Capital Markets Corporate

November 1, 2019

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Across Instinctif Partners’ Financial Services team, we are always keeping an eye on the key developments taking place across the sector to evaluate their impact on the many businesses we work with. Here we share our picks of the week’s most interesting news, and our expert views.

Auto-enrolment success

The auto-enrolment pensions scheme has proved to be a “rare” public policy success, with the Pensions Regulator reporting an increase of 10 million employees who have started saving since the scheme’s introduction. The scheme, which was introduced in 2012, ensures that all UK employees have private pensions in addition to their state pension. Young adults aged 22 to 29 have particularly benefitted from the scheme, as the proportion of young adults participating in pensions saving in the private sector rose from 24% in 2012 to 84% last year. (From The Guardian, 24 October, 2019)

Fraction trades to attract millennial investors
Brokers plan to offer trading in fractions of popular stocks as they struggle to find the next generation of investors. The plans emerged as a result of the generational inequality between baby boomers and the new generation of millennials, who are unable to afford the steep prices in the stock market. This would allow an investor to, for example, purchase a tenth of an Amazon share (that would originally cost $1,765) for $176. (From Financial Times, 27 October 2019)

Historic fraud bill for banks
A damning new report from a Treasury committee has accused banks of failing to address weaknesses they had known about since at least 2016, which could have prevented hundreds of thousands of customers being defrauded. As such, MPs are calling on banks to repay customers who lost money before a new compensation scheme came into force in May, potentially resulting in a £1 billion compensation bill. The report also suggests banks should introduce a 24-hour delay on payments to someone new, to give people time to consider if the recipient might be a fraudster. (From Daily Mail, 1 November 2019)

Number of women in senior FS roles unchanged since 2005
The Financial Conduct Authority (FCA) has found no change in the number of women in senior roles at financial services firms over the past 15 years, despite the long-standing industry rhetoric that diversity is improving. Today, the proportion of women in senior positions is at 17%, almost the same as in 2005. While some improvements have been seen at the larger banks, other sectors lag “well behind”. Investment banking has the highest proportion of women, with 26% in senior roles. (From The Times, 26 October, 2019)

Clients struggle to understand investment communications
Investment companies struggle to effectively communicate with clients, according to a study by Communications and Content. A large portion of the written material published by asset managers for their clients has proven difficult for clients to actually understand. The organisation behind the study, which compared the readability of articles in the financial press with content produced by investment managers, recommends that fund managers should strive to emulate the writing in financial press. (From the Financial Times, 28 October 2019)

The £1 million retirement dream

For many, a pensions pot of £1 million might seem like a distant dream – but that’s how much the Pensions and Lifetime Savings Association (PLSA) suggests a couple needs to have saved to enjoy what they deem a comfortable retirement.

According to their new Retirement Living Standards, retirees with less than this can expect to wave goodbye to regularly replacing their car, enjoying multiple foreign holidays and generous birthday presents for friends and family. With the pensions industry long scratching their collective heads over how to encourage greater saving for retirement, could this tangible form of goal-setting be the answer?

Simply getting people to save for their retirement at all remains a significant hurdle. According to Scottish Widows, as many as one in five UK adults are not saving at all, with many worried about running out of money in later life as a consequence.

Automatic pensions enrolment has been partly successful in addressing this problem, as everyone who is employed is automatically enlisted into a workplace pension. According to the Pension Regulator, an additional 10 million people are now contributing to a pension, with record amounts being saved. There are many, however, who fall outside of this net – such as the self-employed or those with low incomes.

Another criticism frequently levied at auto-enrolment is that standard contributions are too low. In April 2019, these rose from a total minimum contribution of 5% to 8% (which includes an employee minimum contribution of 5%). However, because of the way contributions are calculated, the actual amount often ends up being lower.

Even the full 8% is not said to be enough to secure a decent income in retirement. The PLSA suggests around a quarter of monthly income should be saved to achieve a comfortable retirement. Pensions Minister Guy Opperman has spoken of future ambitions to raise minimum contributions, while research suggests increasing contributions to just 12% could result in younger workers having £87,700 more in their pension pot by retirement.

But would people willingly supplement their automatic enrolment savings if they had a clearer picture of what they needed to afford the lifestyle they desire? The PLSA seems to think so, arguing that their living standards should be adopted throughout the industry in order to cut through ambiguity and help savers think in a practical way about the kind of lifestyle they might lead in retirement.

The concept isn’t necessarily new. Many major pensions providers host online calculators and tools designed to give savers an indication of how much they might need to achieve various lifestyle goals, from home improvements to eating out and holidaying.

In addition, it also isn’t always practical or even possible for people to suddenly boost their pensions savings, given the other heavy demands on their finances that range from high rental and housing costs to creeping inflation. This is something the industry must remain sensitive to if they are to avoid alienating a generation of savers.

However, if these lifestyle guidelines or ‘savings rules’ were adopted uniformly throughout the industry, including in how the pensions industry communicates to savers, it could provide the visual push needed for a pensions boost  – or at the very least, a more realistic view of the life people can expect to lead in retirement.

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