Chair Sir Hector Sants gives the keynote speech at Pinsent Masons, 30 Crown Place, London.
Good morning. It is a pleasure to be here.
Hopefully by now you all know who we are. For those of you who don’t – the Money and Pensions Service (MaPS) is a new organisation, set up by Parliament. We have a clear and ambitious vision – of “a society where everyone makes the most of their money and pensions.”
We are in the process of developing a new National Strategy to improve the financial wellbeing of the UK. To achieve this, we have been holding what we are calling a “listening phase”.
We have been travelling around the country, speaking to financial services firms, charities, employers and others, consulting on a new approach to help people make the most of their money and pensions.
I want to use this opportunity today to reveal a little of what we have learned from our listening phase, to share some of our developing thoughts on the task ahead of us,
and to speak about what financial services can do to better support and engage people in their later life.
That last point is a complex one. So, let me start by asking who are we talking about. Traditionally, we think about those in retirement or those of pensionable age.
This is a growing segment. There are currently around 12 million people aged 65 and over in the UK. This number is forecast to reach almost 16 million within the next fifteen years and by 2040, nearly one in seven people are projected to be aged over 75.
This group is not just increasing in number but shifting in terms of financial profile.
The average amount of cash savings among over 65s is £45,000. Almost half own a property that is worth more than £250,000. One estimate puts the housing wealth of over 65s at £1.6 trillion – 43% of the total in the UK.
An underlying feature of later life could thus be seen in terms of the shift from wealth accumulation to deaccumulation.
However, it is also the case that 20% of older people in retirement have less than £100 in savings and investments, and around one in five do not own their own home.
Another shift is the erosion of the boundary between work and retirement. In the last 20 years, employment rates among over 65s have more than doubled, to around 11%. Retirement is not the cliff edge it once was.
Another key theme here is the interaction of financial wellbeing with physical and mental health and thus social care.
We all know that, sadly, overtime our physical and for many our mental health deteriorates, which both reduces our wellbeing and often creates a need for expensive social care.
The number of people aged 85 and over needing 24-hour care is projected to almost double to 450,000 between 2015 and 2035. Yet fewer than three in ten people at retirement age have a plan for how they would manage their finances if they were to suffer ill health.
As we know, funding of social care is a major policy issue for government. Thankfully, it is not for MaPS to solve this broader question, but perhaps I could suggest that in addition to the question of funding and provision the current debate in this area could give more focus to the benefits of financial planning and the link to financial capability.
More generally, financial anxieties are serious barriers to financial and personal well-being among people in later life.
· 26% of older people in retirement (3.1 million) feel that keeping up with their bills and credit commitments is a burden.
· 19% (2.2m) feel that thinking about their financial situation makes them anxious.
· And 24% (2.9m) do not feel confident managing their money.
Those statistics would support a view that around a quarter of those in later life suffer from financial anxiety.
The next question is – should people in later life be seen as vulnerable?
In their recent report on consumer vulnerability, the Competition and Markets Authority focused on four characteristics associated with consumer vulnerability, including older consumers aged 65 or over.
However, they also recognised the need for caution in using age as an indicator of vulnerability, since being older does not necessarily make you vulnerable. Older people face the same challenges as consumers of all ages, although there are conditions associated with ageing that may lead to some older people becoming more vulnerable.
The interaction of personal characteristics and circumstances and wider environmental factors can create vulnerability for some older people.
Older people show relatively high levels of financial confidence, but the greater likelihood in older age of poor health or disability can in turn impact their financial capability.
Furthermore, older people can be vulnerable to abuse and scams. Approximately 130,000 people over 65 who live in the UK have suffered financial abuse and more than £43m of people’s retirement savings has been lost to fraud since the pension freedoms were announced in 2015.
We also know that older people are more likely to be digitally excluded – women over 75 and on lower incomes being among the most digitally excluded.
Further challenges arise for older people from specific circumstances and life events, such as periods of isolation, loneliness or bereavement.
This question of vulnerability is an important one for MaPS. Our statutory objectives include a requirement to focus our resource on those in vulnerable circumstances.
In considering how we fulfil this requirement we do not wish to create unnecessary complexity or reinvent the wheel, so let’s start with FCA definition of vulnerability:
“A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.”
This is a good starting point but to ensure it is aligned to our objectives I think it is useful to refine it.
Now, we are still in our listening phase, and still refining our approach to this issue, but I can today give you a flavour of our direction of travel.
It seems helpful to articulate what type of detriment we are seeking to mitigate, based on the wording of the act, and reflected in our mission statement that is financial detriment.
Our vision is a society where everyone makes the most of their money and pensions and the opposite of that is clearly financial detriment. For those who are in vulnerable circumstances, it’s particularly important to be clearer about how we assess the probability of financial detriment occurring. Our suggestion is to focus on the individual’s current circumstances.
I have previously said that everyone is potentially vulnerable which is correct. Everyone’s circumstances can change. We can lose our jobs, our health can deteriorate – however, if we were to use that lens we would not be able to focus our scarce resources.
So, I think our understanding of vulnerability, building on the FCA definition, would be to see the expression of vulnerability as being those who due to their current circumstances are at particular risk of financial detriment either now or in the future.
So, in fulfilling our mandate:
“We will focus our resources on those whose current circumstances mean they are either suffering financial detriment or have a significant probability of suffering financial detriment in the future.”
This refinement of the Financial Conduct Authority (FCA) definition to drive MaPS’ statutory responsibilities is, of course, not a direct answer to how firms view vulnerability. I hope our perspective along with FCA guidance and the new guidance they have promised to issue later this year will provide a clear framework for firms to address the issue.
Three points of refinement:
Firstly, we recognise there are degrees of detriment and certainly in respect of our remediation work we currently do, and will, continue to give priority to those in distress. This focus is reflected in our commitment to a long-term goal of free debt advice for all who need and want it.
Secondly, to emphasise that we do recognise everyone is potentially vulnerable and that their personal financial planning should recognise and mitigate that risk.
Thirdly, when considering our approach to risk-based resource allocation, we will adopt a segmented approach. By which I mean we will take a different approach to resource targeting reflecting what life stage the individual is at. In particular, for children and young adults we are thinking that in order to achieve our capability objective, that whilst our resource allocation will take into account vulnerability, the goal should be universal.
Finally, a point of overarching importance. Our resource allocation needs to be framed in consideration of the considerable gender bias in the retirement system. It is clear that throughout our lives in financial terms men fare better than women but by the time we reach retirement it is very stark.
May I illustrate:
• Over the last decade, men’s occupational pensions have risen 83% more per week than women’s – £23 for women and £42 for men
• The average pension pot for a 65 year-old woman in the UK is £35,800, just one fifth of the average 65 year old man’s
• Three quarters of people falling beneath the new auto enrolment pensions eligibility threshold of £10,000 annual earnings are women
Addressing this challenge is for all of us. Which takes me to the question: “How should firms respond?”
This takes me back to two key themes we have been developing. My two key proposals are related to resource allocation and corporate purpose.
On resource allocation:
The industry should increase its emphasis on prevention: what we term ‘financial capability’. At a strategic level it should shift the balance of engagement from remediation to prevention.
The industry spends billions on a mix of regulatory fees, direct internal controls and compliance; let alone the billions spent on redress. Yet the expenditure on prevention – in other words, equipping individuals to be empowered – is at best a few hundred million.
I would suggest that’s not the most effective use of your resources. A switch in the balance, in my view, will give better outcomes for consumers and reduced risk for firms.
On corporate purpose
I believe there should be a further cultural shift by firms to see customers as individuals, all of whom potentially are vulnerable, with a goal of promoting financial wellbeing rather than focusing on individual transactions.
Rather than putting customers first, firms should focus on customer wellbeing. Achieving this shift will probably only be achieved by building this into corporate purpose rather than just talking about it in the customer material.
This will not be sufficient on its own. It will also have to be built into the product and service design and evaluation processes.
This focus on customer wellbeing will have to become part of a firm’s culture – its DNA.
These are genetic themes but very relevant to engaging with those in later life.
I think the point on resource allocation is relatively self-explanatory, but it may well be helpful to expand on what it means to see customers as individuals, and in a practical sense for firms how does that differ from “treating customers fairly”.
It clearly builds on treating customers fairly but is about taking a more holistic view to customer engagement and seeking to help them build their financial capability and financial resilience, not simply assessing the suitability of individual transactions.
This requires considerable further thought and discussion, but I expect it will involve a shift to encouraging customer engagement with financial planning, building resilience and education.
This may well involve a shift for firms from a focus on transactions as the drivers of engagement to thinking more about other channels such as employers, the NHS and the social care sector, or considering other triggers – such as the impact of life events or changes in circumstances.
What could this look like?
During our listening phase, we have explored the idea of ‘later life review’ with stakeholders. You will have heard of the mid-life MOT. On a similar model, a later life review would be an opportunity for older people in to take stock of their financial wellbeing. To consider whether to release housing wealth, to look at how their health might change over the coming years and to plan for the future.
Another promising idea arising from our listening phase involves us working with industry to help ‘future-proof’, or ‘age-proof’ financial products. People’s needs change with time, and products need to change with them. They need to be fit for purpose for the lifetime of the person as well as the lifetime of the product.
Taking a holistic approach to customer financial wellbeing will require us to recognise people’s individual circumstances. This is especially true in later life, when there is greater likelihood of people becoming vulnerable.
I hope these thoughts have given you a flavour of our thinking and we look forward to working with you as we develop the national plan.