The Financial Conduct Authority’s largest survey of UK consumers’ financial habits has identified concerns around financial resilience and undersaving, as experts urge improvements to the auto-enrolment framework.
Fifty per cent of UK adults show one or more characteristics associated with vulnerability, meaning they could be at increased risk of harm or suffer disproportionately from harmful financial events, according to the FCA's Financial Lives research published on Wednesday.
It also identified 4.1m people who have failed to meet credit commitments or pay bills in three or more of the past six months.
What is clear to us is that a large number of employees are not saving enough
George Currie, PLSA
The situation is worst among 24 to 35-year-olds, 13 per cent of whom are in this position of “difficulty”, while 19 per cent of respondents in this group had no cash savings.
People are still not saving enough
Against this picture of localised low levels of financial resilience, the survey also found that 38 per cent of all UK adults still do not save into a pension scheme.
The number of people saving into a pension scheme is likely to increase as auto-enrolment continues, according to Christopher Woolard, executive director of strategy and competition at the FCA.
“At the same time though… it doesn’t necessarily equate to them having short-term savings or indeed not having a significant level of debt,” he said.
While saving for the long term cannot be said to guarantee an individual’s short-term financial health, it is difficult to say with certainty that the short-term pressures experienced by some respondents to the FCA survey make it difficult to save adequately into a pension.
Other factors, such as financial capability and confidence in making financial decisions, are also at play, according to George Currie, senior policy adviser at the Pensions and Lifetime Savings Association.
“What is clear to us is that a large number of employees are not saving enough,” he added.
The PLSA’s paper, 'The Lifetime Savings Challenge', published in collaboration with asset manager Close Brothers’ financial education services division, found that a third of employees are saving less than £50 a month, which includes 20 per cent not saving anything at all.
Currie said measures such as introducing sidecar accounts for liquid savings might boost saver confidence that they are balancing their short-term and long-term financial needs, but added that such a move would need “very careful consideration” before it is implemented.
More focus needed on financial capability
He said positive progress was being made by employers using education to give their employees greater confidence in managing their finances, and hoped that others would build on this example.
For now at least, the level of financial capability among the FCA’s survey respondents leaves something to be desired. Twenty-four per cent of adults have little or no confidence in managing their money, and just 35 per cent of those aged 45-54 have given a great deal of thought as to how they will manage in retirement.
“This is the problem,” said Tom McPhail, head of retirement policy at platform provider Hargreaves Lansdown. “From the moment people are enrolled in a pension there should be an explicit policy objective to engage them in their financial wellbeing.”
He said the FCA’s previous work on its retirement outcomes review, which itself pointed to problems around consumers’ decision-making, made the mistake of focusing on financial capability at the point of retirement.
The power of inertia
McPhail said the policy objectives of bodies like the FCA and the Department for Work and Pensions should be adapted to champion saver education and improving financial health. “Otherwise you’ll just perpetuate the problems we’ve got today.”
Could a shift in AE contributions balance raise saving levels?
Analysis: As questions remain over the adequacy of auto-enrolment contributions, a shift in the balance between employers and employees might provide the answer towards raising retirement saving levels.
Despite this drive towards engagement, the power of inertia should not be underestimated, according to Adrian Boulding, director of policy at mastertrust Now Pensions.
The beauty of auto-enrolment, he said, is that “the money comes out before it even hits your payslip”. He said he doubted that increases to auto-enrolment minimums would worsen the situation evidenced by the FCA, because people structure their spending around their net pay, after contributions have been taken.
Indeed, he said the FCA’s findings indicated easy wins for policymakers, such as lowering the age at which auto-enrolment takes effect and treating all of salary as pensionable.
“The earliest contributions are the most valuable,” he said.
