Failure – Sending out the wrong message

To encourage you to save – whether in ordinary bank savings accounts, in cash ISAs or in pensions – a string of successive Governments have failed to take bold decisive action to help savers and instead tinkered at the edges.

Put brutally, no transparent, cogently-argued or clear Government policy has to date emerged to encourage you to save. In fact, on the contrary, the past two decades have been witness to savings initiatives conjured up and made ‘on the hoof.’

Take a look at the conveyor belt of every new savings product to pop out of banks on offer to you: each carries the hallmarks of gesture politics rather than forming part of a joined-up strategy to give you an incentive to save.

Since 1987, a myriad of savings products have been launched including Personal Equity Plans (PEPs); Tax-Exempt Special Savings Accounts (TESSAs); Individual Savings Accounts (ISAs); Child Trust Funds; stakeholder pensions; a national-rollout of the ‘Savings Gateway’ for low-income savers; and, from 2012, personal accounts – yet another new pension scheme, this time one into which employees will be automatically enrolled.

The decline in savings…

Here’s a statistic to send a shiver down your spine: Britain’s average household debt – when you look at it as a percentage of your disposable income, or spending money – is now nudging nearly 180 per cent. That’s a lot of cash being spent that hasn’t first been banked and accounted for.

So small wonder that, over the past 10 years, UK household savings themselves have plunged from 10 per cent of disposable income in 1997 to just 2 per cent in 2008 – a mighty fall.

That’s not all: research by Investec Private Bank shows that nearly a third of savers have reduced the amount of money they put aside because of successive cuts in the Bank of England Base rate to just 0.5%.  Some six million pensioners rely on savings interest for up to a fifth of their retirement income, and the Government has acted negligibly to try and counter the impact of rock-bottom savings rates.

A lack of incentive to save…

Now, if savings interest rates rose or savings interest was abolished altogether, then a remarkable 23m of us would put aside more of our income to save, Investec found.

Just look at the evidence: since Base rate was cut to 0.5% in March 2009, less than 4 per cent – a pitiful one in 25 – of instant access savings accounts offer a rate of 3 per cent (gross) or more on balances of £5,000, according to research from Sainsbury Bank.
Paltry rates of return on our savings have driven droves of us to drop the need to save down our priority list, warns Nationwide building society. In July 2008, it asked a consumer panel if saving was good and some two-thirds responded ‘yes’.  In July 2009, the number had slipped to just 57%…

Why debt became the new black….

Savings simply haven’t had a chance, and part of the blame lies with the sexy linguistic ‘rebranding’ of debt that almost made it fashionable.
Take the language of borrowing which has become simpler and more widely understood than the fusty language of saving.   Before the onset of the credit crunch, borrowing was rather euphemistically called ‘credit’ instead of ‘debt’ and homeowners were guilty of regular boasts over the gargantuan size of their mortgages as though they were a badge of honour.

It’s a sad state of affairs but until the onset of the crunch and panicking lenders, it would have been far easier for you to call up and obtain a credit card, personal loan or mortgage than to open a savings account or set up a pension.

Worst, you could have easily applied for and got a self-certified mortgage – designed for anyone without ready or steady income to apply for a home loan – with few or no credit checks.  Perhaps unsurprisingly, it encouraged plenty to exaggerate or even lie about their take-home income and end up in all sorts of financial difficulties.
And all the while, hundreds of thousands of students have been forced to take out loans to fund their studies to produce a generation of students leaving college with average debts of over £10,000.

Asleep at the wheel….

So where were the regulators and authorities during the boom times when many of us were borrowing way beyond our means, with barely a thought to how it would have to be paid back?  Simple: looking elsewhere and enjoying the spoils of a debt-fuelled expanding economy.

In a nutshell, the Treasury, Bank of England and the Financial Services Authority (FSA) had all taken their eye off the ball.

First, it’s worth noting that the Treasury last produced a report on savings in 2000 (Helping People to Save – the Modernisation of Britain’s Tax and Benefit System) – that’s nearly a decade of neglect.
Let’s turn to the Bank of England: its monitoring of the savings culture has been in steady decline since 2002 , without a scrap of ongoing regular assessment.

And what about the FSA? Its policy throughout the boom years was to apply a ‘light touch’ regulatory regime to the financial services industry because the Government was in hock to the City thanks to the giant revenues being generated for the Exchequer.

But as we’ve sadly been forced to see, it was all a house of cards. With the collapse of the credit-fuelled economy, the chickens are coming home to roost with devastating consequences for pensioners, students, homeowners, small businesses and companies.