Don’t blame the young for the way they save – don’t blame the old for the way they spend!

The World Economic Forum has issued a report into retirement savings that concludes that most of us will be bound to the outcomes of defined contribution savings plans rather than the beneficiaries of defined benefit pension plans

Don’t blame the young for the way they save

The report finds that in Britain , the average investor is saving in a recklessly conservative way. This is because the research it did was into the NEST savings scheme and the investments they looked at were part of NEST’s Foundation phase, which aims to stop young people falling out of love with savings by investing them in low-risk investments.

This research may be flawed, only a small proportion of all saving going on for retirement in this country goes on in NEST and the Foundation phase of NEST is not typical of most defaults which invest young people almost entirely in growth assets like shares.

The report is right to point to NEST’s foundation phase as bad news – both for the young people who miss out and as an example for other schemes and indeed citizens who might think by following NEST, they are following Government policy.

The NEST Foundation phase has been in place for a number of years now and this contagion hasn’t happened, mainly because people aren’t so stupid as to think that NEST was right!

What is much more worrying is the new idea within Government that encourages people to hedge their savings bets, by investing for retirement but hedging bets by using ISAs and keeping money in short-term investments in case people change their minds and swap savings for the deposit on a residential property.

So for the wrong reasons , the report draws the right conclusions. The right conclusion is that young people should take on more risk to achieve better outcomes. However the threat is not NEST, which is likely to change its silly Foundation idea, but Government interference through fiscal incentives that confuse people by conflating retirement saving and home ownership.

We shouldn’t blame the young for this confusion, it is created by silly politicians who think they can solve issues like inter-generational fairness with gimmicks. Retirement is too important a topic to be messed about with either by NEST’s naive behavioural misconceptions (no one jumps from pensions because of market blips) or by self-serving politicians.

Don’t blame the old for the way they spend

I will quote the report on its views on the help people aren’t getting as they move from saving to spending their retirement pot.

Given the range and complexity of potential options and approaches, and the difficulty most individuals have making a choice, policy-makers should consider whether default decumulation structures would be beneficial, similar to the default structures that exist for accumulation.

This will be highly dependent on each country’s retirement system. Policy-makers should also consider how to make the wide array of available information easier to understand for the individual choosing a retirement plan (including potentially numerous savings accounts, government benefits and employer-based pensions).

Dashboard reporting or introducing auto-consolidation of savings accounts can help this effort.

Lastly, individuals also need access to effective financial advice, if default plans are not suitable. Advice must be comprehensible, accessible, priced effectively, transparent and aligned to the best interest of the advisee.

The establishment of strong fiduciary rules by policy-makers should be of paramount importance to help meet these criteria.

Whether this be collectively, through CDC style decumulation or individually through the development of investment pathways as pioneered by Alliance Bernstein’s Retirement Bridge (and adopted by NEST’s blueprint), we need obvious ways for people to spend their savings and a simple choice architecture to help us make our decisions. The choices must include annuities and insurance schemes to protect us from the financial impact of needing long-term care,

It is not the fault of people of my generation , that we don’t have these choices or choice architecture today. These problems have been known about for decades and the need to do something about them was increased when we introduced pension freedoms. The really hard stuff – how we fund our most vulnerable older people through physical and mental decline – remains an elephant in the room.

A useful and timely report

Well done the World Economic Forum for a comprehensive and timely commentary on the problems we have created for ourselves by abandoning pension schemes for savings schemes.

The FT headlines the report’s finding that

UK citizens will on average outlive savings by 10 years

Jo Cumbo, who wrote the article ,knows how to write a headline. The baby boomer’s worry is that their savings won’t last as long as they do and this report plays to that neurosis.

It’s right that we keep asking how we are supposed to manage the nastiest hardest problem of finance (the pension) with the limited toolbox we currently have available to us.

I don’t blame the young – they are keen to know more about investment and are given too little information.

I don’t blame the old – they want to behave responsibly but aren’t given the tools to do so.

I don’t even blame Government, who are currently at sixes and sevens over everything from BREXIT to dashboards.

It is not for us to point the finger at others, it is for us to do something about it ourselves. That’s why I’ve started AgeWage, why 500 people supported me in our recent crowdfunding and why I’m writing this blog!

For completeness – here is what the World Economic Forum sees as the blueprint for a successful DC system.

Screenshot 2019-06-14 at 06.27.39

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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