BBA Consultation on the Future of Savings. Response from The True Potential Centre for the Public Understanding of Finance (PUFin)

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1 BBA Consultation on the Future of Savings Response from The True Potential Centre for the Public Understanding of Finance (PUFin) August 2014

2 Based at The Open University Business School, PUFin is a pioneering centre of excellence for research and teaching related to personal finance capability. It brings together academics with expertise in fields such as regulation, taxation, consumer attitudes, motivations and behaviours, and social marketing. PUFin is generously supported by True Potential LLP. Views expressed by PUFin may not reflect those of True Potential LLP. On a number of different measures, the UK saves less than other developed countries. In 2012, the UK showed a negative savings rate (-0.5% of GDP), compared with 4.4% for the Euro area. In contrast, Norway, Sweden, Estonia and the Netherlands showed savings rates of more than 10%. 1 In the 2014 ING International Survey, which covered 13 European countries, 32% of people reported not having any savings at all. In the UK, this figure was 27%, compared with 15% in Luxembourg, 19% in the Netherlands, 23% in Austria, and 26% in France. 2 It is difficult to find comparable cross-national data on the ownership of saving products. Six in ten British households (58%) have a savings account (down from 68% in 2008/10), and 48% have an ISA (down from 49% in 2008/10). For those with a savings account, the median value of their savings is 4,000, while for ISA holders it is 9, At the same time, it is worth noting that current account balances held by British households have increased: from a median of 1,000 in 2008/10 to 1,200 in 2010/12 for current accounts in credit. 3 With continuing low interest rates, this could suggest that people let money accumulate in their current account (e.g. as an emergency fund) rather than save it in an existing savings account or bother opening a new savings account. The official statistics also do not take account of new forms of saving and investing, such as peer-to-peer platforms, which may increase in importance over time. 1. Why do British people save less than residents from many other countries? Why people in the UK do not save is a complex socio-economic matter with strong linkages to government policies. Factors that affect savings behaviour include the economic environment; the availability of debt products to fund purchases; the availability of insurance products to cover contingent costs; the availability of State support (e.g. health, education); and the use of pension funds to provide for retirement income. Arguably, in a situation where debt products (including short-term unsecured loans) are readily available, State support robust, insurance products widely employed, income in retirement secured, unemployment low and wage levels rising then why should households hold more that modest savings balances to cover unevenness in household cash flows? During a period of negative real interest rates, this logic is further reinforced. The extent to which this situation exists in the UK is debatable. Certainly, compared to other countries associated with higher levels of savings (e.g. Germany, Austria, Netherlands), the UK has 1 OECD (2014) National Accounts at a Glance OECD Publishing 2 ING (2014) ING International Survey. Beyond the crisis? An age of financial prudence and debt dilemmas 3 ONS, Chapter 5: Financial Wealth, Wealth in Great Britain In: Wealth in Great Britain Wave 3,

3 lower median household income 4 and the fall in real household incomes in the UK since 2008 is welldocumented. 5 But saving behavior was a concern pre-recession as well, so income is clearly only part of the jigsaw. Indeed, while lack of money is the most commonly self-reported reason why people in the UK do not save, there is an important distinction between genuinely having no spare money to save and having other priorities for any spare cash. 6 Survey analysis shows that 21% of the population in 2006/08 could afford to save but were not doing so. 7 While this figure may have reduced as a result of the economic environment, nonetheless it gives some sense of the potential for boosting UK savings. Linked to this, many commentators have identified the UK s borrow to spend culture as a significant factor that has impacted savings over time. Other countries face similar concerns, albeit not to the same extent as the UK. With initiatives to promote lending and boost economic growth (e.g. Help-to-Buy) the need to build up savings balances is arguably further diminished. The fall in the real value of savings interest may also have deterred the build-up of savings assuming that people understand the impact of inflation on their cash savings. 2. What more could banks do to encourage customers to save? In thinking about ways to encourage saving, it is useful to distinguish between (1) encouraging people to start saving and (2) encouraging people who are already saving, or have a savings account, to save or invest more, as the policy responses may be somewhat different. There are examples of UK banks using behavioural finance principles to encourage people to develop a savings habit, such as Lloyds Bank Save the Change. A similar initiative exists in Poland. These type of initiatives could in particular help people to start saving by making it a default behaviour. Where such schemes exist, it would be helpful if banks were willing to share high-level information about their effectiveness either publically or with the BBA (commercial sensitivity notwithstanding). Particularly in terms of encouraging existing savers to save more, or to save regularly, higher savings balances could be encouraged by higher interest rates, loyalty bonuses, and tiered rates for higher savings. Yet if deposit takers remain sufficiently liquid (especially via Funding-for-Lending ) there is little or no incentive for them to pay for retail balances they do not need, or indeed to market savings products at all. Moreover, Basel III and national capital adequacy criteria mean that the focus of deposit takers is very much on profitability and capital ratios rather than keeping savers happy. In this somewhat barren savings environment, making sure that people can get the best deal on their savings is more important than ever. 8 With historic low interest rates likely to continue for some time, it is equally important that savers understand the impact of inflation on the real value of their cash savings. 4 OECD (2014) Society at a Glance: OECD Social Indicators. OECD Publishing 5 Levy, S (2013) Changes in real earnings in the UK and London, 2002 to ONS 6 E Kempson and A Finney (2009) Saving in lower-income households: A review of the evidence. HM Treasury 7 Daffin, C (Ed) (2009) Wealth in Great Britain - main results from the Wealth and Assets Survey ONS 8 Which? (2014) The Savings Trap: How to avoid it and make savings work for consumers and providers 2

4 3. Should Ministers consider ending taxation on all savings products? The argument generally put forward for ending taxation on all saving products is one of fairness the money going into savings has already been taxed so why should it be taxed again? 9 Whether or not ending taxation would encourage saving is less clear. Among non-savers, it is highly unlikely that taxation is a major barrier to saving. Given the current 15,000 NISA limit, most savers or potential savers are likely to be able to protect all their new saving from tax (provided they know about it). A recent review found no conclusive evidence that tax-favoured savings vehicles generated new savings, or increased overall savings, due to the lack of a counterfactual measure. 10 This suggests that further work is needed to fully understand the impact of tax policy on individual savings behaviour across the income range. 4. The BBA has called for the creation of new work-based savings products that workers could transfer to different employers. Would you support this and if so why? Like workplace pensions, this idea draws on the principles of behavioural finance to nudge people to save. In a recent report on tackling serious debt, the Centre for Social Justice also called for workplace savings schemes 11 and a similar scheme operates in Germany. Transferability between employers is an important feature - to reduce the risk of people having multiple small savings pots that they lose track of, and so that employees can clearly see their savings build up over time. Any workplace saving scheme could also look to replicate Save More Tomorrow which has helped boost pension saving in the US, by automatically increasing the amount saved as salaries increase. Research cited by the CSJ indicates support among UK employers for workplace savings schemes: one in six UK companies offer their employees access to a cash ISA savings scheme, while 41 per cent either already offer or are considering implementing a centralised online savings management platform. There is however an important question about fiduciary responsibility, in terms of the accounts that employees are nudged into. Should, for example, employees be encouraged to save into cash products that have negative real interest rates? If not, what are the alternatives? These are issues that NEST faced in the development of workplace pensions, and from which any new scheme can hopefully learn. 5. What other policies by governments and regulators could encourage more people to save? As noted earlier, a wide range of factors affect savings behaviour from the global economic environment, to an individual s personality and upbringing. It is not possible within the scope of this response to identify all the policies that could encourage more people to save. We believe some of the most important include: Develop a stronger savings culture in the UK. This is not just the responsibility of government and regulators, but also the financial services industry and others. It is an ambitious and long-term objective particularly as we move out of a period austerity and money and credit start to flow again. It might include targeted social marketing through 9 See for example and 10 T Crossley, C Emmerson, A Leicester (2012) Raising household saving. British Academy Policy Centre 11 Centre for Social Justice (2014) Restoring the Balance: Tackling problem debt 3

5 popular media, using savings champions. Importantly, it means starting where people are acknowledging that people feel it is important to live for today, but also stressing the importance of living for tomorrow too. 12 Evidence from the UK and elsewhere shows that well-targeted, clear and simple incentives (such as bonus payments, matched savings, financial incentives for regular saving, prizebased savings accounts) are more effective than tax relief or savings interest in encouraging people on lower incomes to save. This evidence could usefully be taken into account in the development of any workplace savings scheme. Pay more attention to policy interactions and unintended consequences. We believe it is crucially important for policymakers and regulators to take a holistic view of national policy to see how it impacts on saving and investing. What has been the real impact of credit regulation on saving, for example? What about the impact of regulation on savings and investment activities? What is the likely impact of workplace pensions on any new savings scheme? Survey analysis has shown, for example, that each euro of pension wealth is associated with a decline in non-pension wealth of between 47 and 61 per cent. 13 And to what extent are disincentives to save built into the tax and benefits system, particularly for people on lower incomes and/or with small savings pots? Financial education and financial capability are likely to feature in many consultation responses. Savings habits developed at a young age often persist into adulthood, so encouraging school-based schemes is an important element of trying to build a savings culture. Until recently, we have lacked robust evidence about what works, or even what can work, to increase savings. The evidence base is slowly getting better, however. As part of a major programme led by the World Bank, for example, a large-scale financial education initiative was carried out in nearly 900 high schools in Brazil, involving 26,000 students. Using a randomized control trial, the evaluation showed a 1.4 percentage point increase in savings which is a relatively large and economically relevant effect. 14 While the question of generalizability from one evaluation remains, nonetheless there is a lot that the UK could learn about how the Brazilian scheme was developed and implemented. Sharon Collard, Professor of Personal Finance Capability, PUFin Martin Upton, Director, PUFin 12 E Kempson and S Collard (2012) Developing a vision for financial inclusion 13 A Alessie, V Angelini, P van Santen (2011) Pension Wealth and Household Saving in Europe: Evidence from SHARELIFE. Netspar Discussion Paper 10/ M Lundberg and F Mulaj (2014) Enhancing Financial Capability and Behavior. The World Bank 4

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