BLOG: A 15% national savings target must be just the beginning
As we approach Budget day – debate has intensified around pensions reform including the potential introduction of a “Pensions ISA” and the altering of tax relief. But as our young people face a financial abyss; this is the equivalent of placing bandages on a gunshot wound.
Affordability of pensions is one of the UK’s biggest current challenges. Our population is ageing, fertility rates are decreasing and the government is already heavily in debt. Let’s ask the tough question. Who will pay for future provision? We need to make decisions now that have an impact in 10, 20 and 50 years and that reflect the profoundly changing demographics and savings levels.
In 2015, we needed a pensions revolution. What we got was ‘Freedom and Choice’. An exercise in political expediency, it did nothing to address the profound shift in responsibility from government and employers to the individual – rather it focused on those who already had accumulated pensions pots. The opportunity to diffuse the pensions time bomb was lost.
Last year, through the Age of Responsibility report we campaigned, alongside Lord Hutton, for the introduction of a 15% national savings target to ensure a comfortable retirement for our young people. Now we are seeing similar recommendations from various bodies including the Independent Review of Retirement Income set up by the Labour party in 2014. Our 15% was considered radical when we introduced it in 2015 – in ten years I believe it will be considered conservative.
According to a demographic research report by Amlan Roy at Credit Suisse, health and pension expenditures are projected to grow close to 20% of GDP. This is unsustainable. Life expectancy at 65 years has also exhibited a significant increase since 1990: from 16 years to over 20 years today.
The government now not only has to support a larger group of retirees (baby boomers entering retirement period) but it also has to support them for a longer retirement period.
This has very immediate as well as long-lasting consequences on health care, long-term care and the pensions expenditures of governments. Compounding the problem is increasing life expectancy combined with low fertility rates which leads to an increasingly high old-age dependency ratio.
We all want a certain and comfortable retirement, but the majority of us do not want to adopt a discipline of saving. Why not? Are we unsure about what we want, or do we lack the culture and collective mindset to overcome our need for short-term gratification? This is a collective problem for individuals, companies and government – it should be in our mutual interest to solve it.
Only a few nations embrace the ‘save today to finance a better tomorrow’ culture. These include Norway & Singapore: nations that exemplify long-term financial planning and thinking.
With this in mind, and ahead of the Budget, I set out a five-point plan for a healthier financial future, with the aim of fuelling further policy debate.
A five-point plan for the UK’s financial future:
- Establish a 15% national savings target. Auto-enrolment is a step forward, but even the 2018 auto-enrolment figure is merely poverty prevention.
- Implement a far-reaching financial education programme to build the financial capability of our children – tomorrow’s workforce.
- Deliver a simplified tax system that is fair for all.
- Install an independent pensions commission with the power to make real decisions, free from political interference, akin to the Bank of England.
- Set out safe harbour guidelines encouraging companies to educate and inform their workforce on how to take responsibility for financing their financial freedom.
Robert Gardner is co-CEO of independent investment consulting firm, Redington