21 April 2004
SPEECH GIVEN BY RUTH KELLY, FINANCIAL SECRETARY TO THE TREASURY, AT THE RETHINKING LIFE INSURANCE CONFERENCE
I am delighted to be here today, and to have this chance to say a few words to you about what the Government is doing to promote and protect the savings of this country.
As I’m sure you’ll agree we all, as citizens, have an interest in people making the best possible decisions over their savings, and providing effectively for their own future needs. And so we all have an interest in whether these savings are managed efficiently as well.
For this to happen, it is fundamental that the savings and investment industry in this country is both efficient and widely trusted – this is essential for the welfare of the people who depend on it, and for the effective operation of our capital markets.
Because of this, the Government has been determined to address problems in the level of public trust and confidence in the long-term savings market.
The last few years have been challenging times that both we in Government and you in the industry have had to struggle with: from pensions mis-selling and the mis-selling review in our first term and the more recent Penrose enquiry into Equitable Life to the fact that the UK has been experiencing a 3 year bear market.
It is true that these have been tough times for the industry. And there are legitimate areas of concern including: the level of saving, the complexity of products, and the number of people leaving employment too early and too suddenly. In addition longer life spans are adding real demographic pressures. We estimate that by 2031, over 40% of people in the UK will be over 50 years of age, and almost a quarter will be over retirement age.
None of these issues are insurmountable, but they do require us all – the Government, the financial services industry, and the wider population – to make changes to the way we prepare for the future.
As a country, we need to re-examine our attitudes towards the transition from work to retirement. In place of the current “cliff edge”, we should look to increase the options available to workers nearing the end of their careers to adjust their hours and workload, rather than simply leave the workforce. The Government wants people to have real choices about their working lives: Once we have implemented our tax simplification measures, it will be possible to draw a pension and carry on working for the same employer, perhaps for fewer hours a week.
Demographic pressures also have implications for the Treasury – particularly in how we ensure that the knowledge and potential of older people is not wasted by working practices and cultures that undervalue the contribution they make… And for the ways in which we regulate the financial services on which people depend to support a longer life.
The Pension Bill sets out our proposals to renew the pensions partnership between the Government, individuals, employers and the financial services industry - long the mainstay of the UK pensions system. It also includes measures to protect the consumer where possible – for example through the pension protection fund.
We have also – as you know – been keen to encourage the development of simple and flexible savings products, and to broaden access to the financial services industry. And it is on these issues that I would like to concentrate.
Our real challenge is to encourage people to save what they need. Working longer, as I have said, will play a vital role in making lifetime finances add up for many people. However, whatever other choices are made, the best way to secure a better income in retirement is to save more during the working life.
It is clear that not everyone is doing this. Our analysis shows that around 3 million people may be seriously under-saving and a further 5 to 10 million may be disappointed in retirement.
Encouraging people to save for their futures is a complicated problem – involving all sorts of issues…. from their current levels of indebtedness, to the consumer education they receive and the financial advice and value for money that is available to them. Critically it involves the industry providing products that people can understand and trust.
When Ron Sandler’s review reported in 2002, it recommended the introduction of a suite of low-cost, risk-controlled simple products to help the industry do this.
Following extensive consultation on the product specifications for the Sandler product range, the Government made the decision to introduce a “Stakeholder Suite” of products that will include:
Firstly, a deposit account along the lines of a CAT-Standard cash-ISA
Secondly, a unitised medium-term investment product which carries with it the requirement to diversify assets across markets and sectors in order to meet the needs of a cautious investor investing for a 5 –10 year period. This will also contain smoothed investment fund product features – dovetailing with the FSA proposals on treating policyholders fairly.
Thirdly, the suite will include a modified Stakeholder pension – one that requires a lifestyled default fund, so that investments can move into less volatile assets as retirement approaches.
And fourthly, the Child Trust Fund.
We are currently developing detailed product specifications including what charge caps should apply to the various products – and we will announce our decisions on these in tandem with the results of the FSA’s work on measures to streamline the sales process later this Spring. In the meantime, we certainly welcome responses from the industry on all these aspects of the stakeholder suite.
The Government believes these products can help us to tackle a number of problems:
- They give consumers products they can trust and understand
- They create products that limit the potential detriment to consumers
- And by doing so they mean the FSA can consider a lighter touch sales regime for them, improving the economics of their sale
- They are a win for Government, Industry and Consumers.
An important stream in this work is the need to develop and improve methods of delivering products to consumers efficiently and cheaply.
And of course, people need the skills and the knowledge with which to make sensible decisions about their money in the first place. Here I am talking about the broad objective to develop financial capability. In other words, not just educating through imparting knowledge – although that is hugely important and challenging – but creating confidant people who can make sensible and informed choices throughout their lives. This will also help to drive innovation, competition and best practice within the industry.
We also believe that it is beneficial to start young. Indeed, one of the underlying motivations for introducing the Child Trust Fund is to create future generations that are more financially astute and have been instilled with a savings habit. And three years ago, this government introduced personal finance education in schools – as a non-statutory part of the national curriculum in England.
The FSA are, of course, already very active in delivering their statutory objectives for public awareness and consumer protection. These are key parts of the FSAs work, and developing capable consumers has a major role to play in delivering both of them.
Indeed, the FSA has increased year on year the scale, range and topicality of its public awareness work. It has fostered initiatives on financial literacy (including within the educational system) and has provided independent information and guidance to consumers through a variety of channels.
Most recently the FSA has established a new Financial Capability Steering Group – on which I sit – which has the remit to develop and implement a national strategy for financial capability.
The objective is to provide consumers with the education, information and generic advice needed to make their financial decisions with confidence. And to engage with a wider range of organisations in doing this – in order to fully utilize the range of knowledge and experience within the industry.
The financial services industry as a whole must also take a certain amount of responsibility in this area – not only over the quality of their lending and investment decisions, but also over the level of support and information that is provided to their customers.
Another stream in our work to improve how people in this country save is regulation. A healthy savings culture needs a system of regulation that allows firms to compete and gives consumers confidence that they can invest safely.
Although Equitable Life was, as Lord Penrose pointed out, a unique case, his enquiry revealed the deficiencies with the deregulatory, light-touch, reactive regulatory system that predated the FSA.
In 1997, as soon as this Government came to power, it took action to put an effective regulatory system in place, setting up a single integrated regulator combining prudential and conduct of business regulation. A key part of the new regulatory regime was the creation of a comprehensive Financial Services Compensation Scheme and a single Financial Ombudsman service.
Since then, the FSA has proceeded to introduce risk-based insurance regulation and individual capital standards. It is also in the process of introducing realistic accounting by life offices, including a requirement to reserve for terminal bonus. And the use of future profits implicit items is being phased out.
The FSA is also removing responsibility for making key decisions on asset allocation and distribution in with-profits funds from the Appointed Actuary and transferring it to company boards. And it has brought forward proposals on better treatment of customers by firms, and fuller transparency of with-profit funds.
The Penrose enquiry provided important corroboration for the approach the FSA have been taking… which, he said, reflects “a major, comprehensive reassessment of the requirements of an efficient regulatory system for the insurance sector”. (App E/ 3).
I recognise the difficulty of implementing a regulatory change of this size and importance, but I trust that you, like me, recognise the benefits it will bring to customers and the conduct of your own business and I hope that you will continue to give the FSA your full support in taking the necessary changes forward.
In everything that we – collectively – do to improve and reform the savings and investment industries, it is essential that we learn from our mistakes – and do not repeat the errors of the past.
I hope that this has been a useful outline of the measures we are taking forward. As I hope I have made clear, one the key drivers behind much of this has been the desire to strengthen the hand of the consumer, and to encourage people to save. I appreciate the cooperation we have had from many parts of the industry – in the reviews and consultations that have been conducted. It is essential for the industry to play as full a role as possible.
Thank you.