Britons Continue To Feel the Squeeze

Transcription

1 Britons Continue To Feel the Squeeze The findings of a new survey showing how the economic crisis has changed British financial behaviour bodes ill for financial institutions. Companies that develop pension products appealing to beleaguered consumers will fare best. 1

2 Considering the amount of media attention being given to the current British economic crisis, it s perhaps no surprise to learn that most Britons are feeling the squeeze financially. A.T. Kearney, in conjunction with an external research partner, surveyed more than,000 British adults on the ways in which they manage their finances and how this behaviour has changed since the onset of the financial downturn (see sidebar: About the Study on page 4 ). Some of the results are startling. For example, when asked to name their single most important consideration regarding their overall financial situation, nearly half of all respondents (45 per cent) say making ends meet or providing for others. Only 16 per cent respond with making investments and 15 per cent with paying off debts. As few as 1 per cent say their main priority is saving for a rainy day (see figure 1). More interesting still, a comparison of the pre- and post-crisis findings reveals significant differences. When asked to state what their priorities were before the economic crisis, only 8 per cent of the same people say making ends meet or providing for others. These results highlight a marked decline in day-to-day financial circumstances, with more people in post-crisis Britain now focusing on the basic essentials and fewer saving, investing, or paying off debts. This difference is slightly more pronounced among women, with 48 per cent stating that making ends meet or providing for others is their single biggest financial consideration, compared with just 9 per cent who say they felt this way before the recession. It appears that with finances so tight, post-recession Britain has begun to adopt a live for today mentality, where families and individuals are more concerned about the financial resources they will need to make it to the end of the month or even the end of the week than about saving or investing for the future. Figure 1 More Britons are focused on making ends meet or providing for others Respondents (%) Pre-crisis Post-crisis Making ends meet or providing for others Paying off debts Investing Saving for a rainy day None, not sure, can t recall

3 Financial Concerns are Countrywide Those in the age bracket, a time when the cost of growing families, mortgage payments, and credit card debt begins to put added pressure on household finances, seem to be the worst affected by the financial crisis with 5 per cent stating their primary objective is making ends meet or providing for others (see figure ). Close behind them is the group with the lowest income, 18 to 4 year olds; just under half (46 per cent) of those in this age bracket are now chiefly concerned with trying to make ends meet. Regardless of age, those with the lowest incomes, earning less than 15,000 a year, report the greatest shift in priorities as a result of the recession. Fifty-six per cent in this group are focused Figure Making ends meet is top of mind among 18 to 4 and 35 to 54 year olds Respondents (% by age group) Pre-crisis Post-crisis Making ends meet or providing for others Paying off debts Investing Saving for a rainy day None, not sure, can t recall Making ends meet or providing for others Paying off debts Investing Saving for a rainy day None, not sure, can t recall 3

4 Figure 3 Making ends meet or providing for others has become the most important financial consideration for those with lower incomes Respondents (%) Pre-crisis Post-crisis Less than 15,000 15,000 4,999 5,000 39,999 40,000 59,999 60,000 99, ,000+ Annual salary ( ) on trying to make ends meet, compared with just 31 per cent prior to the crisis (see figure 3). Those making from 15,000 to 60,000 say they too are finding it difficult to make ends meet, ranging from a 17 point difference for those in the 15,000 to 5,000 salary bracket to an 18 point difference in the 40,000 to 60,000 bracket. Our findings mirror similar research in this area. A new report by MoneySupermarket.com, for example, reveals that U.K. adults are so stretched financially that more than a quarter (6 per cent) say they now instantly become stressed or worried when they receive a bill. Worse still, more than half of this group (54 per cent) say that the biggest cause of their stress is the fact that their bills just keep rising, making it difficult to predict what the exact amounts will be and how to deal with them. Nearly a third (31 per cent) admit that they feel panic when a bill About the Study A.T. Kearney, in conjunction with an external research company, performed this research study to analyse differences in the underlying behaviour and attitudes of U.K. consumers toward retail financial services before and after the financial crisis. The fieldwork comprised an online survey of,073 U.K. adults, conducted over a 48-hour period from December 16 to 19, 011. Specific issues were explored in relation to the following topics: current accounts; savings accounts; secured and unsecured debt; overall financial situation priorities; channel usage; and pension contributions. The survey responses were analysed with reference to aggregated top-line results together with more detailed analysis to explore variation of responses by gender, age, geographic region, marital status, and annual income. The survey results have been supported by an additional literature search, which has incorporated directional trends appropriate to the overall findings and results. 4

5 arrives, for the simple reason that more money is going out of their current account every month than coming in. It seems that no area in Britain is free from similar financial stress. Although we find some geographic differences in terms of attitudes about current finances, U.K. citizens overall appear more worried now about making ends meet than they were before the recession. Wales is relatively worse off than the rest, with more than half (5 per cent) now focusing on the basic essentials, compared with just 30 per cent for whom this was the top priority before the crisis. By comparison, less than half the respondents from Scotland (43 per cent), where university tuition and prescriptions are still fully subsidised by the government, consider basic essentials as their main financial consideration. Nonetheless, this figure represents a marked increase from the pre-recession concerns expressed by Scottish citizens when only 34 per cent say they felt the need to focus on this particular area. Bills are rising, income is falling, and the need to pay for the bare essentials is dominating the financial strategies of millions across Britain. One group of survey respondents is faring better than the others: Less than a quarter (4 per cent) of those earning more than 100,000 a year say they are focused on the basic essentials. In fact, 5 per cent of this group which earns considerably more than those earning the full-time national average annual salary of 6,00 cite investing as their main financial consideration, compared with just 9 per cent who considered investing a priority before the crisis. In every other income group, either the same number of or fewer respondents treated investing as a priority after the crisis compared to before it. There are other reasons why the higher-income group may be benefiting albeit slightly from the current economic situation. In general terms, this group tends to have the largest mortgages, which means that the historic drop in interest rates in recent years may be responsible for freeing up additional income. This may also help to explain why only 19 per cent of those earning more than 100,000 a year now consider paying off debt as a priority, compared to 33 per cent before the crisis. Less Money, More Scrutiny Clearly, when money is tight, individuals tend to feel more anxious about managing their finances. At the same time, continual media speculation about an imminent financial meltdown combined with sharp questions over where the economy is headed next leaves many people wondering whether unemployment will continue to rise or benefits will be scrapped or reduced. Not surprisingly, in recent years Britons across the board have become far more attentive when it comes to monitoring their bank accounts. In fact, nearly three-quarters (71 per cent) 5

6 of respondents report that they now look at their current account at least once a week, compared with just 54 per cent before the financial crisis (see figure 4). This rise was most noticeable in the 18 4 group, with 70 per cent of those in this group saying they now monitor their current account at least once a week, compared with just 45 per cent previously. The increased frequency with which savings accounts are checked follows a similar pattern, with 1 per cent reviewing their savings weekly, compared with just 13 per cent before the crisis. Our research does highlight one key difference in terms of how Britons are monitoring their current accounts versus their savings accounts: While 71 per cent report reviewing their current account each week, this number drops to just 1 per cent for savings accounts. The obvious explanation is that Britons simply have fewer savings than they used to, a conclusion confirmed by recent statistics released by the Department of Work and Pensions, which reveals that as many as 30 per cent of British households currently do not have any savings at all. For those who do save, figures released by ING Direct reveal that, as a result of the high cost of living and recent job cuts, average savings in the United Kingdom now stand at just 1,783, representing a 1 per cent decline in two years. The research also reveals that 41 per cent of U.K. citizens are relying on their savings to help pay for everyday basics, such as groceries, utilities, and fuel. In addition, because people are concerned about their job security and fear they may be left unemployed and saddled with debt they cannot afford, many are using their savings to reduce their loans. Figure 4 Britons check their current account more often since the financial crisis Respondents (%) Pre-crisis Post-crisis 8 71 How often do you monitor your current account? Daily or weekly Every two weeks or quarterly 1 1 Half-yearly or more than yearly Never, can t recall, not applicable 6

7 It is perhaps for all of these reasons that most people seem determined to monitor their finances more closely now. This is especially true for those age 55 and older, with about 71 per cent in this group reviewing their current account at least once a week, compared with just 56 per cent before the crisis. Although financial concerns now affect all age groups, they clearly represent a serious problem for older people in particular. Age UK reports that 4.5 million people 60 years of age or older can only just afford the basics, and that more than half (55 per cent) of those age 60 or older are finding it harder to manage their regular outgoings compared to this time last year. An ICM poll carried out to coincide with Age UK s report, Living on a Low Income in Later Life, reinforces this finding, revealing that nearly 10 per cent of those age 60 or older are finding it quite difficult or are really struggling to manage on their present incomes. More Debt, Less Scrutiny Despite the pressures of the financial crisis, our research shows that people are only slightly more likely to check on their debt levels, including mortgages, unsecured loans, and credit cards, than they were before the economy began to falter. Just 5 per cent now check these balances each quarter, compared with 3 per cent of those reporting this same frequency before the financial crisis. By comparison, nearly half of all respondents claim that they never check these balances, or cannot recall checking them, and only 15 per cent say that they review their debts on a daily or weekly basis (see figure 5). Twenty-five to 34 year olds are the most vigilant age group with 3 per cent checking their debt levels either daily or weekly. Figure 5 Despite the pressures of the financial crisis, Britons are only slightly more likely to check their debt levels Respondents (%) Pre-crisis Post-crisis 6 How often do you monitor your debt levels? Daily or weekly Every two weeks or quarterly Half-yearly or more than yearly Never, can t recall, not applicable 7

8 People in the 18 4 age group follow this general trend very closely, with only 16 per cent reporting that they look at these figures weekly. One might assume that this age group has the lowest level of debt to worry about, but it is worth noting that it is likely to face deferred debt later on, since student loans on courses beginning after September 01 will need to be repaid as soon as an individual begins making more than 1,000 a year. In nearly all the age groups, the number of respondents who do not check debt at all (or for whom it does not apply) is greater than for those who check weekly, quarterly, or more than yearly (see figure 6). Whether our study participants choose to check their debt levels regularly or not, Britons in general still have problems with debt. The Aviva Family Finances Report, published in January 01, finds that the typical U.K. family owes 7,944 in unsecured debt (credit cards, personal loans, hire purchase, overdrafts, store cards, and so on), which they repay on a monthly basis. This is up from 5,360 in January 011 and now stands at 31 per cent of the typical annual household income. The report also reveals that credit card debt is the most significant source of unsecured debt, with an average of,314 owed by U.K. families, followed by personal loans of 1,739 and overdrafts of 775. Direct Channels are Changing Habits Direct channels (telephone, the Internet, and smartphones) are now outstripping bank branches, the mail service, and independent financial advisors (IFAs) when it comes to managing personal finances. Sixty-two per cent prefer to use these direct channels to keep Figure 6 Almost two-thirds of 18 4 year olds never check, or can t recall checking, their debt levels Respondents (% by age group) Pre-crisis Post-crisis

9 Figure 7 The majority of Britons use direct channels telephone, Internet, smartphone to manage their personal finances Respondents (%) Pre-crisis Post-crisis Visiting local branch Via mail Direct channels Using an independent financial advisor None or can t recall track of their financial situations, compared with just 48 per cent who say they felt this way before the recession took hold (see figure 7). Londoners are the most likely to use direct channels in this way, with more than two-thirds (67 per cent) choosing this option. The increased use of direct channels is reflected among all income groups in our study, and all income groups, in fact, show a marked preference for direct channels over visiting a local branch or working with an independent financial advisor. Postal services will feel the draught too. In all income groups under 100,000, whereas between and 4 per cent of respondents managed their personal finances by post before the crisis, that number has now dropped to 15 to 16 per cent. Even within the group that uses direct channels the least, the percentage has risen from 48 per cent pre-crisis to 60 per cent (see figure 8 on page 10). This shift should not be surprising, and may or may not have anything to do with the financial crisis. After all, Internet connections are now ubiquitous, both at home and at work, and the level of smartphone penetration in the United Kingdom has now reached 40 per cent. As a result, this way of communicating simply fits well with most people s daily lives. The growing preference for direct channels is evident across many different sectors including, for example, insurance. A recent Datamonitor survey reveals that nearly 90 per cent of those questioned arranged their motor insurance policies over the telephone or Internet, and that all socioeconomic groups now prefer to use the Internet to purchase a motor insurance policy. 9

10 Figure 8 Britons at all salary levels are using direct channels telephone, Internet, and smartphones more often to perform bank transactions Respondents (%) Pre-crisis Post-crisis Less than 15,000 15,000 4,999 5,000 39,999 40,000 59,999 60,000 99, ,000+ Annual salary ( ) These findings are sure to raise a number of questions for the financial services sector. For example, can banks afford to keep branches open as the number of visitors continues to drop? To date, the fear of a public backlash may have deterred banks from closing branches, but changes in this area may soon be unavoidable given the need for banks to reduce costs and increase profitability. These findings highlight similar concerns for the IFA market, which is already bracing for greater transparency over pricing once the Retail Distribution Review comes into effect at the end of 01. Among respondents earning more than 100,000 a year, the number of those using IFAs has already dropped by nearly half in the wake of the financial crisis, with per cent using IFAs before the crisis compared to just 13 per cent today (even though, as discussed earlier, more than half of these same people cite investing as their current primary financial consideration). These figures are likely to cause concern for IFAs, especially as more than three quarters (77 per cent) of respondents within this income bracket or above report that direct channels are now their preferred means for managing their finances compared with just 59 per cent before the crisis. Both of these figures contrast sharply with the 13 per cent of high earners who prefer to work with IFAs for their investment activity. This shift may reflect a wider trend toward self-directed investing, whereby savvy investors use the Internet, books, and the business press as a basis for their financial decisions, rather 10

11 than working with an IFA. This new approach to financial education, combined with the rising popularity of direct channels for investing, will almost certainly require IFAs to review how they market and deliver their services. Crisis Contributes to Personal Pension Neglect Our findings relating to personal pensions are arguably the most startling. Nearly two-thirds (64 per cent) of respondents across all regions in Britain say they have either stopped contributing to a personal pension plan since the financial crisis or they do not have one, or do not know if they have a pension plan (see figure 9). These figures are much higher than those released at the end of 011 by the Department for Work and Pensions, which revealed that only 38 per cent of U.K. adults contributed to a pension arrangement. Nearly two-thirds of Britons have either stopped contributing to a personal pension plan, do not have one, or don t know if they have one. This situation represents a growing problem for women in particular, with 49 per cent of women claiming they are unsure whether they have any pension savings at all, and 19 per cent saying they have either reduced or stopped their contributions since the onset of the financial crisis Figure 9 One-fifth of Britons have stopped contributing to their pensions since the crisis began Respondents (%) How have your pension contributions changed since the financial crisis? Stopped contributing 0 Started contributing Increased contribution Didn t change contribution Reduced contribution Don t know or not applicable 11

12 Figure 10 More men than women stopped contributing to their pensions (3% versus 18%) and increased their contributions (1 versus 5%) Respondents (%) How have your pension contributions changed since the financial crisis? Male Female Stopped contributing Started contributing Increased contribution Didn t change contribution Reduced contribution 10 Don t know or not applicable 1 3 (see figure 10). Adults between ages 18 and 4 are even less well prepared, with 76 per cent stating that they do not currently have any pension arrangements in place. It is this same group that will soon be tasked with finding (and keeping) a new job, paying back deferred student loans, and managing unsecured debt in the form of credit cards, all of which will make it more difficult to pay into a pension plan in the coming years. Britain s lowest earners were the least likely to have robust pension arrangements in place. Nearly 90 per cent of survey respondents earning between 15,000 to 5,000 a year either don t have a pension or don t know if they have one, or have reduced, stopped, or maintained the same contributions to a pension arrangement, since the financial crisis took hold. Surprisingly, more than a quarter (8 per cent) of people on a salary of 5,000 to 40,000 a year are unsure about whether they have any pension arrangements in place at all (see figure 11 on page 13). Nor is this problem confined to the lower and middle range of the salary bracket. Even among those earning 100,000 a year or more, 9 per cent do not know whether they are still contributing to their pension or if they have a pension plan at all. In addition, despite continuing to invest post-crisis, nearly half the respondents in the 100,000 or more category have completely stopped (rather than reduced) their contributions to their pensions. This change could be due to recent government tax reforms that cap the annual allowance for pensions at 50,000 for the tax year. As a result, many people, in particular higher earners, may be looking to invest in other areas that offer fewer restrictions, such as the buy-tolet market, which grew by per cent between 010 and 011, according to recent data from the Council of Mortgage Lenders. 1

13 Figure 11 Pension savings changed based on annual income, with 47% of higher income earners stopping their contributions altogether Respondents (% by annual salary, ) How have your pension contributions changed since the financial crisis? Less than 15,000 15,000 4,999 Stopped contributing 3 Started contributing Increased contribution Didn t change contribution Reduced contribution Don t know or not applicable ,000 39,999 40,000 59, ,000 99, , Note: The 100,000+ chart totals 99 per cent due to rounding. 13

14 Even so, set against a backdrop of shrinking company pension plans and the reduced buying power of state pension plans in the future, these results are especially alarming. Already, the Association of Consulting Actuaries 011 Pension Trends Survey has revealed that 1 per cent of U.K. employers with defined benefit liabilities have now closed their defined benefit programs to future accrual, a sizeable jump from 7 per cent in 010. Defined benefit programs are normally arranged so that the benefit on retirement is determined by a set formula, rather than depending on investment returns. At the same time, the National Association of Pension Funds (NAPF) recently reported that the number of people actively saving in company pension programs in the private sector has almost halved since For the government, this situation is akin to a ticking time bomb. Incentives need to be put into place to make saving as easy and early as possible. At the same time, private sector companies will need to develop pension products that appeal to consumers that have become wary of investing their hard-earned money after years of volatile stock markets, investment scandals, and high-profile failures of industry stalwarts such as Equitable Life. For the government, the situation is akin to a ticking time bomb. Incentives need to be put into place to make saving as easy as possible. The introduction of the government s auto-enrolment pension plan later this year will be an important step forward. It will ensure that, for the first time, people have a pension that comes with their job and will receive employer contributions to that pension. Even so, between five and nine million people, a third of the workforce, could still fall through the cracks in the system, leaving these missing millions to face a bleak old age, according to the Workplace Retirement Income Commission (WRIC). Reaction to Recession Raises Key Question Our research makes one thing very clear: People in Britain are feeling the pinch financially. Bills are rising, income is falling, and paying for the bare essentials is now dominating the financial strategies of millions of people across Britain. As a result, no matter how attractive any government tax breaks or investment plans may be, the majority of Britons are more focused on their ability to pay the rent or mortgage each month. This anxiety is manifesting in a number of different ways. For a start, Britons across the board are making use of direct channels to monitor their current and savings accounts much more frequently than they were doing pre-crisis, and yet they seem less willing to review their debt as regularly, save for the future, or pay into private pensions for their long-term security. These actions, often described as recession behaviour, typically occur when a population feels an urgent need to tighten its belt. 14

15 Is this behaviour understandable, given the current state of the British economy? Certainly. And yet it also raises a key question for the government, financial institutions, and consumers: How does Britain address the growing level of distress among its ordinary citizens and determine the steps that will be needed to ensure a brighter future? Certainly, the first step should be for government to come up with appealing products that encourage citizens to plan early for later life and offer them simple and safe ways to do so. IFAs have an important role to play in helping people make the correct investment decisions in tumultuous times, and they need to pick up the ball again and devise strategies for reconnecting with consumers. Finally, but importantly, private sector companies need to address the serious problem of declining interest in pension plans. Those that develop pension products that both meet the needs of and overcome the understandable fears of consumers that have lost confidence in the investment market will themselves be well placed for a prosperous future. Authors Neil Dennington, principal, London neil.dennington@atkearney.com Ettore Pastore, partner, Milan ettore.pastore@atkearney.com The authors would like to thank Ronnie Ahluwalia and James Le Chevalier for their valuable contribution to the development of this paper. 15

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