Martin Palmer Head of Corporate Pensions Marketing, Friends Provident
The alarm being raised over pensions is only half the story about the state of the nation’s savings. It is estimated that nearly 5.3m people in the
UK are living beyond their means. This isn’t an occasional drift into the red but a way of life. An interesting observation by Kevin Sharpe, Professor of Renaissance Studies at Queen Mary, University of London, is that the huge rise in student debt is partly the result of undergraduates wanting posh digs and smoked salmon lunches. They are trying to live an ‘uppermiddle class life’ he says. They want it all and they want it now.
We shouldn’t assume that our fellow citizens have suddenly decided on collective financial suicide, however. The consumer society certainly has more temptation for those who tend towards instant gratification, but there are also millions who are saving and ensuring that their pension contributions remain steady.
That still leaves the problem about what we do about the rest. Can we save them from debt collectors and a miserable old age? Here the focus shifts to the workplace where those in employment have the best chance of grabbing the reins of their personal finances. Company pensions – DB and DC – have encouraged saving where none might have been achieved. The next step is to broaden communication and education around pensions to embrace money and debt management and offer some other savings options such as corporate ISA.
Look at a whole workforce and its diversity will be striking. Within every age group there will be natural savers, natural spenders and a wide range of personal circumstances. A common factor will be plenty of over confidence about the future. Employees who piloted a Friends Provident financial education workshop recently reported that their understanding of state pensions benefits increased by 119%! Clearly there wasn’t much understanding at the start, but some of the participants must have been literally labouring under some significant illusions. The level of the state pension shocked nearly everyone in the sessions. Another shock was the retreat of retirement. Many didn’t know about increases in retirement ages in the UK.
This kind of information is all very well, but it doesn’t necessarily turn spenders into savers. Younger workers still have to overcome their reluctance to put away money now for use in 40 years time. The introduction of corporate platforms and new employee benefits such as corporate ISAs will help to overcome some of the resistance – particularly if they can see their assets and transact online – but with greater choice in the workplace comes greater need for financial literacy.
What was ‘communications’ around pensions is now rapidly moving into education aimed at improving decisionmaking. New techniques and tools are required to motivate employees to act for themselves and in their own interest. It may seem strange that this is necessary but behavioural economics has some convincing arguments about why people don’t make good decisions.
Setting personal goals has been ‘norm’ or many years in relation to work and we should now get used to the idea that employees should also set some personal finance goals. Stress is a major reason for absenteeism and much stress is caused by debt or other money worries. Offering some help to get finances under control is one of the reasons why employers will be interested in financial education. The there is that if they are offering a wider range of savings to differentiate theiremployee benefits from Personal Accounts, it will become even more important to ensure that employees are equipped to make good financial decisions.