Emma Wall: Hello and welcome to the Morningstar Series "Ask the Expert" I'm Emma Wall and I'm joined today by Freddie Ewer, Investment Consultant for Redington.
Hi, Freddie.
Freddie Ewer: Thank you very much for having me Emma.
Wall: So this week we are focusing on back-to-basics financial education and today is Pensions Day. Wanted to talk to you today about the challenges, the psyche challenges of saving for a pension. Because if you are in your 20s, 30s or even statistic show 40s the idea of putting money away for something that is 20, 25, 30 years in the future until you see the benefit is a very difficult thing to do.
Ewer: Yeah, I mean to start with you are exactly right. It's a real challenge and it's a challenge on a number of fronts. I mean there is a lot of behavioral evidence, behavioral finance evidence in fact that shows that it is very difficult for people to save. It's very difficult for them to say, I would rather have the money in 10, 20, 30, 40 years' time than have it today and that’s called present bias. So that’s the first challenge.
The other challenge that I think we face is that young people entering the workplace have a whole realm different priorities. So they are thinking about paying off their student loan. They are thinking about saving up for a flat. They are thinking about going on holiday and most people, so talking to my friends and industry contacts aren’t thinking about putting money away in a pension.
That’s a real challenge because if they are not putting money away in a pension early that compounds the problem as we know. You start saving early the money can compound up and accrue over time and if you wait you are going to have to sacrifice big chunks of your salary for the latter part of your career. So I agree with you it's a real problem that we are facing at the moment.
Wall: With that starting early concept. I know that you are a co-founder of RedSTART which goes into schools and talks about this. Is it about there is got to be a sea change in the psyche of the British people, well not just the British people but everyone and everywhere of as catching those children to get this sort of into their brains that it needs to be something that you start to do young looking forward.
Ewer: I mean it absolutely is and the research is there to evidence that. As part of work that we did with Lord Hutton on our Age Of Responsibility report we worked with nudging it. It used to be part of Number 10 Downing Street and looked at exactly this problem how do we nudge people to save more. And one of the conclusions that they come out with that we need to make saving social.
It needs to be social, it needs to be the done-thing and at the moment it's really not. You hear about lots of people who rather than taking their company contribution to their pension will take it out as cash because they are saving for mortgage as we discussed earlier or they want to go on holiday. And it needs to become the done-thing. It can't become. It can't remain what is something that is perceived to be difficult and unattractive it needs to become the social norm and the research is really there to show that.
Wall: But that’s a real challenge, because it is terribly un-British to talk about money. So you are saying now we have to go and face the (compatriot) and say hey I just made auto-contributions to my pension.
Ewer: Exactly that is the sort of challenge that we are facing. And it's part of this big shift onto the shoulders of individuals that we've seen with DC. Pensions used to be something that people didn’t worry about because it was thought to be the responsibility of the government or the responsibility of their employer. The harsh reality is now for the vast majority of employees that responsibility sits on your shoulders. And it's taking time for that perception to become a reality so people aren't thinking about it, they are not talking about it and we need to change that.
There are other ways that we can encourage that it's not just to say should be a social norm and it will become a social norm. We need to make it easy for people.
So we need to make it for people to save. If you look at the sort of interfaces that sit on top of people's pensions at the moment and the postal communication they receive about that pension is very difficult to interpret even for people who are financially suave like yourself. For people that don’t have any financial knowledge they can't tell you the difference between an equity and a bond the sort of paperwork they are receiving is really difficult to comprehend.
Wall: Too much jargon.
Ewer: Exactly too much jargon, hard to read. So it just gets put to one side and ignored. And those friction issues are again really well evidenced in the research that we've come across in our work. There are other things, other simple behavioral things you can do. You can make it timely.
So if you look at the evidence people are far more likely to sign-up to something even in January in the whole New Year's resolution spirit. So they are much more likely to sign up for the gym they are much more likely to start saving more to commit to saving more.
Wall: Freddie, thank you very much.
Ewer: Thank you very much Emma.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
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