PEP & ISA Managers Association Response

PEP & ISA Managers Association Response HM Treasury s Consultation Financial Capability: the Government s long-term approach April 2007 1

Introduction and Review of Savings in the UK As the UK's leading trade body for tax-incentivised savings, PIMA is delighted to respond to HM Treasury's consultation on financial capability in the UK. With its inherent consumer focus, PIMA takes financial capability very seriously and is actively working with members and broader stakeholders to improve the state of financial capability in the UK. Delivering the best outcome for the consumers and savers is at the heart of PIMA's work on key workstreams such as ISA reform and regulations, Child Trust Fund (CTF), Wraps, Savings Gateway, and holistic savings. The Government's ISA regime has been hugely successful in promoting savings in the UK. Over half of the working adult population in the UK hold an ISA. In total those savers have an estimated 220 billion in savings through ISAs. Taken together with the funds in the legacy scheme, Personal Equity Accounts (PEPs), savings reach nearly 300 billion for nearly 20 million adults. PIMA believes that the success of these schemes come from their accessibility and attractiveness to a very broad base of consumers. Unlike some other savings vehicles, the ISA is transparent, flexible, simple and efficient. Transparency is a very important trait for all savers, particularly those who may not be learned or experienced in financial matters. With schemes such as ISAs or PEPs, valuations of underlying assets can be done using simple math, based on prices quoted in most newspapers. Many financial providers are now offering innovative telephone and internet-based facilities that clearly show the value of investment holdings. There has been a great deal of progress in the industry in recent years on charging transparency and PIMA continues to work with providers, advisers, HM Treasury, the FSA, and other interested parties on achieving even greater progress in this area. The ISA is flexible in a way that fundamentally fits the lifestyles that people lead. ISAs permit saving as and when individuals are able. While many providers do give individuals the opportunity to set up regular savings into an ISA, lump sum contributions are equally valid in short, the ISA does not impose onerous cash flow commitments on individuals. This is particularly beneficial for those with varied working patterns, such as the self-employed, women and carers. Unlike other common long-term savings products such as occupational pensions, ISAs are completely individual. Changes of employer or illness do not affect the ISA. On the contrary, savings in ISAs can actually provide a very useful financial safety net should the unexpected strike. This access to funds is often derided by others promoting different financial schemes or products, particularly with respect to long-term savings, as giving individuals too much freedom and allowing 2

potential to squandering savings. PIMA emphatically rejects this assertion, based on anecdotal evidence and members' informal soundings of users. ISAs are simple they are easy to use and understand. Both Cash and Stocks & Shares ISAs are widely available through multiple distribution channels. They can be bought, managed and sold in person, by mail, over the phone and over the internet. Providers regularly communicate with savers about their holdings. While ISAs do require some understanding of the nature of interest rates, equities and financial transactions, these are core competencies for most financial products. The transparency discussed above also adds significantly to the simplicity of use and management. The simplicity is almost certainly why so many people choose the ISA as their savings vehicle year after year. ISAs are extremely efficient. Their tax-incentivised nature means that consumers can take confidence that they will retain gains from interest or increased value from investments. In contrast to other pensions, there is no tax when savers withdraw their funds. The importance of this combination of tax advantaged status can hardly be overstated. To further incentivise ISA savings, some distributors even offer deeply discounted initial charges for stocks and shares ISA holdings, making them particularly attractive. CTFs share many of the same traits of ISAs, indeed they are based on the ISA Regulations - the main difference being the Government contributions and that they are locked-in until age 18. However, as a result of PIMA's extensive work with HM Treasury of the CTF structure, the scheme is efficient, transparent, and simple; they are in fact simpler than ISAs and more flexible as they do not have the separation between interest bearing (cash) and risk bearing (equities) investments which in ISAs are referred to as components. Consultation Response It is with this in mind that PIMA responds to the Financial Capability: the Government's long-term approach consultation. PIMA believes that it is a social imperative that the UK population's financial capability is significantly improved. PIMA believes individuals have the capacity to take responsibility for their financial arrangements and, furthermore, that this is a desirable policy outcome. Expectations of what the state should and can provide must meet with reality of its ability to do so. The Government's intention to reform pensions and incapacity benefit will drastically alter the welfare state in the UK throughout one's working life and in retirement. The population must be aware and prepared for these changes at both a macro and individual level. 3

Financial capability must reflect the lives people lead. It should holistically reflect and enhance their broader development as an individual in society. The paramount consideration in designing and implementing a national plan of financial capability is for individuals to understand its value and thereby create demand for it and actively be engaged with it. Scope The scope of the review is appropriate. The wider view across the lifecycle is welcomed, particularly the focus on curriculum; children, families and young people; and adult education. However, PIMA believes that the scope should certainly be widened to include tax and benefits. An understanding of tax and benefit implications is fundamental to modern life. Concepts of tax on income, tax on capital gains, and tax relief are fundamental concepts that all people should understand. An understanding of tax is particularly important for savings and investments as tax can substantially erode gains. This is a key concept and should be incorporated alongside an explanation of tax-incentivised schemes, like the Government's flagship savings vehicle the ISA. It is also important that people appreciate the impact of the various savings schemes on their current and future benefit position. Should the scope be broadened to encompass matters like benefits and welfare issues or utilities? PIMA believes that there is a fine balance to be struck between enhancing individuals' wider consumer capabilities and overwhelming the demands on any financial capability programme. It is crucially important that the review not be made so wide that the purview of end product is diluted. Fundamentally we need to consider where need is the greatest. Are many consumers struggling with mobile phone and utilities expenditure to their detriment? Perhaps, but not to the same extent as they lack financial capability. Should the understanding of available benefits and welfare be greater? Again, perhaps, however it should be noted that there is an existing network of advice centres for benefits, Job Centre Plus, and there are also a number of third sector organisations delivering advice on benefits, such as the Citizens' Advice Bureau. Thus, on balance, the Government should limit the plan of action to those areas where the need is greatest-- particularly around key financial concepts. Programmes and Initiatives PIMA believes that the focus on asset ownership by the Government is a tremendously sound social policy that will deliver very desirable policy outcomes. This Government has introduced a number of very good initiatives to further this ambition, such as the ISA, CTF and 4

Savings Gateway. ISAs and CTFs have been a success in sustaining and creating asset ownership across the socio-economic spectrum. Over 17 million people own ISAs (while over 3 million own the legacy product PEPs which will soon be merged into ISAs). Child Trust Funds, the universal benefit given to each child at birth, are adding additional millions to those owning a government incentivised savings product. Taken together, it is safe to assume that over 20 million people in Britain own these products, demonstrating their strength and the breadth of their appeal. While Savings Gateway is only now in the final stages of its pilot, we believe that this has exciting potential to broaden the savings habit, particularly to those who need different (not inferior) incentives for saving and improved financial inclusion. PIMA supports Savings Gateway and looks forward to further work with the Government on this initiative as it is moves from pilot to programme. The simplicity and transparency of all of these schemes allow for seamless integration of financial education and improved financial capability. The universal nature of the CTF also successfully promotes financial inclusion. PIMA enthusiastically applauds the Government's clear and manifest intention to put the CTF at the heart of the financial capability strategy in the future. PIMA and its members have been at the forefront of CTF policy development, support, implementation, and publicity. PIMA has worked with the Government in its CTF-themed weeks and eagerly anticipates even greater involvement in the future. In giving each child an asset at birth, the Government effectively provides a real-life example that can be used to educate children in the classroom and the entire family about finances and managing investments over the long-term. By embracing the broader potential of the CTF beyond its value at maturity, the Government will maximise the social utility of this scheme in a way that has never been done before in the UK. Ideally effect will ripple from families to the classroom and back again, fundamentally enriching financial literacy amongst an ever greater segment of the population. Early trends in the CTF towards Stakeholder investments can constructively be used to imbue greater understanding about equity-based investments - an area we know is lacking from the FSA Baseline Survey. The recent announcement that the Government intends to link CTF with ISAs by allowing transfers from the former to the latter at maturity gives a natural pathway along which financial education, advice and participation should follow. The compatibility in the design of the schemes is not unintentional and PIMA worked diligently with HM Government to ensure that they work together in the best interest of the consumer, our members, the Government, and broader 5

stakeholders. PIMA is seeking to build a similar link between the Savings Gateway and ISA schemes. There are a number of financial capability programmes that are delivering high quality financial education emanating from the public, private and voluntary sector. Indeed, several of the examples cited in the consultation of private sector innovation are members of PIMA. The broader outreach and educational work of PIMA's over 100 members is felt in many projects across the country. However, there is potential for greater connectivity, relevance and efficiency through an overarching, refined Financial Capability Strategy. Members would welcome the opportunity to enhance and expand the links between the private, public and Third sector and PIMA could usefully act as a facilitator in that process. FSA Baseline Survey The FSA's baseline survey into financial capability enhances our understanding of the current state of financial literacy in the UK. The survey of 5300 people, based upon individual responses, confirms anecdotal evidence and raises some new concerns. Those under 30 are not adequately preparing for their financial future, particularly with respect to long-term savings/pension provision. Most likely this reflects a variety of pressures upon disposable income and more immediate priorities and may be cause for less immediate concern. What is particularly important for this group, and wider segments of savers, is the fundamental need to understand the relationship between risk and reward in personal finance. We would support more work on individuals' understanding of this vitally important sub-topic. This inevitably leads to a discussion of the characteristics of key asset classes, such as cash, property and securities. As all three asset classes may be included in ISAs and CTFs, PIMA represents the interests of savers in each area. However some anecdotal and statistical evidence suggests worrying changes in both individual attitudes and social trends. Some would suggest that people have recently become overly inclined towards cash for their long-term savings because it is the most simple to understand and appears cost free falling to appreciate opportunity cost. Likewise, because of unprecedented appreciation in retail property prices, some think of this as a lucrative investment with virtually no risks. PIMA believes that both property and cash are an important part of a diversified portfolio. However, both also hold a certain risk which investors should understand. Property prices do fluctuate and cash returns are undermined by inflation. At the same time, fewer people are enjoying the benefits of occupational pension schemes 6

which have traditionally given exposure to equities markets without the need of individuals to make investment choices. At an individual level, some see equities, volatility, and the stock market as mysterious and difficult to understand. Too often, the stock market is seen as too risky or the preserve of the wealthy. Others may be averse because of negative experiences connected with the downturn at the beginning of the decade. However, it is essential that individuals share in the longterm potential in the stock market to accumulate assets as a part of their broader savings and investments. Coordination To address this, we believe that Government should work with a broad range of stakeholders, including the industry, to develop and roll-out educational programmes that give greater understanding of collective investments. PIMA intends to respond separately to the Thoresen Review and will present its view on generic advice. However, as the leading trade body for individual savings and investment in the UK, PIMA is willing to take an active role in helping to promote better capability in this regard to ensure consumers are making the best choices for their lives and their future. Finally, PIMA has long held that there is an urgent need for a single, holistic financial and savings strategy in the UK. Therefore, we would welcome as much simplification and consolidation of all finance and savings-related policy formation and delivery in the interest of the consumer. Whether there is a need for a central coordinating function above and beyond the National Strategy and proposed Ministerial Group is unclear, given the prematurity of those levers. However, PIMA and its members would be delighted to act as a key conduit for consumer and industry input into the development of the Strategy and the work of the Ministerial Group. 7