A workplace savings strategy is a good idea – but tread carefully
This is a useful and important development because a strategy to improve short and medium term savings could bolster long-term savings as well as help people develop greater resilience to financial shocks.
No recent government has managed to implement a comprenehsive plan on savings even if they had individual policies ranging from the good (the Savings Gateway support low earners) to the more suspect (the Help to Buy ISA).
However, we have to approach the subject carefully. We can learn much from the “nudge” that automatic enrolment gave to improving the numbers saving for a pension, the central role played by the workplace and the government’s efforts in ensuring access to good value products.
But we have to be clear what kinds of savings we, as a society, would like to encourage. And in doing so the priority has to be that we don’t undermine people’s propensity to save for their old age.
Minimum pension contributions need to rise – and rise well beyond the 8 per cent of band earnings currently legislated for – if people are to have a good chance of a decent standard of living in retirement.
However, this risks more people opting out or dropping out when suffering short-term financial shocks, from a broken boiler to a new baby.
In short we greater general financial resilience, through attention to long and medium-term saving- would put pensions saving on a secure footing.
Currently almost one in three UK households has no savings and a further 14 per cent hold savings of less than £1,500. However, we know that people are typically adept at saving for short term expenses such as birthdays or Christmas. We just struggle to put money aside for that apocryphal “rainy day” or medium-term expense.
You can blame the prevalence of insecure low paid work, you can point to a prolonged period of minimal wage growth, you can also look at the impact of distortions such as the expensive UK housing market. Indeed, dealing with these is vital.
This shouldn’t preclude exploring savings policy as long as a number of important questions are answered.
The minister highlights savings for later-life care needs, debt repayment or house purchase. These would tend to happen to different life stages. But when, then, would the saving for old age take place? And wouldn’t savers be left just as vulnerable to one-off financial upsets without short-term cash reserves to tide them over?
Is there an argument for starting younger workers off saving into an ISA not a pension? But would this undermine the compounding impact of savings tucked away from decades?
Is there any point supporting the savings of those who are already saving? The IPPR has previously suggested savings bonuses (funded by cuts in pension tax relief for higher earners).
What we must avoid is throwing out many of the gains – five million new pension savers and potentially another four million to come – from the roll-out of auto-enrolment, which requires savers to actively opt-out of workplace schemes
This is what I fear if we follow the prescriptions of the Centre for Policy Studies which today reiterated its call for the effective merging of pensions and ISAs.
The CPS is justifiably scathing about government tinkering with tax relief (which appears likely to be a feature of the forthcoming Budget) and, at least as it is currently structured, its ineffectiveness in incentivising saving among low and middle earners.
But by favouring flexibility, its proposals risks undermining saving for retirement.
Human beings tend to place short-term concerns over their long-term interests. The temptation to dip in, to tinker to cope with short-term demands would be almost overwhelming.
The price would be a reduced standard of living in retirement.
A broader system of workplace savings may be a useful, indeed perhaps even essential addition, to workplace pensions savings if we ensure one does not undermine the other.
Perhaps the Minister’s intervention will be the catalyst to, at long last, develop a coherent savings strategy in the UK.