Green paper: Saving us from ourselves

1. Context
2. Key findings
3. Recommendations
4. Points to consider

Context

The UK’s low level of personal saving is well-understood and well-evidenced – but much less is known about what actually works to improve outcomes concerning saving and investing. As a result, the UK remains poorly prepared for unexpected events and for retirement.

Behavioural economics shows that a large part of the underlying problem is how people think and feel about saving and investing (creating a psychological barrier) – and how firms respond to the publics’ attitudes and behaviours. This Green Paper is a literature review of evidence concerning why people fail to adequately save or invest. It concludes by presenting five core recommendations that address financial attitudes and behaviour change.

Key findings

• Financial environment: easy borrowing in the UK has generated a ‘no need to save culture’. Alongside high living costs and squeezed incomes in more recent years, individuals find it difficult to know whether to spend or save.
• Personal behaviour: people are prone to under-save because it requires not buying things that you want now in order to benefit in the future. Such behaviour can be explained psychologically. Individuals tend to use mental ‘rules of thumb, leading to easy mistakes (e.g. assuming that assets that have historically invested well will continue to do so in the future).
• Financial firms and regulation: firms are selling products that consumers choose to buy, using advertising that consumers respond to. For example, consumers actively choose – even demand – savings accounts with appealing introductory offers, thus flooding the market with such products. Intervention from regulators or the government, in addition to changes by financial firms, is needed to help set the right framework and incentives for firms to make competition more effective at driving positive outcomes for consumers.
• Emotion: research has shown that positive feelings, such as contentment, tend to drive more optimistic decisions. Conversely, negative emotions, such as boredom, are linked to pessimistic decisions. Fear and anger can have significant – and opposite – effects on our perceptions of risk, with emotions such as anxiety or regret influencing financial behaviour from saving, to investing and purchasing.
• Attitude: research suggests that people who perceive money as security are more capable of planning their resources than those who do not associate money with security. They also have lower odds of experiencing adverse financial events (such as bankruptcy or credit refusal) than people who associate money with power.

Recommendations

1. Solutions need to work with behavioural biases and draw on advances in digital technology. The report makes five recommendations to improve the public’s financial resilience: Improving the public understanding of personal finance: financial organisations need to understand what works and what doesn’t work, in educating the general public.
2. Helping children and young people to form good money attitudes and habits: financial organisations need to evaluate, understand and promote effective financial technology to help children and young people become money smart and develop good money habits.
3. Making it easy to save: financial organisations need to work with industry, the civil society sector and consumer organisations to explore ways to make it easy to build up resilience savings, and to identify and assess the key features of successful schemes e.g. incentive schemes, digital technology.
4. Simplifying the products and information that savers and investors receive: financial organisations need to work with the broader finance sector to explore how information could be simplified or framed for the general public in different ways; helping individuals to make better investment decisions from the wide variety of options available.
5. Using defaults to improve consumer investments when they choose not to choose: financial organisations should explore the use of default investment in pension funds - testing the effects of different defaults and exploring the outcomes of investing in a default fund compared to making an active choice.

Points to consider

• Methodological limitations: this is an unsystematic literature review, and thus draws on specifically selected sources to explore the issues outlined by the authors. Whilst this does provide a good overview of why people do not tend to save in the UK, it is worth noting that the findings are not as strong as those that would come from a more comprehensive literature review.
• Relevance: this document provides the reader with a good understanding of the problem saving/investment education problem in the UK, and presents a series of solutions based on some strong evidence.
• Generalisability: taking into account a range of services and programmes across the UK, this review is strongly representative of the savings/investment environment around the country.
• Applicability: this reviews is a good starting place for organisations planning to run a savings or investment intervention. For organisations already running such a scheme, this document provides a good bank of evidence and tips for potential future directions.

Full report

Green paper: Saving us from ourselves - full report