News analysis: More than a quarter of London’s millennial population are permanently in debt, it has been revealed. What role does pensions policy play in their financial health, and could more flexible solutions improve their situation?
The automatic enrolment of over 16.2m eligible employees into pension saving has been one of the most trumpeted successes of government policy in recent years.
If you give people absolute freedom then you’ve got to be prepared for people to make poor decisions
Richard Butcher, PLSA
But statistics revealing the over-indebtedness of some demographies in the capital, compiled by the London Assembly’s Economic Committee in a new report, suggest tension between short and long-term priorities, and that greater flexibility may be needed for younger cohorts.
The report cites Young Women’s Trust research, which found that 27 per cent of Londoners between 18 and 30 years old say they are in debt all the time. Similarly, the Financial Conduct Authority’s Financial Lives Survey 2017 found that 44 per cent of people in “financial difficulty” in the UK were 18 to 34-year-olds.
Short-term debts prevent young people from saving enough for later life, the committee argued. Research by insurer LV has found that 40 per cent of 24 to 25-year-old renters are unable to save any money each month. Student and credit card debts were the most common barriers to this saving.
In response, the committee has urged mayor Sadiq Khan to take action, including a charter to ensure that every young person leaving school has access to a bank account, and improvements to financial education programmes available in schools.
Rethink retirement savings products
While the recommendations of the report will be of limited interest to the pensions industry, campaigners who worked on the report said that retirement savings products also need a rethink to suit those in short-term difficulty.
“Often people feel that they can’t commit to long-term savings, for their pension for example,” said Sian Williams, director of the Financial Health Exchange at Toynbee Hall, a charity fighting poverty in east London and the wider UK.
A schedule of regular contributions from income towards pensions can threaten to push the poorest further into debt, she explained. As a result of this “crisis in confidence” and the exorbitant interest charged by payday lenders and others, many opt out of saving.
Williams said she was encouraged by work being done by mastertrust Nest and researchers at Harvard University on 'sidecar savings' products, stressing that enabling low-income workers to tackle their debt should not come at the expense of retirement planning.
The new product, still in its research phase, will split contributions between a pension and a liquid savings account for use when an individual’s essential costs spike unexpectedly, for example when dealing with a car breakdown. The trial is due to be launched this spring and summer.
Self-employed most in need of flexible solutions
“The current system is built for a 19th century industrial economy,” agreed Tony Greenham, director of economy and inclusive growth at the Royal Society of Arts, Manufactures and Commerce.
Greenham said the need for flexible solutions was most acute when dealing with the fast-growing self-employed sector, which typically features fluctuating income levels.
“I think a sidecar product would be very helpful for this,” he said.
The pensions industry has broadly welcomed the idea of a more flexible form of pension saving, albeit with reservations about how such a proposal could be implemented in practice.
“The principle of the sidecar is a good one,” said Richard Butcher, chair of the Pensions and Lifetime Savings Association.
He said allowing limited or once-in-a-lifetime access to tax-free cash from a pension could give low-income savers the same “sense of access to cash when it’s needed”, incentivising them to save.
However, Butcher said it would be difficult to decide what conditions should be met for sidecar cash to be made available.
If laid down in “hard and fast” regulations, the system would inevitably give rise to circumstantial injustices where savers have a genuine need but are unable to access money, he said.
How financial education could help
Of course, individuals could be left wholly responsible for their sidecar accounts. But Butcher feared this would lead to accounts being continually drained, diminishing the potential for adequate long-term savings to build up.
“If you give people absolute freedom then you’ve got to be prepared for people to make poor decisions,” he said, noting the industry’s increased suspicion of freedom and choice for the same reasons.
The Economy Committee’s suggestions for financial education to improve at London schools were more emphatically welcomed.
“It’s about time they did really start seriously teaching financial awareness in school,” said Kate Smith, head of pensions at Aegon. “We always need to do more, whether it’s at curriculum level or wider, because obviously a lot of people have missed school.”
Smith said financial education could not turn around people’s financial health on its own, but would play an important part in encouraging them to live within their means.
