Big picture thinking: Towards sustainable savings

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Big picture thinking – towards sustainable savings is an Aviva report with analysis and editing by the Economist Intelligence Unit. The report is the culmination of a research programme begun in 2010 to explore the role of savings in financial prosperity. It contains an article from Robin Bew, chief economist and editorial director of the Economist Intelligence Unit, essays from nine thinkers who took part in a roundtable debate on savings in October 2010 and a short report exploring the business world’s view of what is the right balance between policymakers, corporates and individuals in supporting savings, based on a survey of over 800 business leaders from around the world and in-depth interviews.

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Big picture thinking: Towards sustainable savings

  1. 1. The Future Prosperity Panel 2011 or é C a rl H on Pa we l Sw ie bo da Simon Tay fo r A nn P e t ti D ia n e C o y le Big picture thinking – Mat the w Ta ylor towards sustainable savings Ja ne Fu lle r rk ar B ij a p uR ama An Aviva report, with analysis and editing by the Economist Intelligence Unit to n A la in de B ot
  2. 2. About AvivaAviva is the world’s sixth-largest insurance Our Business: Our business helps our About this reportgroup. We provide more than 53 million customers to manage the risks of everyday The Economist Intelligence Unit organisedcustomers with insurance, savings and life and protects them long into the future. the meeting of the Future Prosperity Panel,investment products. We are the UK’s largest We must be there for them throughout and commissioned and edited the essaysinsurer and one of Europe’s leading providers their lives and beyond, so it’s crucial we written by the panellists. It also wrote theof life and general insurance. are a sustainable and profitable business, preface, The Savings Health of Nations, for the mutual benefit of our customers the closing comments and Building aWe’re here to help secure prosperity and and our shareholders. New Social Contract, which is based onpeace of mind for our customers. We helpprotect almost every aspect of people’s lives; Our People: We’re determined to a survey conducted by the Economisttheir homes, cars, families, health and their stand apart from other financial services Intelligence Unit.financial futures. For over 300 years, we’ve companies. We’ll only achieve this if our About the Future Prosperity Panelhelped people protect what they have today people are proud to work for Aviva, so we In order to address the long-term savings challengesand to plan, invest and save for their futures. listen to them, respect them and recognise outlined in this report, the Economist Intelligence the personal contribution they make to Unit, on behalf of Aviva, convened a panel ofEveryone in our business understands the our business. international thinkers to use insights from publicdifference they can make to people’s lives, policy, business and behavioural economics toparticularly in times of need. Society: We want to encourage more consider new approaches to improve prosperity people to secure their financial futures. around the world – the Future Prosperity Panel (FPP).Our Customers: For us, insurance is about We’re committed to working with ourpeople, not policies. That means responding About the Economist Intelligence Unit customers, governments, regulators,to our customers with thought, care The Economist Intelligence Unit (EIU) is the world’s charity partners and business partners toand understanding. We want people to leading resource for economic and business research, find solutions that increase the financialchoose us and stay with Aviva throughout forecasting and analysis. It provides accurate and well-being of both individuals and society. impartial intelligence for companies, governmenttheir lives because they know we’ll be therefor them – and they like dealing with us. More information is available at agencies, financial institutions and academic organisations around the globe, inspiring business www.aviva.com, or follow us on leaders to act with confidence since 1946. www.twitter.com/avivaplc EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at www.eiu.com and www.businessresearch.eiu.com, or follow us on www.twitter.com/theeiu
  3. 3. Introduction: Analysis and conclusion: 0102 Foreword by Andrew Moss, CEO of Aviva 66 Building a new social contract: views06 Preface by the Economist Intelligence Unit from the business world by the Economist08 The savings health of nations by Robin Bew, Intelligence Unit editorial director and chief economist of the 71 Closing comments by the Economist Economist Intelligence Unit Intelligence Unit 74 The Future Prosperity Panel overviewGuest essays Introduction1 Making the connection: empowering savers How the financial 2 Play to win Gaming holds the key to changing savings behaviour. services industry can help savers Page 18 better connect with their money. Guest essays Page 123 Rebranding saving 4 Saving made simple How the financial services industry can rebuild trust and get people saving again by reducing complexity 5 Creating a new savings paradigm for emerging markets Current attitudes towards savings Financial services companies need and information overload. Analysis and conclusion can be changed and reconnected to adapt strategies and products for Page 30 to positive traits such as generosity. new emerging market consumers. Page 24 Page 366 Pensions, their portability 7 Asia’s rebalancing and prosperity and the implications for future prosperity Pension transferability is key to labour mobility, which benefits the European Why Asia must put its savings to more productive economy and individual prosperity. uses and focus on inclusive growth. Page 48 8 9 Page 42 Savings and the Fostering a new alchemy of credit culture of saving Invention of bank money and the Savings may make sense at the individual development of banking systems. level, government savings are not Page 60 a precondition for investment – and prosperity. Page 54
  4. 4. 02Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 2011 Foreword by Andrew Moss, Group Chief Executive, Aviva
  5. 5. Introduction Guest essays Analysis and conclusion03
  6. 6. 04Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 2011Foreword When we decided to prompt a between the income people hope to have in retirement and what they’re actually saving debate on future prosperity weby Andrew Moss, knew we were taking on a big totals €1.9 trillion a year across Europe. Four inGroup Chief Executive, Aviva topic. One which touches on ten people near retirement age today are now planning to work beyond the normal retirement everything from the household age in order to properly fund their retirement.2 budget to the big macroeconomic challenges of our age. For a business like ours, whose purpose is to provide its customers with prosperity and peace This debate comes at a time when the world of mind, there is a role in helping understand economy has weathered a series of major these consumer needs and seeking new shocks that have shaken it to the core. Trust in ways to meet them. Helping people manage the financial sector has suffered a major blow. their financial futures effectively requires But the significant trends are still clear. understanding how, why and when they save. In many developing markets, economic growth Few other issues have such profound global continues to accelerate, helping to deliver major implications in the way they link macroeconomic improvements in living conditions for millions and political debates, culture and psychology, of people. Consider, for instance, that by 2030 local and global economic imbalances. an estimated two billion people will have joinedWe all ne ed this de bate It is for this reason that we brought together the ranks of the global middle class, with the nine prominent thinkers from a range of to happe n now and bring majority in emerging markets. backgrounds to take part in our Future Prosperity Panel. It was a real pleasure to take to be ar many voice s and And people are living longer. Demographic shifts and improvements in healthcare mean part in the discussions and we’re now proud to pe rspe ctive s if were to that global life expectancy rates have increased be publishing their essays which bring to bear by four years since 1990. Government liabilities their considerable experience in public policy, find the answe rs to the are mushrooming as an elderly population business and behavioural economics. challe nge of our future is increasingly reliant for support on a Contained in these, there is fresh thinking and smaller workforce. a wide range of views. Indeed there is plenty prospe rity. But much of the evidence we see suggests of disagreement between them. But that’s people are not preparing enough for the future. precisely the point. We all need this debate to Our ‘Consumer Attitudes to Savings’ research happen now and hear from many voices and across ten of our major markets finds that six perspectives if we’re to find answers to the in ten consumers are worried they won’t have challenge of our future prosperity. Therefore, enough money when they retire to provide perhaps it is no surprise that the thinkers an adequate standard of living.1 Our ‘Mind identify roles for governments, individuals the Gap’ report last year found that the gap and industry. 1 58% – Aviva consumer attitudes to savings survey February 2011 Join the debate www.aviva.com/fpp 2 38% – Aviva consumer attitudes to savings survey February 2011
  7. 7. 05As a global business, we are well positioned But I believe there is clearly far more to do to Secondly, we must strive to Introductionto build on some of the thinking here. meet this challenge. At the heart of it is trying change people’s relationshipsIndeed, many things we are doing already. to provide what customers want and need. to saving.We support financial education in many There are two broad areas covered by thecountries, which is something many of the thinkers in particular that I intend to focus on: Savings are about aspiration; we should talkpanellists raise. For example, our UK ‘Paying more about the positive things people arefor it’ initiative provides a free educational First, help people better saving for in their own lives. And I believe weresource in schools to bring the citizenship understand the financial can do more to kick start the savings habit incurriculum alive for 14 to 18 year olds. choices they need to make. people from a young age and get people to keep the habit over a lifetime. In doing this, Guest essaysAviva works in partnership with the Citizenship I believe this is key. Whether it’s the writtenFoundation charity to deliver these practical there might well be scope for making use of information we send, the content that sits onlessons using our staff as volunteers. new approaches like the characteristics of our websites or the support they receive when gaming to make saving feel more interactive,And we make our products responsive to they call us – we want it to be as clear and compelling and – dare I say it – even fun.different needs in different parts of the world. helpful to people as possible. Regulators can In small tangible ways, we need to askIn Sri Lanka, we have developed a micro- help by looking at the information they require ourselves can we design the products thatinsurance product to extend the benefits of life companies to provide to customers, to make nudge people towards better providing forinsurance to tea plantation workers for the first sure it’s specific and useful and not so their own future prosperity?time. In India we have developed a child plan burdensome that people cannot see the Analysis and conclusionproduct that allows parents to insure and wood for the trees. There are exciting provocations in these essaysinvest to help secure their child’s education. that we will explore further in the coming We are seeking to make our website a ‘go to’In the UK, we’re developing our products months as we progress these priority areas. source of online guidance for people makingand services to respond to the introduction For us, this is not the end of the debate. their financial decisions – whether they chooseof automatic enrolment for pensions, built on It’s the beginning. Taking on the big challenges to become Aviva customers or not. We willthe behavioural habits and communication in sustainable savings and providing for launch an innovative online tool that helpspreferences of today’s consumers. prosperity in the future is a task for everyone customers understand their current financial – no one single player can affect the necessaryWe’re also seeking transparency and choice situation, the financial implications of life events change. That’s why we’re looking to theso people get a good deal. For example, we’re such as starting a family or paying school fees, industry and investors, our competitors andcampaigning in the UK for the annuities market and shows them how they can realise their regulators, our customers and our staff,to be thrown wide open and companies forced wants and dreams. to join us in this big debate and help taketo publish their rates so people can see where Next, we want to work in close partnership things forward. We hope this series of essaysthe best deals are to get the most for the with governments around the world to will provoke new ideas and actions, and thatmoney they’ve saved over their lifetime. help people get the information they need. you enjoy reading them. This is why we have been campaigning for the introduction of annual pensions statements – bringing together people’s forecasted retirement income from state, occupational and private pensions, all in one place. If people Andrew Moss can see where they stand, they can better plan Group Chief Executive, Aviva for the future.
  8. 8. 06Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 2011Preface Big picture thinking – towards To advance the latest thinking in this vitally important area and better understand the sustainable savings is an Avivaby the Economist report edited by the Economist challenges and opportunities in supportingIntelligence Unit Intelligence Unit. The report saving and prosperity globally, we enlisted the help of nine thinkers to form the Future is the culmination of a research Prosperity Panel. programme begun in 2010 to explore the role of savings Drawn from a range of disciplines, representing in financial prosperity. a variety of global perspectives, the nine panel members met at an event in London in October Our prosperity depends on how we save, 2010, hosted by Aviva CEO Andrew Moss and when we save and why we save. More than chaired by The Economist’s capital markets any other issue, the world of savings links editor Philip Coggan. The Future Prosperity the big macroeconomic and political debates Panel considered the roles of individuals, of our time with the specific and everyday business and policymakers as they sought concerns of individuals and companies. It links answers to the questions: Why do some save high politics with culture and psychology; local more than others? What are the consequences markets with global economic imbalances. of their decisions? And how can we change? It affects our livelihoods, our political debate and the development of society worldwide. After the initial debate, the thinkers were challenged to drill deeper into their areas It is these reasons that make saving such an of expertise to work towards solutions. important subject for research, but evaluating Using insights from public policy, business all the associated issues is a significant and behavioural economics, they considered challenge. The Economist Intelligence Unit’s new approaches to improving prosperity and chief economist and editorial director, Robin promoting responsible saving. Essays detailing Bew, outlines a number of important aspects their proposed solutions form the bulk of of savings and prosperity and argues that this report, but here is an overview of their two key issues currently stand out: global main suggestions: imbalances, and retirement provision in an age where so many countries are home to • ane Fuller, co-director of the Centre J a dramatically ageing population. His article, for the Study of Financial Innovation – ‘The savings health of nations’, follows empower savers and bring them closer to this preface. their money through ‘do it yourself’ saving options; incentivise savers by connecting investments with causes they believe in • arl Honoré, journalist and author – C put the fun into finance by translating the qualities of gaming – interactivity, virality, instant gratification and competition – to product development
  9. 9. 07• lain de Botton, philosopher and A • atthew Taylor, chief executive of M Introduction author – rebrand savings by using advertising the Royal Society for the Encouragement to reconnect it to its social benefits and lose of Arts, Manufacturers and Commerce – its associations with meanness foster a new culture of saving by redirecting tax incentives to the less well-off; explore ways• iane Coyle, economist, Enlightenment D of increasing savings returns and bringing Economics – create simple savings products down fees; and get children into the savings with clear information, which prioritise habit early with school-based accounts. customers’ long-term security; boost financial literacy; simplify regulation And to gain an additional perspective on the Guest essays issues, a survey of the Economist Intelligence• ama Bijapurkar, consumer behaviour R Unit’s Opinion Leaders’ Panel explored the expert and author – create financial business world’s view of what is the right products suitable for emerging markets; balance between policymakers, corporates remodel independent financial planning and individuals in supporting savings. and rethink individuals’ financial risk Over 800 business leaders from around the more holistically world gave their views, which are analysed P ´• aweł Swieboda, president of in the article ‘Building a new social contract’ demosEUROPA – simplify and improve towards the end of this report. Analysis and conclusion the pension system at an EU-level to boost portability and improve transferability and transparency• imon Tay, chairman of the Singapore S Institute of International Affairs – nurture Asia’s emerging middle class with policies of inclusive growth; harness savings to develop infrastructure and increase investment in human capital• nn Pettifor, executive director of A Advocacy International – enable central bankers to regulate credit creation and set lending rates; support savers in making economically productive investments with higher rates of return; reconnect the financial system with the real economy
  10. 10. 08Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 2011The savings health of nations Evaluating all the issues associated What are the chances of the world learning from its recent mistakes? To understand with economic health and savingBy Robin Bew, editorial around the world is a mammoth whether lessons have been learned, wedirector and chief economist, task, but two key issues currently first need to explore why the rise in trade imbalances occurred in the first place.the Economist Intelligence Unit stand out: global imbalances and retirement provision in an The way the economy is age where so many countries ‘supposed’ to work are home to a dramatically Current account deficits can be explained, ageing population. at least in part, by the flow of savings across the On both counts, the scale of the challenge world. The traditional view is that savings should is daunting. Governments appear unwilling flow from the developed world to the emerging. to tackle these problems at the root and are In developed countries, incomes are high and storing up trouble for the future. There is the private sector is able to save. Some of those time to make the necessary changes, but savings are invested locally, funding infrastructure policymakers need to start taking action now spending, business investment, and government if they are to avoid serious problems further investment in schools and hospitals. down the road. But in developed countries that already have Global economic imbalances a substantial capital stock, some of the spare money will instead flow to places where it Trade imbalances are a normal part of economic can be put to better use – the emerging world. life. Across the world, trade deficits are offset There, incomes are low and savings therefore by trade surpluses in other countries, and for limited. But the need for investment is high – individual countries running a small surplus infrastructure is less developed, and the stock or deficit is normal. Large deficits can become of existing business investment is low and of difficult to finance and can ultimately lead poor quality. Savings from the developed world to crises for the affected country, but in fill the gap, allowing investment in emerging general most countries trade imbalances countries to outpace investment that could be are perfectly sustainable. funded from local savings. And a lot of that However, in recent decades the average trade investment would take the form of machinery imbalance has become larger. According to EIU and equipment, which would be imported from CountryData, during the 1980s the total of all the developed countries. So a textbook pattern current account imbalances around the world for global trade and capital flows would be (the absolute sum of all deficits and surpluses) savings flowing from the developed world averaged about 2.4% of global GDP per year. into the emerging markets, fuelling investment, In the 1990s the average was 2.3%. But in the and the emerging world running a trade deficit most recent decade it had risen to 4.5% of because their imports of plant and equipment global GDP. The global financial crisis has in are offset by trade surpluses being run in the large part been blamed on this phenomenon. developed world. If that assessment is correct, trade imbalances will need to become smaller in the coming decade, or further crises loom.
  11. 11. 09The 2008 financial crisis and its All this cash flooding into the US and other In the case of the oil-producing nations, Introductionroots in the 1997 Asian crisis recipient markets held interest rates down, it seems highly unlikely. Demand for their major encouraging a borrowing binge, initially among product remains high, so their oil revenuesDuring the 1990s the most clear-cut example credit-worthy individuals but ultimately among are likely to continue to outstrip their domesticwas the boom in South East Asia. Money cohorts of the population who would normally investment needs. For all the talk of parkingflooded in from Europe and America; growth struggle to access credit. Financial firms were these excess savings in the eurozone, the desiresurged. However, some of the money was also able to borrow very aggressively to support to hold a good proportion of their reserves inbeing invested in an unsustainable their equity investment strategies or trading dollars suggests that oil producers will continueproperty boom, rather than in productive activities. The borrowing supported an to channel their money into American financialassets. Once investors realised that their savings Guest essays unsustainable boom in the property and equity markets for years to come.might not be safe, cash surged back out of markets, the unravelling of which left individualsAsia, leaving behind the wreckage of the Asian For China, since the 1997 Asian crisis, the and financial institutions insolvent, forcingeconomic crisis. The exact mechanics of the government has deliberately implemented a large-scale government intervention andcrisis are unimportant to the story. But the policy designed to bolster exports and generate causing much of the economic hardship thatkey thing is the lesson that Asian governments high savings. The more recent developed world still reverberates today.learnt from the experience – that foreign savers financial meltdown has, in the minds of manycan be fickle and relying on them can expose Have we learnt the lessons? Chinese policymakers, vindicated that stance.their own citizens to considerable economic China has suffered economically from the It is arguable, of course, that much of the Analysis and conclusionrisks. As a result, most governments in Asia recession in its major export markets, but the blame for this lies with policymakers in the US, pain was mild in comparison with the turmoilresolved to reduce their reliance on foreign UK and other countries which experienced bigsavers, and pursued policies designed to boost in the US and Europe. So the incentive to capital inflows, low borrowing costs and surging radically change policy – specifically, to allowdomestic saving – primarily by holding their asset prices. Interest rates could have beencurrencies down and running trade surpluses the Chinese currency (the renminbi) to higher to choke off speculative bubbles, and appreciate and thereby reduce the Chinesewith the rest of the world. lending practices better regulated to limit credit trade surplus and national savings – is weak.As a result, savings in many developing Asian to those most able to afford it. But these errorseconomies have actually exceeded the level are easier to identify in hindsight than during China’s policymakers see the benefits ofneeded for domestic investment and, in a the boom, and in any case it was always going increased domestic consumption – includingcomplete reversal of received wisdom, for to be difficult to deal with such a wall of the more rapid development of a consumermuch of the last decade savings have actually savings swamping developed financial markets. economy and higher living standards for China’sbeen flowing from the emerging markets The financial crisis uncovered the need for citizens – but the unwinding of their currentinto the developed – particularly into America. governments to adapt regulatory frameworks, position is likely to be slow at best. Overall,Asia (especially China) has been one key but preventing another crisis will require smaller therefore, it seems likely that global imbalancescomponent of this, but not the only one. global imbalances in the years ahead. What are will persist at their current level or could evenBig oil-producing countries in the Middle East, the chances of this? start to widen again – meaning that the risksbuoyed by high oil prices, also have been able and potential instabilities that such imbalancesto channel considerable sums into the cause will remain. Given the deeply engraineddeveloped world. nature of these developments, it is perhaps with retirement provision that the most progress can be achieved.
  12. 12. 10Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 2011The savings health of nations Retirement provision For example, research conducted by Aviva and Deloitte found that Europeans planning to retireBy Robin Bew, editorial The second major issue relating to the savings over the next 40 years should be contributing health of nations is that of retirement provision.director and chief economist, Populations in most developed countries and an extra €1.9 trillion a year to their pensions to live comfortably in retirement (assuming a 70%the Economist Intelligence Unit some emerging ones are ageing rapidly. income replacement rate, as recommended byContinued Most worryingly, the ratio of older people to those of working age (the old-age dependency the OECD). Those in the UK are the farthest behind in their savings; an average annual extra ratio) is set to rise rapidly. The baby-boom contribution of €12,300 per person is needed generation is retiring, and the next generation to fill the ‘pensions gap’. is not big enough to fill the gap. In the UK today, there are four workers for every one retiree. What can be done about this? Governments In 2050 there will only be two-and-a-half. have two main options: to compel higher saving In Italy, the situation is even worse – by 2050 or to raise the retirement age, which has the there will only be one-and-a-half workers for effect of increasing the period when people pay every retiree. into their pension and reducing the period when they can draw it. In addition, given their scale and These demographic shifts raise critical potential to positively influence the behaviour of questions about the sustainability of pensions. their employees, businesses also have a crucial Are countries making adequate provisions for role to play in effecting real change. their retired populations? An analysis by the Melbourne Centre for Financial Studies and Ultimately, the solution to the pension problem Mercer in 2010 concluded, somewhat will rely on a combination of three factors: depressingly, that out of the 14 pension systems an acceptance of lower state pensions, more they studied, none warranted an ‘A’ grade private saving and a higher retirement age. (defined as delivering good benefits within Based on the current direction of policy in a long-run sustainable pensions system). most developed countries, lower benefits The UK and US were rated ‘C’, having some will take most of the strain. Savings are not good features but also major risks and rising sufficiently, while planned increases in shortcomings. In both instances, pensioners the retirement age are not enough to make could be left with very low incomes, and private a difference. The OECD has calculated that, savings are currently too low to be confident despite the fact that the average official of achieving an adequate pension pot. retirement age for men will rise in the OECD over the coming years (from an average of 63 today to 64.6 in 2050), increases in life expectancy will more than make up for this, and the average time a man can expect to enjoy his pension will actually increase to 20.3 years in 2050 despite later retirement in many countries.
  13. 13. 11 Investing for the future China does recognise the need to become Introduction a more consumer-orientated society, but that While at the individual level the amount of will take time and, as demand in the developed savings for retirement is key, at a global level world recovers, it seems likely that imbalances there is an additional complication. An increase will re-emerge, challenging policymakers again. in the number of retirees implies that an even bigger share of the world’s population is no Looking at pensions sustainability and ageing longer active in producing goods and services. populations, there are few options to address Yet they still need to eat, and the global the inadequate savings of many rich nations to economy needs to be big enough to provide provide the kind of income levels expected by Guest essays for them. This means that pension savings their citizens in their old age. Retirement ages must be invested so as to boost the productive will need to rise further and benefit levels pared The re is lit tle happe ning capacity of the global economy, otherwise back if a crisis is to be avoided. And one of the key strategies for addressing the challenges of hardship will result no matter how much has which would give much been saved for pension provision. ageing populations – ensuring that retirement comfort to those hoping savings are invested to maximise the boost to This implies that retirement savings should global productive potential – is not being that the root cause s be directed towards activities which have followed, with far fewer retirement savings being the biggest impact on global investment Analysis and conclusion invested internationally than might be expected. of the re ce nt financial and production, so equities in preference to Both these savings challenges are long-term bonds and emerging markets in preference crisis have be e n to domestic investment. Yet what we actually issues. Both are easy to ignore now, but the re solved. see is the exact opposite – retirement savings consequences of not addressing them could are disproportionately invested in bonds, and be great in 10 or 20 years’ time. Governments are more often invested at home than abroad. need to act, but they cannot solve this These are perfectly sensible risk-reduction problem alone. Businesses must be involved strategies from an individual perspective, due to their scale and ability to influence the but not from a global perspective. Where will behaviour of their employees. The financial the goods and services come from once the services industry must give employers and workforce in the rich world retires? individuals the tools to save in the form of improved financial products. And individuals The state of global saving must take charge of their own financial futures and economic health and save at a level and in a way appropriate to Looked at through the prism of global their own needs. Together these stakeholders economic imbalances, there is little happening can address these savings challenges. today which would give much comfort to those hoping that the root causes of the recent financial crisis have been resolved. The smaller imbalances we see today are a function of weaker economic growth, not some fundamental change in the relationship between saving nations and borrowers.
  14. 14. 12Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 20111 Making the connection: empowering savers + Jane Fuller, co-director of the Centre for the Study of Financial Innovation, a financial services Think Tank, director of independent consultancy Fuller Analysis and former financial editor of the Financial Times, discusses how the financial services industry can help savers better connect with their money.
  15. 15. 13 Pe ople ne ed to be able Introductionto unde rstand whe rethe ir mone y is going - and incre asingly to dire ct that. Guest essaysJane Fuller,co-director, Centre for the Study of Financial Innovation Analysis and conclusion
  16. 16. 14Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 20111 Making the connection: Savers in many developed It would help, of course, if the messages about economies have been receiving saving were less mixed. Governments can – empowering savers some very mixed messages since and do – provide tax incentives, and they can also remove disincentives. A proposal in the the financial crisis began in 2007. UK for a higher basic state pension and no If over-borrowing was the cause of the crisis, means-testing is a welcome step in this then saving – or paying down debt – should direction. In Singapore, by contrast, it is be part of the answer. But savers have been much simpler: compulsory saving against discouraged by low interest rates, as central a background of minimal state benefits banks have tried to keep a lid on them in order and low personal taxation. to help stimulate economic recovery. Compulsion, through taxation or state- If people on low incomes save for a pension in mandated pension scheme, is part of the a means-tested system, they may end up doing answer. But to tackle the threat to living little more than saving the government the standards, saving must be made a more cost of paying them benefits in retirement. attractive prospect. This requires changes in attitude on the part of both the public If money is put into even a semi-actively and the financial services industry. managed investment fund, fees often eat up a significant portion of the returns. To bring the two together, a connection has to be made between saving and prosperity. And yet, the decline of final-salary pension This should not be restricted to the limited view schemes and the falling real value of state of individuals preserving what they have. It also pensions mean that people increasingly have to requires a recognition that the money set aside take responsibility for funding their retirement. will create prosperity through investment in Research by Aviva in 2010, revealing a businesses, infrastructure and even in causes, €1.9 trillion pension gap in Europe, laid out the such as environmental improvement, that will options for those without savings: relying on benefit the economy and society overall. non-pension assets, such as property; retiring For this to happen, people need to be able to later; working in retirement; and/or accepting understand where their money is going – and a significantly reduced standard of living. increasingly to direct that. And they need to Each has obvious drawbacks. believe that the financial services industry, In countries that do not have welfare state which provides them with the investment benefits, the incentive to plug the gap through vehicles, is giving value for money. saving is straightforward. But even where the availability of means-tested benefits complicates the calculation, investment to build up a retirement fund will provide a better standard of living in old age.
  17. 17. 15Where does the money go? Focusing on the destination of the funds can Introduction + be a big motivator. What might be the sourcesGrowing numbers of people are taking of future prosperity? Investment themesresponsibility for their own pension funds. €1.9 trillion which might capture the imaginations of saversThe number of self-invested personal pension include renewable energy, electric cars, waterschemes in the UK has roughly quintupled purification and conservation, social media orsince 2005 to 650,000 and the fastest helping communities in Africa. Current pension gap in Europe,growing part of the market is the entirely Research by Aviva 2010self-managed option. How can the industry meet this demand? Guest essaysOther evidence of ‘do-it-yourself finance’ canbe seen in the rapid expansion of the peer-to- The investment industry, including the trillionspeer lending market. The biggest operator is of dollars put to work by pension funds andUS-based Prosper, founded in 2006, which insurance companies, is pursuing similar themes.now has more than a million members and Indirectly, it is already connecting the funds$215 million-plus in funded loans. Many similar of millions of people with wealth-creatingsites have sprung up, including Zopa and parts of the economy, both domesticallyFunding Circle in the UK. The latter stresses and internationally.on its website the feeling of engagement Do-it-yourse lf finance Analysis and conclusion An obvious first step towards engaging is le ading to a de mandbetween the providers and recipients of funds: savers is to be absolutely clear about how the‘feel good about supporting small business’. money is being invested. Instead, innovationIndeed, ’feeling good’ is leading to a demand is too often directed towards creating products for products that providefor products that provide not only a returnbut also fund something in which the investor marketed according to some modelled return. This is what led John Kay, the Financial Times not only a re turn but alsobelieves. The Social Stock Exchange Association, columnist, to write of ‘kickout bonds’: “Like so fund some thing in which the inve stor be lie ve s.based in Germany, aims to promote the many structured products, these bonds areestablishment of exchanges with ‘hybrid’ bought only by people who do not reallyreturns, combining financial rewards with understand what they are doing.”social or ecological goals. The first such A better route is to design transparent,exchange was set up in Brazil, alongside low-cost products that allow individuals tothe BOVESPA stock market. Another is being invest alongside the professionals. A greatformed in Portugal within Euronext Lisbon. example of this – although some of theseWhile it is easy to see the search for ‘meaning’ are now structured and complicated – is thein social investment, the mainstream savings exchange-traded fund (ETF). An individual canand investment industry can learn from this make a broad decision to invest in a sector,level of engagement. Saving for a pension is a country or a theme and then buy an ETF,a long-term game and it is intimately linked which acts as a basket of underlying securities.to the concept of future prosperity for both Direct sales and a high level of automationthe saver and those who benefit from access minimise the cost.to their funds.
  18. 18. 16Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 20111 Making the connection: Pooled investment funds with much longer The low-cost approach works for retailers histories than ETFs include unit trusts and because of the size of the market and because empowering savers mutual funds. But too often layers of customers are used to exercising choice. Continued intermediaries, and therefore cost, build As long as most people relied on state provision up between the saver and the destination or defined benefit company pensions (also of capital. known as final salary pensions), those conditions did not apply to the private savings market. A retailer would ask: where do customers actually need help? At one end of the spectrum This is changing. At the other end of the are those confident enough to pick their spectrum from the confident retail investor, own stocks using public stock exchanges. increasing numbers of people in the developed They need cheap execution, tax-efficient places world are having responsibility for saving thrust to park their portfolios and easy online access. upon them (as is the norm elsewhere). This willSucce ssful re taile rs They also need information. Increasingly, naturally make them more engaged – and more start with what the stockbrokers, financial advisers and the demanding. Prompts include being asked to financial media are providing charting facilities choose between different types of portfolio custome r wants and and other data online, at least for the main equity markets. in defined contribution, or money purchase, pension schemes. focus on de signing Yet even confident retail investors need For the provider, the principle should be products that of fe r increasing amounts of help as they move towards more thematic or exotic destinations the same whether the customer is financially experienced or not: the more direct and the be st quality at for their money. This is where the industry transparent the link between the saver the lowe st price. can make it easier to invest alongside and the destination of the funds, the better. professionals in a transparent way. Helping the customer to understand the investment landscape will build loyalty; A big, well-resourced provider ought to be in a exploiting their ignorance will not. good position to provide such products – rather like HM, the international fashion retailer Value for money based in Sweden, which owns no factories but works with independent suppliers in Asia and This argument cannot go any further without Europe. Successful retailers – IKEA is another addressing the issue of cost. Behind this are prime example, and also Swedish – start accumulated layers of fund managers, advisers, with what the customer wants and focus on traders, custodians, compliance officers and designing products that offer the best quality more. An extreme example is the maze that at the lowest price. lies between an individual saver and investing in a hedge fund. Using a fund-of-fund structure, a gross return of 10% would be whittled down to about 3% after all the intermediary expenses had been paid.
  19. 19. 17 But that is a niche activity. The new mass Introduction Action points: pensions vehicle that will go live in the UK from 2012, the National Employment Savings Trust • inancial services companies should provide F (NEST), is aiming to keep annual charges to less customers with clear explanations of where than half a percentage point. their money is going and clearly spell out the charges. This provides a challenging benchmark for the industry. But an equally important point • inancial services companies should design F is that it will demonstrate that small accounts and provide customers with direct access can be managed cost-effectively. A lesson to simple, low-cost products. Guest essays+ from emerging markets such as India is that mass markets of micro-customers should be • inancial services companies should tap F into a range of investment themes about650,000 viewed as opportunities. Margins may be low but they are on bulk sales, and it is worth wealth creation, including funding for building the loyalty of customers who are small domestic businesses, for improvingself-invested personal pension gradually becoming wealthier and more standards of living in developing countriesschemes currently exist in the UK financially sophisticated. and for sources of clean energy. Of course, the industry will need to charge • inancial services companies should F Analysis and conclusion more for active than passive fund management. enable customers to mix their pursuit of But the watchwords should be proven a commercial return with investments in outperformance and transparent charging. causes they believe in. No one minds paying extra for an activity that has demonstrably added more value. Technology now enables both micro-payments and the automated administration of micro- accounts. The internet has made it cheap and easy to spread information about financial products, and to create networks for swapping advice. In other words, there is no longer any excuse for the financial services industry not to follow the lessons of the retail sector: give the customers what they want at the best possible price.
  20. 20. 18Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 20112 Play to win Maybe we can unle ash a savings re volution by making saving more like a game. Carl Honoré, journalist and author
  21. 21. 19 Introduction+ Guest essaysCarl Honoré, journalist and author of theinternationally best-selling book ‘In Praise ofSlowness: How a Worldwide Movement isChallenging the Cult of Speed’, believes that gamingholds the key to changing savings behaviour. Analysis and conclusion
  22. 22. 20Big picture thinking – towards sustainable savingsThe Future Prosperity Panel 20112 Play to win Imagine children springing out Nor does it help that the case for saving is of bed to tidy their rooms, take usually couched in the language of doom and out the rubbish and hang up the gloom. While financial services firms pump out charts and graphs decrying our shrinking nest washing. Colleagues sneaking into eggs, politicians warn that we will all have to work early to do the dishes in the work harder and longer. Newspaper headlines office kitchen. Or even students often shout: “Save Now, Or Suffer Later!” jostling for the right to scrub It is all stick and no carrot. toilets in a hall of residence. This is not some fantasy inspired Using the instinct to play by Mary Poppins or the Stepford That is where the gaming world offers a lifeline. Wives. It is real life for the many The best games use carrots to induce people people who play Chore Wars, to do things they might otherwise avoid. an online game launched in 2007 It helps that the gaming instinct is hardwired that achieves the unimaginable into us. Long after play has helped build our by making housework fun. brains in childhood, we carry on loving games, from Scrabble and Sudoku to checkers and Chore Wars is part of a growing trend for chess. Seventy years ago, Johan Huizinga, designing online games that change behaviourThe gaming instinct a Dutch sociologist, identified play as a basic in the real world, transforming a necessary human need in his famous book ‘Homo is hardwired into us. evil (housework) into something that people actually want to do. This is a trend that could Ludens’. “Play cannot be denied,” he wrote. “You can deny, if you like, nearly all abstractions: work wonders in the financial services industry justice, beauty, truth, goodness, mind, God. – maybe we can unleash a savings revolution You can deny seriousness, but not play.” by making saving more like a game. You certainly cannot deny that a gaming Today, that sounds like pie in the sky. revolution is washing through our culture. Saving money seems to be the opposite of Today, human beings rack up three billion fun and games. It means forgoing instant hours playing video games every week. gratification. It feels boring and uncool – when Screen-based games now earn more than was the last time you heard a sports, pop movies and DVDs combined. or movie star extol the virtues of paying into a pension plan? Planning for retirement also forces us to confront our own mortality.
  23. 23. 21 To anyone over the age of 40, this can all seem Measuring success is central to the Chore Wars Introduction + slightly baffling. Older generations remember experience. Rewards for completing chores are video games in their infancy: the monotonous immediate and you can always monitor how 3 billion bombardment in Space Invaders or the soporific powerful and skilful your avatar is becoming. rallies of Pong. But gaming has come a long Measurable, constant and incremental progress way since then. Today, the best games are is precisely what the reward circuitry in the hours are spent by people playing dazzling, complex and hugely addictive. brain craves. The promise of a large prize in the video games every week distant future – a juicy pension pot, for instance However, the stereotype of the gamer as a – simply cannot deliver the same buzz that spotty teenaged boy blowing away zombies Guest essays smaller ‘wins’ in the here and now can. in a lonely bedroom no longer holds true. The average age in the gaming community Chore Wars favours the carrot over the stick is now 34, and more than a quarter are over in other ways. Each ‘adventure’ yields differentMake saving a spur-of- 50. Nearly half of gamers are women. rewards and players are free to decide which the -mome nt adve nture Chore Wars: a case study ones to tackle. This removes the sting of coercion and turns housework into a series by se nding re al-time Chore Wars offers a useful case study of the of voluntary acts and creative strategising. ale rts whe n rival save rs ingredients that make games so compelling. Chore Wars is also profoundly social. Analysis and conclusion To play it, people from a real-life household make de posits. Players receive constant feedback from rivals, or office create an online group with virtual a thumbs up for finally unblocking the gutters, avatars for each player. They then draw up for instance. Rather than fostering a winner- a list of chores to be performed in return for takes-all ethos, the most successful games rewards ranging from virtual gold to points strike a balance between competition and that enhance their avatars. They can also collaboration. As soon as a new game hits assign real-world rewards in return for that the market, fans flock to the web to compare digital treasure: a trip to the ice-cream parlour notes and help each other play better together. for the children, perhaps, or a foot massage Chore Wars works because players compete for a partner. within the context of a shared adventure.

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