Is financial guidance a solution to one of the defining social problems of our age?
The chronic level of under-saving in the UK is now recognised as one of the defining social problems of our age. This is leaving households financially vulnerable day-to-day, and creating longer-term issues for those who have not adequately prepared for retirement.
Many UK households are woefully underprepared to deal with even minor financial upsets, with two thirds of families having £1,500 or less in savings to fall back on.
We also know that 40 per cent of adults are not in control of their finances. Households are experiencing high levels of debt, low levels of saving and decreasing financial security through their working life and retirement.
Typically, those people who are saving into a pension are not contributing enough, and the Office for National Statistics data points towards future non-state pension retirement incomes that could be just a quarter of what pensioners receive today.
FINANCIAL GUIDANCE BODY
The government's recent public financial guidance review and proposal to create a single financial guidance body is an important opportunity to work collaboratively with the private sector to help address the widespread under-saving currently facing UK households.
A combination of cost and lack of understanding of the value of financial advice has resulted in less than one in five consumers being prepared to pay for such services.
There is therefore a pressing need to ensure that the mass market is supported by financial guidance services that help people make informed choices and result in good consumer outcomes according to their needs.
The Money Advice Service, The Pensions Advisory Service and PensionWise currently play an important role in supporting the financial capability of consumers by encouraging higher levels of saving, both for retirement and for everyday emergencies.
However, these services could be made more effective and easier for consumers to use by consolidating them into a single 'Financial Guidance Body'. It presents an opportunity to provide a step-change in the way that public guidance services enhance consumer engagement.
We envisage the new body having a heavy focus on education, helping those in debt, encouraging short, medium and long-term savings to enhance financial resilience, and protecting consumers from scams and fraud.
It should provide robust governance over the provision of a public guidance service and ensure efficient deployment of resources.
However, to be effective in this role, the new body needs to work closely with the private sector to ensure consistency in terms of guidance journeys for consumers, the use of terminology and generic rules of thumb, and guidance outcomes.
It is critical also that there are links between the financial guidance body and the services that enable consumers to put into action the guidance they have received.
We'd like to see the new body tasked with six over-arching objectives:
- to increase consumers' engagement with their financial affairs
- to increase financial capability and education
- to increase resilience to financial shocks
- to increase savings and provision for retirement
- to help protect consumers from scams and fraud
- to aid those in debt
For the new body to have the best possible chance of success in meeting these objectives, there are various issues of design that will need to be addressed. Foremost is the need to provide clarity about its offering.
At present, there is little public understanding about the difference between advice and guidance; the target audience for the new service will need to be very clear about what services they are being offered and how it will help them.
We also think that an important measure of success will be the extent to which people take action as a result of the guidance they have received.
This means that there must be mechanisms for introducing people receiving guidance to the places that can provide them with the products and services they need.
Only by introducing such measures can the service be evaluated and improved to make the customer experience more engaging and impactful.
It is too much to expect a guidance body to solve the problem of under-saving on its own.
But, by co-ordinating its services with other strategic initiatives including auto-enrolment, pensions dashboard, portable factfinds, workplace engagement and a digital identity we can at least ensure the consumer experience feels integrated and easy to use.
We should also acknowledge that the resources of a new public body are unlikely to compare with the reach, experience and research of the private sector.
That's why it's vital to work hand-in-hand with the industry to provide a consistent approach, build consumer confidence, and set us on the path towards our commonly held goal to increase the level of financial resilience and wellbeing in the UK.
Charles McCready is a director at Tisa.