Household finances: income, saving and debt Contents

7Conclusions and recommendations

1.The finances of UK households have improved in a number of ways since the financial crisis. But households are facing a series of economic challenges and changes that will continue to place them under pressure. Against this background, the Committee has identified some important points of weakness in the household balance sheet that require action from the Government. Substantial numbers of households are over-indebted or at risk of it and are vulnerable to aggressive debt collection; have little or no precautionary savings; have insufficient pension savings; and are dealing with an under-developed market for pension freedoms.

2.The Government and the Treasury needs to take full and active responsibility for helping households to ensure that their finances are as resilient as possible and well-placed to support their standard of living throughout their lives. The financial services regulators and guidance bodies have important roles to play in this, but they have more limited mandates and policy levers. The Government should not pass the buck to them.

Background

3.Household incomes were hit hard by the financial crisis and its aftermath. But structural changes to the economy—including permanently weaker productivity growth, lower rates of home ownership, lower real interest rates and an ageing population—mean that, for many households, the pressure on their finances will persist. Left unchecked, these pressures are also likely to exacerbate inter- and intra-generational differences between households. (Paragraph 18)

Overall levels of household saving and debt

4.The aggregate household saving ratio is volatile, and short-term movements should not be over-interpreted. Nonetheless, the recent sharp fall, to record lows on certain definitions, is a cause for concern. It also reflects the UK economy’s reliance on consumer spending to drive growth. If rates of household saving remain low, it could reduce the resilience of households to downturns and undermine any gains to economic stability from cutting public sector borrowing. (Paragraph 24)

5.In identifying where debt may cause harm to households and pose risks to the stability of household finances, it is relevant to consider the distribution of household debt, as well as the aggregate level. Additionally, it is important to take a broad view of debt, including not only financial debts, but also non-credit debts, such as rent and bills arrears to both the private and public sectors. (Paragraph 29)

6.The responsibility for improving overall levels of household net saving sits more appropriately with the Government and HM Treasury than the financial regulators, because they have a broader remit and a wider range of policy objectives and tools. (Paragraph 33)

7.The Committee welcomes the Economic Secretary’s clarification that the Treasury does take into account the health of household finances in setting economic policy, and that Treasury Ministers are ultimately responsible for ensuring that low rates of saving or high rates of indebtedness do not imperil long-term economic stability or living standards. (Paragraph 34)

8.The importance of this responsibility is not reflected in the Autumn Budget report, which contains no discussion of household savings or debt. The Treasury rightly has much to say about the public finances. In the next Budget, the Treasury should report on the state of household finances and the level and rate of household savings, at a regional and national level, including its assessment of the implications for future living standards and wider economic stability. It should identify the most consequential risks to the financial resilience of households and set out its strategy for addressing them. (Paragraph 35)

Helping over-indebted households

9.There is no formally-agreed definition of over-indebtedness, but there seems to be a rough consensus that a key indicator is difficulty in keeping up with bills and credit commitments. Risk factors for over-indebtedness include being young, renting and exposure to a ‘life shock’. (Paragraph 42)

10.The FCA’s Financial Lives survey contains important information on the distribution and causes of over-indebtedness and financial vulnerability that should form the basis of evidence-led policy to tackle these problems. It is concerning that Treasury and Department for Work and Pensions (DWP) Ministers were not familiar with it before they gave evidence to the Committee. The fact that officials had not familiarised Ministers with the report gives the appearance that the departments do not attach enough importance to it. The Treasury and DWP should produce a joint response to Financial Lives, in which they set out how it has informed their co-ordinated efforts to identify the most financially vulnerable households, and which policies could be most targeted and effective in improving their situation. (Paragraph 43)

11.Arrears to local authorities are growing. These debts are often pursued over-zealously, and with routine recourse to bailiffs. In addition to local government, the Committee has heard reports that central government can take an uncompromising approach to debt collection. The public sector should be leading by example in their treatment of the most financially vulnerable; but the current approach risks driving them into further difficulty. (Paragraph 49)

12.The Committee welcomes the Economic Secretary’s acknowledgement of this problem, but it would like to see more evidence that the Government is tackling it as a priority. By bringing central government and local authority debt collection practices consistently into line with industry best practice, the Government has the power to make a significant difference to the burden of problem debt in a short space of time. In its response to this report, the Treasury should set out how it intends to do so. (Paragraph 50)

13.The transfer of responsibility for consumer credit regulation to the FCA has led to a change in approach and a shift in the debate around the regulation of high-cost credit. In particular, the evidence that the high-cost short-term credit price cap has been beneficial for consumers suggests that there is not always a trade-off between regulating harmful credit products, and denying access to credit to those who need it. (Paragraph 58)

14.The Committee encourages the Financial Conduct Authority (FCA) now to move forward with its proposals on other forms of high-cost credit—including overdraft fees—as quickly as it can. When it comes to review the impact of these proposals after they are implemented, it should reconsider whether a wider cap on high-cost credit, and compulsory restrictions on unsolicited credit limit increases, are needed. (Paragraph 59)

15.The HCSTC cap precedent also indicates that Government and Parliament can move more quickly than the regulator acting on its own in cases where there is clear harm to consumers in lending markets, and to enforce consistent standards across the industry. (Paragraph 60)

16.The breathing space scheme is an important initiative that should help relieve the burden on severely over-indebted households and give them a better chance of entering sustainable repayment plans. The Government should carefully consider the case for extending the period to be covered beyond six weeks. (Paragraph 65)

17.Given the growing role of non-credit arrears in problem debt, and the aggressive collection practices used by many public sector creditors, the case to include non-credit arrears in the breathing space scheme is overwhelming. The Committee can only offer its support for the scheme if its scope is expanded accordingly. (Paragraph 66)

18.The current provision of free-to-client debt advice appears insufficient, despite the support from the MAS. In consultations over how its successor, the Single Financial Guidance Body (SFGB) will allocate its budget, the SFGB and the Government should consider how the resources available for this advice could be increased, based on an assessment of existing and projected demand for these services. The Government should consider the case for making more funds available by extending debt advice levies to non-credit arrears providers. (Paragraph 69)

19.The inclusion of rent and other non-credit regular payment commitments in credit rating assessments could improve access to low- and mid-cost credit. There is some concern that an across-the-board obligation could penalise some people, however. The Government says it has an alternative to the Creditworthiness Assessment Bill in the Rent Recognition Challenge: it should set out in its response to this Report how this programme will meet the aim of increasing access to credit more effectively than the Bill, and how soon its chosen alternative will be implemented. (Paragraph 76)

20.There may be potential for credit unions and community development financial institutions to take a greater role in providing mid-cost credit to households currently relying on high-cost credit. The Committee would like to see the Government take a more strategic approach in coordinating what currently seem like piecemeal efforts across Government, regulators and industry towards promoting the expansion of this sector. It should also set out what it expects a successful credit union sector to look like. (Paragraph 81)

Saving for a rainy day

21.There is widespread evidence that many households are lacking in “rainy day” savings buffers, and that helping households to build precautionary savings could have a significant impact on levels of problem debt. Clearly, that will not be a practical possibility for all households, and does not detract from the need to address problem debt by easing repayment burdens, making more credit available at a more reasonable cost and regulating problematic debt products. (Paragraph 85)

22.There is little evidence that tax relief is an effective way to stimulate household saving, especially among lower-income households. There is, however, more evidence that cash bonuses and direct matching can stimulate saving and have the potential to help people build a precautionary savings buffer. The Treasury and HMRC should study the impact that recent increases in the opportunities for tax relief on savings has had on the scale and distribution of household saving. Any future changes should be justified in terms of the expected outcomes for the level and distribution of saving. (Paragraph 93)

23.The Help to Save scheme is a promising approach towards helping lower-income households build precautionary saving. However, at this stage its ambition is limited. The Treasury should make regular written reports to Parliament on the usage of the scheme and its efforts to increase take-up. It should give consideration to widening the eligibility criteria in future. (Paragraph 94)

24.The evidence on the merits of sidecar savings schemes is mixed. The Government should examine the results of NEST’s trial of sidecar savings, and, if it is a success, assist with a wider trial and rollout, including any necessary legislative changes. (Paragraph 98)

Saving for retirement

25.Despite the welcome and significant boost to savings rates achieved by automatic enrolment, millions of people are still expected to under-save for their pensions on current policies, many of them to a significant extent. Further reforms to the pensions saving landscape and automatic enrolment will be required to ensure that households have sufficient income in retirement. (Paragraph 107)

26.The Committee is concerned by the evidence it has received that this savings gap is particularly large among women. The Treasury should assess what is driving this gap, and what the consequences could be for both individuals and households. (Paragraph 108)

27.Auto-enrolment has, to date, been enormously successful. The Government is right to focus on ensuring that existing plans for raising the default contribution rate go smoothly. However, looking beyond that, there is little evidence of a plan, or even an ambition, to reduce further the number of under-savers from its current level of 12 million. If the Government has reasons to think that current levels of under-saving are acceptable, then it should say so and explain why. (Paragraph 109)

28.There is widespread acknowledgement that tax relief is not an effective or well-targeted way of incentivising saving into pensions. Ultimately, the Government may want to return to the question of whether there should be fundamental reform. However, the existing state of affairs could be improved through further, incremental changes. In particular, the Government should give serious consideration to replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution. (Paragraph 117)

29.This inquiry has received strong criticism of the Lifetime ISA (LISA) over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The Government should abolish it. (Paragraph 122)

30.In promoting the LISA to retail investors, the Government has not been clear enough that those withdrawing their money early lose not only the 25 per cent bonus, but also a fraction of their capital. In this respect, the standards of disclosure on the gov.uk website fall far below those expected of regulated firms. The Committee welcomes the Minister’s commitment to clarifying the website, but it is deeply disappointed that it has not yet been done, two months after the Minister promised to do so. (Paragraph 123)

31.While maintaining its focus on keeping opt-outs from automatic enrolment low during the rise in the contribution rate to 8 per cent, the Government should start considering the options for raising contribution rates for at least some people beyond that point, potentially by automatically escalating individual contribution rates in line with pay rises. This option and any alternatives should be analysed at the next automatic enrolment review. (Paragraph 126)

32.There is an urgent need to bring the self-employed into the automatic enrolment system, but it is not clear that the Government has a clear strategy or timetable for doing so. According to the evidence received by this inquiry, the most straightforward solution would make use of self-assessment and national insurance contributions. The Treasury should keep an open mind towards doing so, and the possibility should be analysed as part of the next automatic enrolment review. (Paragraph 131)

33.The Government has committed to maintaining the triple lock on the state pension to the end of this Parliament. If it is maintained in the longer term, the state pension will rise relative to earnings indefinitely. This is clearly unsustainable. However, according to the Government’s analysis, replacing it with earnings-uprating could result in a large rise in the number of under-savers. The next auto-enrolment review should explore the options for making up with private savings the shortfall that could result if the triple lock were abandoned in future. (Paragraph 136)

Planning for retirement after pension freedoms

34.The present level of many people’s engagement with and understanding of the choices available to them as a result of pension freedoms is inadequate. One approach to improving this situation is to encourage more people to take up the advice or, at a minimum, free guidance options available to them. (Paragraph 144)

35.In consultations over how it will allocate its budget and priorities, the Single Financial Guidance Body (SFGB), together with the Government, should consider how a mid-life MOT could be introduced, and develop proposals for increased outreach work to engage people with pensions planning. The FCA should consider the case for introducing a strong form of default guidance before people are allowed to access their pension pots. Finally, the Government should make a cross-departmental effort to identify opportunities to “nudge” people towards pension guidance at life events where they interact with the public sector. (Paragraph 145)

36.The Committee remains to be convinced that the SFGB should not be under Treasury lead sponsorship in future, particularly given the continuing shift from defined benefit to defined contribution pensions. The Government should keep the SFGB’s sponsorship under review. In the meantime, the Committee intends to take a close interest in the SFGB and scrutinise it in a similar way as it does Treasury-sponsored bodies. (Paragraph 147)

37.The level and quality of consumer protection and default investment pathways associated with pension freedoms do not appear sufficient at present. There are associated concerns that scams are appearing and evolving faster than regulators and guidance bodies can adapt. The Government should be actively involved in working with the FCA and the guidance bodies to identify opportunities to enhance consumer protection and introducing default pathways to ensure that people do not make poor choices in retirement. It can start by responding to the FCA’s suggestion that it consider allowing people to access their tax-free cash separately from the rest of their pensions. (Paragraph 154)

38.It is desirable for individuals to be able to insure against risks over which they have little control, including longevity risk. The introduction of pension freedoms—and the associated sharp decline in demand for annuities—may have reduced the extent and effectiveness of collective longevity risk pooling in the retirement market. It has been suggested that retirees will instead choose to purchase annuities at later points in their lives than they did before pension freedoms, which could offset some of the reduction in risk pooling. If this is correct, we can expect to see a partial recovery in annuity sales going forward. The Government should monitor this situation as it evolves, and may need to intervene in future if evidence of sufficient risk pooling does not emerge. (Paragraph 158)





Published: 26 July 2018