Cicero Policy Briefer

Issue 5, October 2006

The NPSS White Paper:
Will the Personal Accounts kick-start a new savings culture?

By Mark Twigg

Fact: Britons do not save enough for their retirement. Even if we ignore the ticking demographic time bomb of an aging population, the situation looks stark. The pensions saving shortfall has been predicted to be as high as £60bn, according to the first report of the Pensions Commission back in 2004, and this shortfall seems to be growing according to the latest Pensions Index figures published by Scottish Widows in June 1. So while the Chancellor, Gordon Brown, has spent the best part of a decade extolling the virtues of prudence, the British consumer has largely gone the other way, favouring that other common mantra of our times: “Buy now, pay later”. So just how will the new Personal Accounts sit in an age of immediate gratification? This seems to be an important point, and one which gets little airtime.

The Government talks of the Pensions White Paper being the most important pension reforms since Beveridge in the 1940s. Yet they propose a pensions system in 2050 which retains many features which wouldn’t have looked out of place in 1950: it will largely consist of a basic state pension topped up with means testing and some private pensions savings. It’s more evolutionary than revolutionary 2. While the Pensions Commission makes some attempt to explain how behavioural economics impacts on how and whether people save for the long-term, the final recommendations—and by extension the proposals contained in the Government’s Pensions White Paper—seemingly make little attempt to work with the grain of what is an increasingly short-term consumerist society.

Another fact: there are good reasons why Britain’s savings culture is under threat. Not all of these are properly addressed in the Pensions White Paper. We are bombarded daily by the media, lenders, advertisers and peer groups conditioning us all to live for today rather than save for tomorrow. Regulation, too, plays a role: compare how laborious the pensions buying process can appear with the comparative ease of applying for a credit card or bank loan. Saving for retirement therefore appears increasingly counter-culture.

Government seems to be hoping that people can be hoodwinked into saving through automatic enrolment, which helps harness the power of inertia. However, that may simply overplay the extent to which consumers are indeed apathetic about long-term saving while ignoring the rather obvious fact that for many, not saving is a rational choice. If so, we can expect many people to opt out of Personal Accounts. Indeed, the DWP has signalled that as many as 50 per cent of people will opt out of the new arrangement—presumably because a large number of them are more occupied with the need to pay off debts run up to pay for next summer’s holiday, or repay that bank loan taken out to finance the new family car.

The introduction of Personal Accounts may simply result in consumers shuffling the deck, taking money they were already saving somewhere else and diverting it to the new Personal Account. This is certainly what happened in Australia, which introduced compulsory pension savings as long ago as 1986. The Australian experience shows that non-compulsory household savings rates have fallen from about 10 per cent in the mid-1970s to 0.5 per cent by 2004. At the same time consumer debt levels have continued to rise, particularly amongst the young and those on lower incomes who have sought to maintain their current spending.

The message seems to be that people do not choose to undertake pensions saving in isolation, but make competing decisions about how best to spend their income. As we know from current consumer behaviour most of us choose debt over saving. It will therefore require a concerted effort to challenge that mindset, through a mixture of better regulation as well as better access to financial education and more generic advice. However, as the Pensions Reform Minister James Purnell signalled at the recent Cicero Consulting/MoneyMarketing Pensions Summit, the debate around generic advice will “not necessarily” be a matter for discussion within the forthcoming NPSS White Paper. Without a clear government commitment to changing consumer attitudes it is difficult to see how NPSS—with or without auto-enrolment—will radically alter consumer behaviour.

1. The Scottish Widows Pensions Report 2006
2. Two further features which were not around in the 1950s include SERPS/S2P, which was introduced in 1978 and reformed in 2001; and compulsory employer contributions, due in 2012.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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