ii comments on FCA intergenerational differences statement

Our experts share their views on this sobering feedback from the industry regulator.

Young or old, rich or poor, 2020 has been difficult for everyone, but coronavirus has exposed all sorts of inequalities in society.  

Today’s FCA (Financial Conduct Authority) feedback statement on intergenerational differences comes at a time when all sorts of inequalities are being laid painfully bare. A lack of financial capability and lack of access to financial advice comes out loud and clear in today’s FCA feedback, pointing to a need to move financial education up the political agenda, argues interactive investor. 

Key points include:

• Ageing population, low interest rates, rising house prices, the changing nature of employment and changes to student funding identified as the five key drivers of intergenerational differences and their impact on financial circumstances and needs.
• The FCA says it does not think it would be appropriate or proportionate to pursue bespoke remedies, including rule changes, in response to these findings.
• Responses to the industry discussion argue that lack of uptake of services to help consumers in making financial decisions was suggested as a key driver of harm given consumers are increasingly responsible for key financial choices.

Moira O’Neill, Head of Personal Finance, interactive investor, says: “2020 has highlighted many devastating inequalities in society, as the regulator is all too aware. There is lots to do, but intergenerational issues have also been exacerbated even more by coronavirus. Young people’s long-term job prospects, along with their wider hopes and dreams, have been severely curtailed, along with many older people’s retirement dreams. 

“Our worries change with age. Healthcare becomes a more prominent concern as we get older. Not being able to afford good quality long-term care was the main fear among a quarter (24%) of those aged between 71 and 75 compared to 12% of under 50’s, according to our Great British Retirement Survey last year, and we absolutely agree with today’s statement that consumers need access to better products to fund long-term care. 

“Money worries frequently dominate unease over retirement – even among those who have budgeted and saved prudently for life. But 2020 was a year in which many first-time investors entered the stock market. One of the stand-out themes of the lockdown is that 25-34 year olds have discovered investing.

In quarter two 2020, this age group has seen the strongest growth of new ISA and SIPP account openings with interactive investor, up 275% and 258% year on year, respectively. Financial education is crucial here to a generation who more than ever before have to take more personal responsibility for their retirement.

The Government and FCA need to move personal finance education – it school and in the workplace – higher up the agenda and the Government needs to mandate more time on the school curriculum for financial education, with more tools for teachers. Low levels of financial capability and lack of access to financial advice were key themes in today’s feedback and we would like to see more action on this.

“The industry also has an important role to play, and last year interactive investor launched our Quick Start recommendations for beginner investors. These funds are currently under their annual review to make sure they remain best in class, and we will be sharing our analysis soon. We would agree consumers need better support to manage increased responsibility and additional exposure to risk and that consumers need more hybrid and flexible products to meet their evolving needs – that’s why our own rated lists, quick start recommendations and model portfolios incorporate a range of asset classes.”

interactive investor intergenerational differences

• interactive investor customer data shows that home bias is more prevalent in baby boomers, with UK direct stocks (excluding investment trusts and funds) accounting for 91% of the average portfolio of people in this group (versus 84% for Gen X and millennials respectively).
•  While direct equities are the most dominant investment vehicle (42% for the average baby boomers, 43% for Gen X and 40% for millennials), there are some interesting differences: investment trusts are more popular with baby boomers, where the average account has 27%, compared to 17% for Gen X and 20% for millennials. 
• Millennials are more than twice as likely to favour exchange traded products than baby boomers (12% compared to 5% for the average baby boomer and 11% for Gen X). When it comes to funds, the average Gen X portfolio has 29%, outstripping 25% for baby boomers and 27% for millennials.

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “People often pit one generation group against each other, but fail to fully appreciate the unique set of challenges faced by each. Although methods may be different, each generation have the same goal of accumulating enough wealth that lasts a lifetime – and for parents an ample amount to leave behind for their children.

“For millennials, getting onto the property ladder is not as easy as it once was, and many aren’t afforded the gold-plated final salary pension of yesteryear. What’s more, millennials typically carry more debt because of student borrowing but higher education offers greater opportunity to land a good job to build wealth over the long term.

“We live in an era where the responsibly for financial wellbeing is increasingly being shifted to individuals, evidenced by a shift from final salary pensions to defined contribution pensions and the advent of the pension freedoms. 

“Younger generations can’t escape the harsh reality that the state is unlikely to support them when they retire in the same way as it did for past generations because they can’t afford to do so. So, the onus is on individuals to secure their financial future. Automatic enrolment is a fantastic initiative which has help younger generations unconsciously accumulate a retirement nest egg to achieve this goal.”

interactive investor policy recommendations

Policy recommendations 

Make auto-enrolment work for everyone

Automatic enrolment has added more than 10 million employees to a workplace pension scheme since its introduction in 2012. Workers are contributing more than ever, following an increase in minimum contribution rates from 5% to 8% in April 2019, with the employee paying 5%.

However, it is only compulsory for workers to be enrolled by their employer if they are at least 22 years old and earn a salary of at least £10,000.

We call on the Government to revise the eligibility criteria on both accounts.

We support the proposed reduction in the minimum age limit to 18, outlined by the Department for Work and Pensions in a 2017 review of auto-enrolment1.

However, we feel the Government’s ambition to implement the change in the mid-2020s is lethargic and risks leaving a whole generation of workers behind.

We believe that encouraging consistent savings behaviour from a young age will help more people build up a meaningful level of retirement savings. Those who are automatically enrolled at a younger age are also less likely to feel the loss of money later in life. 

The DWP report calculates that 18-year-olds earn £10,738 on average on a full-time (35-hour) working week, which exceeds the current £10,000 threshold.