I apologise for sounding like a broken record player, but we all need to be reminded that we have a slow moving car crash on our collective hands when it comes to savings, retirement and the demographic time bomb. Both sides of the political debate are guilty of magical thinking.
The Left likes to squawk loudly about hitting poor pensioners and taking from workers. One senses they'd like to get the debate back to lowering the pension age if at all possible. The Right chatters endlessly about pensions freedom, tax benefits to encourage saving and giving investors 'more choice' - as if ordinary citizens really care about 'more choice'. Underlying this latter naivete is the idea that tomorrow's retirees are rational choice seekers, looking to maximise their personal utility. They aren't. They are like confused sheep being led to the slaughter.
Back in the real world, we need to wake up and smell the coffee. Barely a month goes by without some survey reminding us about the lamentable level of knowledge about long-term financial planning amongst our fellow citizens. The latest 'research' this week is from comparison site finder.com.
Their shock horror reveal is…drum roll…..heightened tension…reveal….. millennials are underestimating how much they need to retire. Blow me down, what a surprise. Quite unlike the vast army of 30 somethings/40 somethings/50 somethings/60 somethings who also do not understand how much money is required for a long retirement.
So, what precisely, does this new survey reveal? The top line is that "over one in five adults believe they only need up to 50,000 in their pension pot totalling a meagre £3,333 per year, with millennials the most deluded generation coming in at £395,000 short when estimating how much they need."
Other findings include;
Millennials are £395,000 short on their pension pot estimation
Half of baby boomers don't know how much they need for retirement
Over a third (35 per cent) of Brits do not have a pension
36 percent of Brits don't know how much is in their pension
"Finder.com's survey reveals that Brits on average believe that just £100,000 is enough to fund their retirement."
I apologise. I'm being a bit mean to this survey only because this is about the 20th survey to reveal the exact same finding - that we all, collectively, tend to get the numbers wrong. On a monumental, catastrophic scale.
I would go so far as to say that upwards of 80% of those not on defined benefits are probably undersaving….chronically.
And DC schemes or money purchase plans will not get us out of the mess. Over in the US where they've been playing around with 401Ks for an age, the statistics are truly terrifying about the number of people who are undershooting by a country mile.
The Left's answer to this is to magically think that the state will (somehow) fund the shortfall by vastly increasing state pension payments. Good luck with that idea in three decades time.
As I said the Right thinks that more choice and greater tax breaks is the answer. It isn't. Most ordinary people hate pensions and are already confused by the existing array of tax wrappers. More to the point, most younger people (and by that, I mean anyone under the age of 45) don't have the spare cash to ramp up savings.
So, in the spirit of trying to grapple with the first, baby steps towards providing a sensible, popular set of policies, let me outline my own take on what I call the five basic 'realities' of long term savings:
More choice will not help. Most consumers are confused by too many products and options and liable to make bad decisions about long-term, complex issues. They use mental shortcuts and then assume they've dealt with the problem when they haven't. Nudges such as auto-enrolment are an enormous move forward but currently, this is neither comprehensive enough in its reach nor adequate in its funding
Private sector asset managers and pension providers provide an adequate service to wealthier, more informed clients but for the mass market they are lamentable and part of the problem. Australia stands as a shining example. Super plans have been a big success because they are comprehensive and well funded. But the current Royal Commission has exposed the egregious practices of the big banks and Super providers, socking it to ordinary investors with fees. The behaviour has been almost criminal, and it shows up why the private sector is not up to the task.
The state needs to step in. We need to nationalise a basic pensions fund system (it is a classic market failure problem) and get the state to subcontract out the fund management to big asset managers on a competitive basis. I have no problem with different state-mandated options for this basic scheme and these could include new variants which include a mixture of DC and DB within a risk-sharing structure plus sustainable investments. But the providers must be state appointed mutuals working with the private sector. As for those with above-average incomes, let them choose their own private sector providers but remove all their tax benefits
We need radical simplification of the whole savings tax system. Abolish the distinction between ISAs and pensions and ditch all these unworkable IFISAs, Lifetime ISAs and so on. I'd also include in that draconian regulatory overhaul almost every tax efficient savings plan including IHT AIM structures if I had my way. My suggestion: radical simplification and equalise out the tax subsidies so that everyone understands that they only get say a 10% tax subsidy on the way in and that what stays in the tax-free pot is free of tax upto £1 million. Once it is over that level, it is fully taxable.
Understand that if we are to fix the long-term problems we need risk sharing between generations and socioeconomic classes (yes the rich subsidising the poor), we need drastically lower fund and admin costs and we need to increase the savings rate markedly, probably via compulsion. This will have a knock-on impact on the consumer economy and will probably drag down growth rates, at least in the short term.
