hate losses more than we appreciate gains. As soon as we have the money, we don’t want to lose it, even if we’re effectively giving it to ourselves in savings,” Phillips explained. A project by US fintech firm Digit showed people who pre-committed to saving some of their tax refund saved much more than those who waited until they actually had the money in their account. In the UK, money management app MoneyHub is using joined-up Open Banking data to encourage people them to save ‘found’ money at the moment it is found, and not when they actually receive it.
2. Savings Incentives
Incentives, whether financial rewards or psychological and emotional boosts, can also help people to save more. For example, banking app Monzo congratulates you when you reach savings goals, while impact investing app Tickr lets its Millennial users know their money is being used in the fight against Covid-19. Smartphone investing app Moneybox uses the idea of tax relief being "free money" to encourage people to save into a pension, showing people how much extra money they are getting in a graph. Incentives for saving could be financial or emotional, such as peace of mind, feeling protected, or emotional recognition for meeting goals, said Phillips.
3. Hybrid Savings
A third idea is that of hybrid savings, encouraging people to save for several long- and short-term goals in different "jars" simultaneously. You can pre-set a savings amount for each pay period, with the money spread across the various jars or goals. When you meet one short-term savings goal, the excess cash you have to save is automatically added to the amount you are saving into your workplace pension, for example, rather than not saved just because you reached that particular target.
4. Solutions for Self-employed
Finally, flexible auto-saving is a possible solution for the self-employed whose fluctuating income means they often don't like the lack of flexibility in pension savings. Nest is looking at system which automatically saves only money people definitely have, such as a percentage of any invoices marked as "paid" on an accounting system such as QuickBooks, or a percentage of any payments you get through a payment service such as PayPal. “Some 61% of self-employed people who don’t have a pension are put off by the lack of flexibility, so we’re looking at trialling ‘set and forget’ savings mechanisms that save only when money is coming in, and not when they’re short. It may have broader applicability post-Covid as people’s income has become less certain,” said Phillips.
