Don't blame us for savings gap

Anthony Hilton
14 May 2008

Asset manager JPMorgan Chase has taken a bold step in calling on the Government to treat financial health as seriously as public health.

In a major report published this week, it argues that a major reason why people in this country don't save is they don't really understand how to go about it. So just as there are official guidelines as to how much and what people should eat to stay healthy, so the Government should spend money to educate the public on how much they should save and what areas should be given priority.

Some might think that the Government's guidance on food is not the best analogy given that there is now an explosion of obesity in Britain. This suggests at the very least that those most in need of the Government's advice pay no attention to it. But putting that to one side, one wonders if the basic premise is correct. Is it ignorance and uncertainty that stops people saving and investing? Or is it the way they are treated when they do?

Though the fund-management industry is loath to admit it, the history of investment in the UK over the past 30 years is that the returns have gone to the fund manager, not to the clients. This is true of pension plans, insurance polices and unit trusts. There are exceptionsof course, and normally very heavily marketed ones, but even in long periods when the stock market has risen, the average return on investors' savings is typically less than half of the improvement in the market.

The difference goes in costs born of shoddy and laborious administration, particularly in the insurance world, in grossly inflated salaries to fund managers, most of whom show no particular flair, and in disgraceful levels of commissions to the so-called independent financial advisers they use to harvest their customers. So one reason people don't invest is that too many customers get a lousy deal.

A second is that they don't trust the industry, and again who can blame them? It is not just the pensions mistheselling and the problems with endowment policies or the market timing abuses. It is that while the industry tells people they should save for the long term, it rarely gives a long-term commitment in return.

Look at the hundreds of millions of pounds trapped in with-profits insurance funds which the original owners lost interest in because they were no longer profitable enough and sold as "zombie" funds to third parties like Resolution and Pearl. Firms like this may do a reasonable job for the policyholders (we shall have to see), but it is not what they bought into - and no one ever asked them if they minded.

JPMorgan suggests that people should aim to set aside 15% of their income, which seems to ignore the fact that the reason poor people don't save is that they don't have any money. It has only ever been the top third of society who had enough to save, and even they for the most part don't get going until after the children have left home. With graduates leaving university with debts of £20,000 or more, and house prices still at astronomically levels, it is hard to see that changing. The idea that most people could set aside 15% of their income from their early twenties is barking at the moon. If that is what they need to have a comfortable old age they won't have one - or more likely, when the time comes they will work longer.

Finally, we live in uncertain times, and while some investment plans have flexibility most do not. What good is it to a client to have a pension pot for when he is 60 if he is sick or unemployed and can't pay the mortgage when he is 40? The working lives of people in Britain have changes, but investment products have simply not adjusted anything like enough to cater for what people need now. The fault, in short, is with the savings industry as much as with the customers who turn up their noses at it.