Saving must be a '5-a-day' campaign

14 March 2013, 15:14   By Anna Sandoiu

AVIVA'S second Working Lives report, issued last month, drew some alarming conclusions vis-a-vis the issue of retirement saving in the UK: although more than a half (53%) of the working population has access to a workplace pension, only 38% of workers actively contribute to one.

retirement savings
Credit: Cozine/

Almost half (45%) of those who choose not to contribute invoke a lack of funds as the primary reason, with nearly two thirds (60%) of employees lacking confidence in the UK economy altogether.

What's more, recent research highlights the otherwise intuitive judgement that the poorer we are - the less healthy we are, which further contributes to a bleak picture of the future of British elders.

Add to that the fact that the UK is one of the worst off countries in terms of its citizens' saving habits - and a situation of utter emergency seems to be unfolding.

We might be able to solve this however, if we turn saving into a '5-a-day' campaign, says David Sinclair, Assistant Director of Policy and Communications at the International Longevity Centre - UK (ILCUK).

Spare or despair? Saving during austere times

Urging people to put money aside these days is challenging to say the least. With only 37% of employees being confident about their personal financial situation, Nest's pledge to "curb your urge to splurge" sounds a tad unconvincing.

Five months into the Government's auto-enrolment plan, we are safe in asking: why should we save, how much should we save and what are the best ways to do it?

British people - worst at planning for retirement

"We have one of the meanest pension systems in Europe," says Prof. Martin McKee at the London School of Hygiene and Tropical Medicine (LSHTM), with many UK citizens having to top up their basic pension with benefits in order to make ends meet.

McKee is not the only one feeling this way. A recent study carried out by HSBC found that people will, on average, run out of retirement savings just over half way into their retirement, whereas the UK takes the first place in a top 15 of retirement savings shortfall by country.

Research also shows that one in five UK citizens don't save anything at all for retirement.

The disappointment paradox

The research study carried out by the LSHTM in collaboration with the University of Cambridge points out that the impact of poverty upon elderly people will be unexpectedly harsh.

Having co-authored the study, Professor Martin McKee takes on a psychological viewpoint to explain this; he says the study focused on "the 'disappointment paradox' - a phenomenon whereby people are more significantly affected by losing what they were expecting, than they would have been by an inadvertent gain."

More simply put, if one gets £100 as an (unexpected) bonus - they'll be quite pleased, let's say 'a £100 worth's pleased'. However, in an alternative scenario, if one opens their wallet to find that a £100 note they were expecting to find is missing - their resentment will be far greater than a £100's worth. It might feel like they lost a thousand.

Similarly, Professor McKenna warns, when UK citizens find themselves in old age, they might suffer a severe disappointment. Discovering they're much poorer than they had expected could in turn lead to extremely negative psychological states, and, simultaneously, to poor health.

The connection between being poor and being in poor health isn't necessarily something that needs proving by an academic study.

After all, less money means restricted access to goods that make us healthy; what Professor McKenna warns against, however, is the possibility that elders suffer from an unusually harsh impact upon their health, both mental and physical, whereby the former enhances the latter and vice versa.

As Prof. McKenna explains, "poorer members of society tend to adopt riskier behaviours, such as smoking and hazardous drinking. Essentially, [there are] two pathways to poor health: one through poverty and the other through adverse behaviour. These pathways tend to operate in conjunction with one another".

Our worst fears turn into our worst regrets

Millions of UK citizens dread an old age spent in poverty. According to a report issued by the charity Anchor, one in three UK citizens with ages comprised between 45 and 54 list this among their primary concerns.

While we're tempted to blame the rough economy for our lack of discipline when it comes to saving for retirement, it's also worth considering how a generation that had it all going for them feel on the matter. Here, even 'baby boomers' list 'wishing they had started saving earlier' as the number one financial regret, according to a new study carried out by Standard Life.

Plan A: Auto-enrolment

How much do we have to contribute?

As part of the automatic enrolment program started in October 2012, the Government has set a minimum percentage that needs to be contributed every month towards the pension scheme.

This percentage is made of three different contributions: the employee's contribution, the employer's contribution, and the tax relief from Government.

The minimum percentages are scheduled to increase gradually over the course of six years (until October 2018) and they do not apply to the entire salary, but rather only to earnings over £5,564 up to a maximum of £42,475.

The employer's contribution is also due to increase over time, from a minimum of 1% in October 2012 to a minimum of 3% scheduled for October 2018.

Is that too much?

The context of austerity makes the task of persuading people to save exceptionally difficult. According to the Working Lives report, 37% of employees will opt out of automatic enrolment, and 28% remain undecided.

Before the auto-enrolment programme, data [pdf] collected by the Office for National Statistics showed that membership of workplace pension schemes had reached a 15-year low in April 2012, with only a third (32%) of private sector workers paying into pensions.

As we have seen however, despite Government's efforts to up retirement savings, the number of people contributing to a workplace pension scheme may not increase by that much even after auto-enrolment.

Tom McPhail, pensions expert at Hargreaves Lansdown, predicted that auto-enrolment would not solve all of the problems of workplace schemes.

"If you want a decent pension [employers and employees] need to be paying in more than the 8% that is compulsory in auto-enrolment. Auto-enrolment addresses the issue of membership, but the next big challenge is going to be getting decent rates of contribution put in for people," he said.

One way that might happen is by improving communication. As Aviva experts point out, 'personalised' communication is the way to go, as almost a quarter (23%) of respondents said that being 'personally' shown what and how they need to save is the preferred type of communication.

Plan B: the '5-a-day' campaign

ILCUK first proposed the 5-a-day campaign almost five years ago. In June 2011, the think tank issued a report recommending that the Government promote a rule of thumb similar to the 5-a-day healthy eating program, urging officials to better promote the existing incentives, particularly among young people.

If communication is key, than nothing does the trick better than a decent PR campaign.

In principle, the ILCUK have been prompting the Government to ensure that the existing saving incentives are being promoted well enough, making sure that employees are fully aware of the Open Market Option, as well as using behavioural economics to get more people to save.

In February 2013, five months into the Auto-enrolment plan, ILCUK has issued another report, advising the Government to come up with a back-up plan should auto-enrolment fail, suggesting (again) that a 5-a-day campaign might be the answer.

Few people know this, but the '5-a-day' healthy eating ratio is actually a compromise between what would ideally be 7-to-9-a-day and what has been deemed feasible for the British citizen.

Similarly, the ILCUK recommends that the information regarding defined contribution pension schemes be made palatable by breaking down large amounts of data into smaller chunks; consumers should receive from their pension provider the key details about their policy on just half a side of A4 paper, reads one of the ILCUK recommendations.

"Simplified advice made workable" is, in a nutshell, the key to getting Britons to save more.

Making sure modest income workers are fully advised on their options, using technology more to make saving easier, and entitling employees to a short conversation about their retirement options are a few of the key suggestions made by the think tank.

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