Indulge me in a thought experiment. Imagine that an asset management firm has commissioned a marketing company to carry out some consumer research. In a room 20 people are gathered from an appropriately broad range of ages and demographic backgrounds.
The first question asked of the group is what comes to mind when they think of the word ‘saving’. It’s likely that a few of the older members of the group will start to grumble about the rubbish interest rates currently available on a savings accounts while someone else might chime in with a childhood memory of carefully stuffing their pocket money into a plastic pig supplied by a high-street bank. Even if most of the group guiltily confess that they fail to save on a regular basis, everyone in the room will be familiar with the concept of tucking money away for a rainy day.
Now the marketing firm asks the group the next question: what comes to mind when they think of the word ‘investment’. The level of conversation in the room will fall. There might be a geek or two who will know that year’s cash ISA limit and maybe even someone who recently bought shares in Royal Mail. But most members of the group will be unfamiliar with the concept of investment and many will view it with deep suspicion.
These deeply opposing attitudes towards the concepts of saving and investment explain why the pensions industry so often prefers to talk of ‘saving’ rather than ‘investing’ in a pension – one concept is familiar and understood while the other is scary and off-putting. The industry says it’s more important to start the conversation about pensions rather than getting too worried about the correct terminology.
I disagree. Using the word saving rather than investment does so much more harm than good. The word saving implies capital protection and a form of guarantee yet spending up to a third of your life reliant on a pension income is such an incredibly expensive undertaking that it’s an impossible endeavour without taking investment risk.
The bitter reality is that if you saved rather than invested in your retirement, you would have to put away so much of every month’s salary that it would be impossible to live. At the NAPF conference in Edinburgh last year, Paul Lewis said the man in the street wanted some sense of security for their pension – they wanted to save rather than invest. A member of the audience replied that would require saving around 50% of their monthly salary. That would make saving for your retirement an academic exercise – you would not be able to afford a roof over your head or to feed your family.
I know that simply replacing the word saving with investment is not going to solve the problem – then you have to explain all about investing. And recent well-intentioned attempts by the industry to educate DC members about bonds and equity markets were epic failures. A more holistic approach is needed – and is started to be taken by the more enlightened members of the industry, such as a focus on retirement income rather than trying to explain tricky investment concepts like equities and risk.
Instead the industry should focus on where the concept of saving for a rainy day and pension investing overlap. Just as saving as much as you can afford gives you the most financial security, putting as much of your salary as possible into your pension pot can make the difference between a comfortable or penurious retirement. Just don’t call it saving for retirement.