As the central bankers of the world gathered at Jackson Hole last weekend and considered how and when to taper quantitative easing programmes (“just how long do we have to hold these government bonds?” must have been one of their breakout sessions), a salutary reminder of the continuing reality of the financial crisis that began in 2007 came in the form of a very interesting Financial Times report highlighting a Which? survey about consumer trust in various financial products. The banking industry, for so long the unmentionable industry to confess to working in and the prime mover of the crisis, has recovered in consumer confidence in the Which? survey to the point where only 23% of consumers expressed confidence in long term savings, compared to 40% in high street banks. Even energy companies, renowned for being the bad boys of price controls, managed a 30% confidence score.
So what has happened in 10 years to cause this healing of the collective memory of the pain caused worldwide by the financial crisis? And why have pensions and savings fared so poorly?
To state the obvious, low interest rates (with generally booming house prices to match) have benefitted the image of banks. Deposit interest may have been terrible, but mortgages and car loans are cheap. And while houses and cars need maintenance and may depreciate, they are tangible assets that we all understand.
The banks have also paid out billions in compensation for mis-selling of PPI, which naturally has boosted the public’s perception of personal wealth (it’s real cash).
In other words, a lot of the population feels richer (despite the lack of pay rises in many sectors) and a lot of that extra cash has come directly or indirectly from the banks. It also no doubt helps to know that banks have had to bear their share of the pain (via tighter regulation and increased capital requirements) in making us feel so willing to trust them again.
Finally and perhaps more remotely, a seemingly indefatigable bull run in equity markets – which is also heavily correlated to historically low interest rates – has no doubt boosted confidence too and made it easier to forgive the past.
Pensions are quite another story. The last decade has not been kind to pensions in the UK. Admittedly, the Government and the pensions industry have (rightly) congratulated themselves on the success of automatic enrolment, but how many newly enrolled workers actually feel grateful for the fact that they may now have the beginnings of a modest savings pot? The reality is probably closer to a begrudging admission that it’s good to have the self-discipline of saving imposed, but it really feels like just another tax.
Time is another obvious factor here: auto enrolment has only been operating since 2012 and coverage of all employers is not due to finish until next year. We have only had five years to appreciate the benefits of savings by inertia – and this may change when employee contributions increase.
But surely “freedom and choice” has been positive for consumer confidence? And that record equity bull market must count for something in the pension saver’s mind?
Time is again important here: we only have two years’ experience of freedom from compulsory annuity purchase, during which over £12 billion has been withdrawn in flexible payments but many of the pots that have been cashed out or put into drawdown are under £30,000. So the enjoyment of all that pensions wealth simply has not had a chance, either over time or in demographic effect, to have had the same psychological impact as cash “liberated” from the banks. Of course, actually getting your hands on pensions money is a much more convoluted process too, as we all know (especially the scammers out there).
It is undoubtedly true that the bull market in equities must weigh on the other side of the scales, although numerous behavioural finance studies have shown that the fear of loss is far more powerful than the enjoyment of gains. (“Losses loom much larger than gains – that’s a very well-established finding” Daniel Kahneman, Nobel prize winner in Economic Sciences.) Although this will only affect better off DC savers, the lifetime allowance (which peaked at £1.8 million in 2010 to 2012) has been reduced to £1 million – £0.5 million below its value in 2006/2007. This must have tempered the giddiness of market returns.
So at least there are positive behavioural signs in the development of DC pensions that time and better financial education may heal.
Sadly, the same hopes are very difficult to entertain for DB pensions. The list of woes that have beset DB pensions over the last 10 years is all too familiar. To name but two: scandals such as BHS live larger in the public consciousness than the success of the PPF in securing the pensions of 235,000 members; those same low interest rates that have helped the banks’ image signal crippling costs of gilts to pension funds with resultant under-funding.
A growing sense of DB pensions envy (which is a generational problem society must address) is also another detraction from general trust: if you are of a DC generation and have no access to a DB promise (however loose that may be now), you are bound to feel a sense of sub-conscious unfairness, even if that is (psychologically at least) not the same as actual distrust in pensions.
Of course frequency of tax relief cuts is also a constraint on the sense of well-being among DB retirees (as well as wealthier DC savers). It isn’t just the opaqueness to an ordinary member of the lifetime and annual allowance calculations, but if you cannot trust the Government not to move the tax goalposts every year, why should you bother to engage with a long-term savings product? However sound the fiscal arguments for cutting and redistributing tax reliefs, the net effect of successive government policies must therefore have conspired to reduce public trust in pensions.
So how can we repair the trust deficit in pensions? This is not a new question and some parts of the cure are very well-rehearsed: wider and deeper financial education, increased contributions to DC and a proper understanding of the power of compound interest, reduced investment costs and proper investment in simple pensions dashboards will all help future generations. But the government must also play its part. Accepting the importance of tax relief to persistency of savings level (so no more cuts please in the Budget) would be a good start. Even better would be healthy scepticism about the merits of retaining the lifetime allowance.