UK: Funding Our Future - Meeting The Long-Term Savings Challenge

Foreword

Investment management is a growth industry. Rising wealth, population growth and constraints on government spending all point towards the industry attracting more assets.

Through a series of reports under the umbrella title of Funding our future, Deloitte seeks to engage the industry, policymakers and regulators in discussing the role the investment management industry can, and should, play in both managing the nation's savings and financing the long-term investments that are vital for supporting a growing economy and population. Too often the financial services industry has been criticised for its short-termism and focus on narrow measures of success. Through these reports we will explore how the industry can continue to enjoy profitable growth while at the same time contributing to the public good. We want to help foster a sense of collaboration between the industry, the policymakers and the investor.

This report discusses the impact of demographics on the investment management industry. It looks at how a growing population, with greater life expectancy, creates substantial new assets to manage but also magnifies the problem of the long-term savings gap. We discuss the nature of the challenge, the hurdles to overcome, and the implications for the investment management industry. We do not seek to be prescriptive, but offer ideas to stimulate debate and create momentum for change.

We hope you enjoy this report and look forward to lively discussion, with both the industry and with a wider group of stakeholders, about the opportunities and challenges that demographics and other long-term trends have for the investment management industry.

Executive summary

In spite of the challenges brought on by changing regulation, the pace of innovation, and the growing demand for low-cost products and services, the investment management industry stands to benefit from the long-term opportunity presented by population growth in the UK.

By 2050, the UK population is projected to grow by almost 20%, to 77 million, as a result of continued net immigration and increasing life expectancy. By contrast, the populations in Germany, Italy, and the Netherlands are projected to decline.

The UK population growth will provide a welcome boost to the assets available to investment managers, although, in time, it will be offset to some extent by the growing number of so-called decumulators (those aged over 65), a cohort that will peak between 2035 and 2040. A larger and older society will also create a tremendous opportunity for the industry to invest in infrastructure, housing, health and long-term care needs. These trends are often presented as challenges, but we believe that if they are addressed head on, industry, government, and policymakers working in collaboration can provide a stimulus to the economy and a welcome boost to overall wealth levels in the UK.

The focus of this report, the first in Deloitte's Funding our future series, is on the UK long-term savings challenge and the role of the investment management industry and policy-makers in responding to the opportunities presented by population growth, longevity and continuing market reform.

Substantial market reforms have already been implemented by the UK government over the past five years, driven by a desire to lessen the dependence of an ageing population on the public purse. The industry has been presented with sweeping changes in the way that people accumulate and draw down long-term savings.

Government action to increase the state pension age and introduce auto-enrolment has been helpful in addressing the retirement savings gap. However, Deloitte expects the annual savings gap per person to increase between 2015 and 2050 from £8,000 to £10,000. For the entire working population, this means that the annual long-term savings gap is set to increase from £250 billion to about £350 billion.

This change will be driven by:

  • a growing population;
  • the further decline of defined benefit (DB) pension schemes; and
  • increasing income needs during retirement due to the rising cost of health care and long-term care.

The government has made substantial reforms in recent years and will continue to tackle the fiscal deficit. While further tax incentives are unlikely, future policy levers exist around non-tax incentives, continued emphasis on education and awareness, and stimulating innovation for the investment management industry.

The investment management industry has an important role to play and stands to benefit from helping people address their long-term savings needs. We estimate, that after taking into account the available housing wealth and non-pension specific savings like ISAs, the industry can close up to 50% of the remaining long- term savings gap. This would be driven by growing the number of people contributing to long-term savings, increasing the average contributions for those people saving, and improving net returns.

To achieve this a number of hurdles must be overcome. We have identified the following four as critical:

  • Human nature and low levels of financial awareness get in the way of decision making.
  • The long-term savings market is fragmented, comprising many different providers and products.
  • Investors require better value-for-money services.
  • Solutions need to be tailored to increasingly diverse personal circumstances and preferences.

While government and policymakers can take steps to incentivise the right behaviour, and create the right market context, the investment management industry has a clear role to play. We suggest four specific solutions that the industry can adopt:

  • Improve consumer communication, engagement and guidance through digital tools.
  • Support information aggregation, to help overcome the fragmented nature of the industry.
  • Lower costs of operations, products and services through technology enablement.
  • Create more flexible products and services that are better tailored to individual needs and circumstances.

To adopt these solutions and win the long-term savings challenge, the investment management industry will need to be more agile and responsive. The task is substantial, but can be accomplished by those industry participants that are willing to invest in new skills in the areas of technology, product management and marketing and communication.

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