1.2.6 Investment and retirement planning: the UK experience

I'm going to kick-off by framing some of the issues around real consumers and risk by giving an overview of the current status quo, and the three big issues that exist around savings. I'll talk about why people don't like risk in a pensions context because given that that's the most commonly held form of investment product. Then, I'm going to talk about the potential for guarantees and to the extent to which they impact perceptions and behaviour, again, in a pensions context, and then I'll draw some conclusions, but they're not really conclusions, simply more questions.

In terms of the current status quo, I think it can be summarised by the title, really, fragile financial resilience. At last, the UK is emerging from recession and a prolonged squeeze on incomes and spending. That said, despite the increase in optimism about the economy, that hasn't translated through, to personal finances. I think it's fair to say that for many UK consumers, resilience remains fragile. One in four UK households have no savings, at all, and where people are drawing down on their savings, we're seeing that it's increasingly for day-to-day essentials rather than luxuries, for example. That situation isn't improving as consumers aren't putting more money aside. UK households saved just over 7.3% of their disposable income in 2012, but by the first quarter of 2014, this dropped to 4.9%. That's obviously from a cash savings perspective. In a longer-term, pension saving only half are currently contributing to a personal pension and currently when people are retiring about 80% of pots are below 20K, which is, simply, not enough for people to live on, by their own definition.

For those who are saving, how are they saving, and why are people saving? This chart asks the reasons why people are saving. The top one is for unexpected expenditures; a rainy day, and that's followed by holidays or leisure expenditure, or, simply because they have always saved. I think, taking that all together we can say that consumers had to save for short, medium and long-term goals but there are three, underlying reasons or mind-sets for saving. The first one tends to be for the future or the unknown, so that's for things like retirement or saving for a rainy day. For this kind of reason, the mind-set is really security and safety, so, keeping that nest egg safe is paramount. The second reason is saving to spend, so that's for the more short-term tangible goals like saving for a car or saving for a holiday. Here, I think the underlying need for the savings is liquidity, so, being able to get hold of that money, quickly. Finally, the underlying mind-set is the growing money so that's more of a traditional investment mind-set, but that's very much a minority among the general population, at large. In terms of how people save, cash is king. When you look at product holdings across the UK, it's traditional easy access savings accounts and Isa's. It's a small minority who have investment product. Property, also, is another very common form of saving.

Taking that in the round, there are three key issues with which I am sure we are all familiar. One is that not enough people are saving, two, people aren't saving enough so there is a coverage issue and an adequacy issue, three, people are not saving as well as they could. That's actually looking at the form in which people are saving. Taking those last two issues, adequacy and the form, I'm now going to come on to risk, which impacts both of those issues. Why don't people like risk? I'm going to focus on pensions because one, they're the most widely held investment products and also. Two, the importance of pensions in the wider savings gap, and those challenges I just mentioned, and then finally, they provide a good illustration as to why consumers, generally, don't like products that involve risk.