My speech to the Association of British Insurers Saver Summit 2006, 23 November 2006

  1. It is a pleasure to be here today – and can I thank the ABI for inviting me to address this conference.
  2. The UK insurance industry is the third largest in the world and the largest in Europe, adding value to the British economy of around £13 billion each year and employing over 330,000 people. Without insurance, companies and individuals would not be able to manage risk, the world would be a far less innovative place and many of the activities people take for granted could be prohibitively risky.
  3. So we value what you do. And the ABI makes a very important contribution to our economic life. As a leading representative of the financial services sector, with around 400 member companies, your expertise and that of your member firms has been invaluable to the Treasury, working for example on issues relating to wholesale markets, travel insurance and motor insurance but also pensions and savings.
  4. Earlier today I gave evidence before the Treasury Select Committee on the scope of insurance regulation. At the Committee I reported that at the first meeting of the Chancellor’s High-Level City Group we agreed to set up a review group to promote reforms to the wholesale insurance market. I can announce that joining Lord Levene to support the timely delivery of wholesale market reform will be Grahame Millwater from Willis Re and Andrew Kendrick of Ace European Group. The aim of this review group is to support the modernisation of London’s wholesale insurance and reinsurance markets – to match developments in other parts of the wider financial sector. At the same time, the Treasury is examining the business environment for the wholesale insurance sector.
  5. On insurance regulation, my overarching message to the Committee was that we are working hard to strike the right balance between consumer protection and proportionate, risk-based regulation which encourages innovation and competition. Many of you will know that following up on a commitment made in 2003 by my predecessor, the Treasury is reviewing whether travel insurance sold with a holiday should be subject to FSA regulation as directly sold travel insurance products currently are. My aim has been to stimulate a debate so we can make a decision based on evidence.
  6. Today the Treasury is starting the next phase of the review by publishing a call for evidence from interested stakeholders. In publishing this I am encouraging the providers, sellers and consumers of travel insurance to all contribute to that debate.
  7. In recent years there have been growing concerns from consumer groups and sections of the industry that the market is not working as well as it could do.
  8. For example, a recent Which? report found that: only 35% of travel agents asked medical questions (compared to 81% of banks and insurers); 19% explained what the policy covered (compared to 81% of banks and insurers); and 0% explained what the policy did not cover (compared to 56% of banks and insurers).
  9. It is clear that there may be an issue here, which raises questions about whether regulation and appropriate redress and complaints mechanisms should apply to this area. We need to get to the bottom of whether travel insurance sold with a holiday is being mis-sold.
  10. Take terrorism as an example. According to the ABI, only half of travel policies cover medical expenses in the event of a terrorist incident. I am concerned that consumers may not always understand whether they are covered for such risks when purchasing policies. The issue here is about both educating consumers to consider the cover they want when they are buying travel insurance and ensuring that consumers are properly informed.

Savings

  1. As the Economic Secretary to the Treasury, it is my responsibility to take an overview of Government policy towards savings and assets, and I am delighted to be speaking at today’s Saver Summit. When I met with Stephen Haddrill last week, I agreed I would use my speech today to stand back and review the progress we have made in savings policy since 1997 and look ahead to the future.
  2. I welcome the ABI’s valuable contribution to this debate. Your “State of the Nation’s Savings” report contains some important messages for us all to consider in development of pensions policy. And I also welcome your ‘Save More Now’ campaign to raise public awareness of the need to save money now for a comfortable retirement.
  3. Since 1997, our approach has been to promote savings and asset ownership for all across the lifecycle – from childhood, through working life and into retirement, so that individuals can have security for the future – setting aside funds for a rainy day but also having the chance to build a long-term stake in our future prosperity.
  4. Since 1997, we have added 1.8 million more homeowners than in 1997. Over 16 million people now have an ISA. Over 2 million children now have a Child Trust Fund account. Around 10 million people are contributing to an occupational pension scheme and a further 5 million are contributing to a personal or stakeholder pension.
  5. But we are now at an important moment: we have our response to Lord Turner’s Pensions Commission – the Pensions White Paper – that we are taking forward at present; we will soon publish a long-term strategy for financial capability; our ISA review has come to an end; and we will have more evidence from our Saving Gateway pilots in the New Year. So now is a good moment to stand back and take stock.

Government Savings Strategy

  1. Since 1997 our savings strategy has focused on:
  • Improving the environment for saving – so that people can plan ahead and make saving decisions with confidence;
  • Providing adequate incentives for saving – through the tax and benefit system;
  • Empowering individuals with the capability to make the right saving choices; and
  • Developing a range of savings opportunities suitable for each stage in a person’s lifecycle.
  1. I want to focus today on our approach to savings across the lifecycle and the next steps that we are taking in this area.

Lifecycle Framework

  1. We have introduced the Child Trust Fund as a universal savings account into which children are now “auto-enrolled” at birth. This provides a platform for all children, regardless of background, to be fully engaged with financial education in school, to kick-start a saving habit and to have access to a financial asset as they start their adult lives.
  2. Early indications are that more parents are now regularly saving larger amounts for their children compared to before the introduction of the Child Trust Fund.
  3. But there is more to do to reach new parents and to encourage the involvement of parents whose child has an account. We will be promoting engagement in the run-up to Christmas through a new advertising campaign, followed, in January, by a Child Trust Fund Week to raise awareness and participation among parents.
  4. In recognition that children in care are a particularly vulnerable group, we have announced that we will provide an extra £100 per year for every child who spends the year in care.
  5. And to ensure that the scheme will be used effectively as a tool for engaging young children, we are working with financial education bodies in developing the resources for teachers to support our proposed Schools Money Week initiative as a focus for financial education.
  6. For adults, the Individual Savings Account is the Government’s primary vehicle for tax-advantaged saving outside pensions. The conclusion of our internal review is that ISAs have been successful in their aim of extending the principle of TESSAs and PEPs to promote saving more widely throughout the population.
  7. Over 16 million people – more than one in three adults – now have an ISA – twice as many as held TESSAs and PEPs in 1999. And the proportion of savers with an ISA among low-income groups and the young is much higher compared with TESSAs and PEPs.
  8. The Government is keen to build on the success of ISAs. As I announced earlier this month, we will make the ISA a permanent feature of the savings landscape. This will provide stability for savers, certainty for the industry and a firm platform on which to promote saving in the future.
  9. I also announced that the overall annual contribution limit would continue to be at least £7,000 for each individual. Obviously any decisions on limits are a matter for Budgets.
  10. In addition to clarifying the future of ISAs, I announced a number of reforms designed to simplify the ISA regime and increase its flexibility for savers. I said that I would consult further on these points and today I can set out more detail on these proposals:
  • I have announced that we will bring PEP schemes within the ISA wrapper. As ISAs are now here to stay, and the number of PEPs in existence will reduce over time, it makes sense to make this change, which many in the industry have requested. This will rationalise the savings landscape and increase the flexibility for savers to manage their funds more effectively. And it will lead to a reduction in administrative burdens for providers.
  • Whilst this change will be compulsory – the PEP label will cease to exist – we do not propose to force providers who have clients with both PEPs and ISAs to amalgamate those accounts – this will be a matter for each provider. I am conscious that there will be an impact from the changeover and we will work with providers to minimise these burdens.
  • I have also announced that we will remove the Mini/Maxi distinction within the ISA, something I know that many in the industry have called for. Instead, we will have just two components – cash ISAs and stocks & shares ISAs. This will simplify the regime, and provide greater flexibility and choice for savers.
  • I know that there have been concerns over how the new regime will operate, so I will clarify matters. We will continue to allow individuals to hold these components with either the same or different providers. And, as under the current regime, there will still be different investment limits for cash and stocks & shares within the £7,000 overall annual allowance.
  • And in keeping with our lifecycle approach, I have announced that we will allow Child Trust Fund accounts to rollover into the ISA when they start to mature from 2020 onwards.
  • There is one further announcement that I would like to make today. While maintaining the general restriction on transfers between the ISA components, we are proposing to allow transfers in one particular circumstance. Individuals with funds saved in the cash component of ISAs from previous years will be able to transfer those funds into the stocks & shares component without affecting their annual investment limit. By removing this restriction, our aim is to further promote share ownership by encouraging savers to diversify their assets and benefit from the potentially higher returns offered by stocks and shares over the long run.
  1. More details on these proposals will be provided in the Pre-Budget Report next month. We will seek views from providers and other stakeholders on the best way to implement these reforms and when it would be practicable to do so.
  2. Pensions are also key to our lifecycle approach I know John Hutton discussed the Government’s thinking on pensions with you this morning.
  3. Our first priority has been to tackle pensioner poverty. We introduced the Minimum Income Guarantee for pensioners, now part of the Pension Credit, which has lifted more than 2 million pensioners out of absolute poverty. The savings reward in Pension Credit has also tackled the penalty of the 100 per cent marginal deduction rate that many savers faced and which we inherited in 1997.
  4. We introduced Stakeholder pensions in 2001, with the explicit aim of widening access to low charge, simple pension products, and more recently we have undertaken a radical simplification of the taxation of pensions, replacing the many existing sets of rules with a single, unified regime, offering less complex and more flexible retirement arrangements for both individuals and employers. This is a far-reaching reform, which will reduce the costs to employers of running pension schemes and remove many barriers to individuals saving for their retirement.
  5. In response to the Pensions Commission, the Pensions White Paper in May set out the Government’s future strategy for private pension saving and signalled a shift of emphasis in approach, based not only on providing information and incentives, but also introducing new interventions to encourage individuals to save more.
  6. The introduction of auto-enrolment, either into a good employer pension scheme, or into the new system of Personal Accounts, will help tackle behavioural and cost barriers to pension saving and make saving in a pension the default option.
  7. Accompanied by matching employer contributions, lower management charges, and a reformed state pension system, these policies should move us to an environment where saving privately in a pension is the norm and where for the vast majority it pays for them to save.
  8. Part of the delivery challenge, along with choosing the right delivery model, will be to ensure people have the appropriate information and skills at their disposal to make effective financial decisions about their retirement. The Personal Accounts White Paper, due to be published shortly, will set out in more detail our plans in this area.
  9. And as highlighted by your Savings report, there may be more for us as Government to do, for example clearly communicating the key aspects of both state and private pension reforms to the general public, and reassuring them of our commitment to the package of White Paper reforms that have been announced.

Challenges for Wider Savings Policy

  1. One group we have been keen to encourage to save is middle to lower-income households. They may be less likely to save than other households and may not have sufficient levels of savings to draw upon, either in times of adversity, for planned expenditures, for retirement, or to pursue other opportunities. Furthermore, lower earners benefit less from tax relief as an incentive to save.
  2. So, we have been piloting the Saving Gateway – a savings account for lower-income households – with the aim of bringing people on lower incomes into contact with mainstream financial services and promoting a saving habit.
  3. Evidence from the Saving Gateway pilots suggests that matching – a Government contribution for each pound an individual saves – can provide a more understandable and transparent framework of support for lower-income savers. And it also offers those who do not pay tax a genuine incentive to save. Participants are overwhelmingly positive about the scheme and the matched payments they receive on their savings.
  4. The recent collapse of Farepak – and the terrible distress this has caused – highlights the importance of this challenge. A charitable compensation fund has also been established for those affected and the DTI are currently carrying out a full investigation of Farepak and the wider European Home Retail group of companies.
  5. I won’t pre-empt the outcome of those enquiries, but I will just say this. Whatever went wrong with Farepak, the incident has raised important wider issues about people’s awareness of savings options and the methods by which people may prefer to save. Although they are not financial products as such, Farepak-style arrangements allow short-term saving for planned expenditure and they are viewed as savings vehicles by many of their customers.
  6. Considered in this way, such schemes often represent a bad deal for consumers. While the features of savings clubs of this kind can be attractive to lower-income savers – offering ease of access through local agents, the ability to pay in small sums regularly, and pre-commitment of funds – customers of these schemes will not earn interest on their money and do not benefit from the wider protection of financial services regulation.
  7. So we must learn the lessons Farepak teaches us for our wider savings policy, in particular as we take forward the Saving Gateway once we have had the full evaluation report on the current pilot scheme next year.
  8. That is why I have asked Brian Pomeroy – the Chair of the Financial Inclusion Taskforce – to look at the reasons why people opt to use hamper schemes and similar vehicles instead of mainstream financial services products and, in the light of this, to consider how the savings needs of this group of consumers might be better met – and to report back by the Budget.

Financial Capability

  1. I believe we can rise to the challenge of broadening access to savings opportunities. But to make this a success we must also do more to equip individuals with the capability to make financial decisions.
  2. Some estimates suggest that poor financial decisions can cost an individual up to £60,000 over a lifetime so it is vital that we provide people with the capability to manage their finances effectively.
  3. People today are living longer: one of the great achievements of modern society. But this means that today’s young people will have to plan for longer and more variable working lives and retirements; to make more use of financial products to spread costs and manage risks for themselves.
  4. And at the same time the features that make our financial services industry world class – competition, technological advances and product innovation – mean ever-increasing choices for consumers to negotiate.
  5. The FSA has led in raising levels of financial capability, through its work with schools, in the workplace and with new parents and young people – and your industry is playing its part.
  6. Now is the time for Government to think about what more we can bring to the table. We will publish a long term strategy in the next few weeks, setting out our long term goals and what needs to happen to meet them. Government can, and must, make more use of the levers we have: our many contacts with citizens throughout their lives.
  7. We need all our young people to leave school with the financial skills to manage their own money and to engage in employment and enterprise.
  8. We need also to exploit the opportunities offered by other Government services, from Sure Start to lifelong learning, and in particular to think about how we use our support for the most vulnerable. We also need to recognise the opportunities and challenges of Personal Accounts, and the information needs of the estimated 8 million people who will become pension savers for the first time.
  9. So I read with interest Clive Briault’s recent speech on distribution. Advice should be the bridge between consumers and a complex market. As Clive noted, however, the current business model does not work well. I very much welcome the FSA’s review, particularly its broad scope and willingness to tackle some difficult questions. I look forward to hearing the conclusions and to seeing the financial services industry take the initiative.
  10. However, the FSA’s review will not provide a solution for customers on low, even middle, incomes that cannot afford to pay for advice. Most financial advice is about selling products, and the incentive is to sell to wealthier consumers. Independent advice is available, but at a price many cannot afford. Meanwhile Government help goes currently – and properly – to those on very low incomes or in financial distress.
  11. There is a gap here. My question on generic financial advice, then, is not whether it should be filled but ‘how?’. How do we devise protocols? What is the boundary between generic and regulated advice? How should referrals into, and out of, generic advice work? How can we draw on existing capacity? These are detailed operational questions and I hope you will help me answer them.
  12. I know that the ABI does not have a single view on financial capability. But I doubt that any of your members would give up the opportunity to make a significant cut in your distribution costs. This is what financial capability offers – products that are ‘bought not sold’. Yes, this is a long-term project – but the prize for industry and Government is well worth having.

Closing Remarks

  1. In conclusion, our task is to entrench a culture of saving for people of all ages.
  2. And as we consider the long-term challenges I have set out today, we will discuss and debate the detail with the industry as well as consumer representatives.
  3. So I look forward to working with you all in the years to come.
  4. Thank you.
Posted November 26th, 2015 by admin