When Savings Got A Bad Name

When I was young, my parents and grandparents drummed it into my head that I should always save some money. I followed their advice when I could, starting my first bank account as early as possible and setting money aside.

Their advice certainly helped me buy my first home soon after I started work as I had plenty for the deposit. Bizarrely, I followed the advice of a rugby playing mate and went for a 100% mortgage and a whopping life insurance policy on an interest-only mortgage despite being single - his advice was to blow my savings on material things that had no long term value. Later, after meeting and marrying an Independent Financial Adviser (IFA), I got things back in check. But it was only when she opened my eyes to what I would need in retirement without the buffer of one of those super company or public service pensions that I started to really save.

Over the last 10 years or so, there has been a huge focus on getting credit in Britain. Banks and credit card companies have fallen over backwards to literally throw cash at us, not just to buy homes but to fund a fantastic lifestyle of flashy cars, superb holidays, up to date whizz gadgets and big TVs and much more. We have never had it so good as we used our own financial instruments to supplement our dwindling (on average) household incomes. In the meantime, our level of real savings has been negative. It was almost crazy to save, in fact, so cheap was the money thrown at us.

Pensions probably fared worst but savings generally have been negative in comparison to our monthly income. Beyond my pension, my wife and I save with ISAs regularly and this year we cashed some of those in at a lowish point and then bought back in using a scheme I had no idea existed called OICs. By doing this we have fared very well and the OIC alone has increased nearly 40% so we have not lost anything during the crisis and our savings are still tax free.

It struck me though, that savings seem to be the last thing on everyone's mind. Although the level of debt on credit cards has actually come down by the odd percent for the first time in ages, outside mortgages, Britons have over £1 trillion of unsecured loans. In trying to kick start the economy, one of the first things that was focused on was rekindling the 'Asset Backed Security Market', or housing markets to us mere mortals. While it made sense to get money into people's pockets in the short term by leveraging their assets, it was clearly exactly the same plan that had got the nation into a financial mess. So long term, there has to be a plan to get Britain saving more.

The problem is that it is not as easy as it sounds - we all know the score. Just when I think I'm on top of things, the washing machine breaks down or the carpet gets stained, the floor needs repairing, the lounge suite is suddenly wearing. With all the juicy sales on all year round these days, there is a temptation to think we are getting a bargain all the time and if we don't spend we will miss out. Saving in a disciplined manner is a hard task in our current environment of materialism fuelled by cheap credit. At least when interest rates were high we could see our savings grow and we borrowed less. Now, my Halifax building society account offers zero interest on our balance and we have had to go elsewhere to get something for our small monthly savings - it's crazy.

The whole market seems geared against savings. There is little focus nationally on pensions and saving for retirement and my wife's IFA business has changed dramatically over the years with structuring and restructuring credit as being her main business versus investment and retirement planning. She firmly puts this down to the attitude of Government, banks and people - it cannot be any one of those alone, it has the right combination and time. At this time, saving for the future is not a priority generally and the whole market is geared toward lending more.

In her opinion, as it is mine, the whole credit crunch was an accident waiting to happen.

Warren Buffett calls it 'capitalism overshooting periodically'. At the height of the crash he invested $5bn into Goldman Sachs and is now sitting pretty. My meagre funds went into the OIC. I am no Buffett but thanks to equally sage advice I have ridden out the storm well. Like Buffett, my pension is down around 25% still, as are his overall assets, but in reality my whole financial situation is as good as it could be in the face of what we have experienced and my pension is clearly for the long term. I am now focused on saving as much as I can. We reduced overall credit card debt to zero by releasing our Halifax savings to make sure we paid no interest while I have been putting as much as I can into my pension.

But how many others have done the same? In fact, the whole panic that has gripped us has seen the focus shift toward getting credit back to previous levels. Britain will soon get back to borrowing more and saving less. Surely, at some point that vicious upward spiral has to end and let's hope it is not as spectacular as last time.

My point here is not a swipe at the Government who have their share to blame. It is not even at the banks who fuel their cash by lending more in their bizarre world of finance. It really is a swipe at us, the public. It really is time to save and invest as the future could get nasty if we don't. Pensions should be brought to front and centre for every working individual and, personally, I don't think retirement planning should be voluntary. I think there should be massive tax incentives to save, instead we get tax on pension dividends, I think insurance premiums should have no tax attached, I think there should be no tax on savings generally.

Realistically, the Government should plan long term - the more we save, the less we will burden the state in our old age. It just makes sense.

Current finances in the country are a mess and it will take a bold Government that thinks long term in this way. However, it really is not rocket science. The more we all save today, the less vulnerable we are to downturns, the less of a burden we will be on the State and the less the system will incentivise us to borrow as banks will see the profit in investments over debt in the end - hopefully.

I have a feeling that pigs may fly first, but I live in hope.

The Pension Game

A report by PriceWaterhouse suggests that the public sector has a very generous pension scheme. Well that was money well spent to find that out.

However, it isn't as simple as it seems. The average annual retirement income for an NHS worker is only £6,500 and the average local government worker gets around £3,800. The reality of all pensions is that only 4% of the retiring population get the nirvana of two thirds of their final salary income when they retire. That's because most people do not stay in a single job long enough, even in a final salary scheme, to qualify for full benefits. The vast majority either change jobs or enter public service late or leave early. So PWC's assertion that is causing a block to talent moving from the public to private sector and vice versa is a myth. You have only to look at some of the salaries on offer in public service jobs to understand that they are very generous pay packets to be earned as well. True, below management grade the salaries are lower but when you look at the incredible pension scheme, the draw to public sector can be strong. Private business salaries do tend to be higher and this keeps the lure of this sector going but that is because Britain has become a society of low savings and even lower planning for the future - we are a live-for-today society.

It is believed that as much as 35% of salary contribution would be required to match the generous public sector pensions for private sector workers - that is because they are back-ended. We accrue on average 6% of our salary at any time to toward our pension but our salaries grow and we pay the higher contributions for a proportionally shorter period and that is why we have huge shortfalls on what is required to live on even if we are diligent savers. In the public sector, this disparity is taken care of by the generosity of the taxpayer - we pay disproportionally more for public sector pensions than the pensioners themselves. That's a simple fact. In other words, we probably pay as much to fund other people's generous pensions as we do for our own over the course of our careers - you would have to check the sums but it cannot be far off the truth with nearly 1 in 4 jobs in the public sector.

There has been controversy lately as companies like Barclays and especially RBS have cut the payouts from their pension schemes after culling staff in the wake of the financial crisis. For RBS workers, it was particularly galling after the fabulous payout and topping up of ex-CEO's Fred Goodwin's pension which he can draw early anyway. At Barclays it comes as a hard blow as staff have been cut and traders are again courting controversy with more bonus payments worth the pension saving in a single year while new teams of 'talent' arrive with amazing packages worth the salaries of hundreds of low end staff individually. It seems very curious that these companies are not saving cash on bonuses and putting it into pensions schemes or, indeed, why have they not been doing this in the past?

Pensions is a looming time bomb for us all and the Government. Our good friend Lord Turner found time between his many jobs to put his name to a report that someone else wrote, I dare say, as he has to earn multiple salaries, which urged pension reform in public service and a potential switch to average not final salaries as the basis for pension entitlement calculation, which would make sense. Pity he doesn't look at other problems with such diligence but as with many high level business people they are great at cost cutting but poor on working out how best to deal with profit as most of it goes to a very narrow band of people leaving little to be invested in pension funds for staff.

It is a question in the private sector that the Government tried to address with the pathetic implementation of the dreadfully poor and ill-thought out stakeholder scheme. It got us nowhere but hit the soundbite machine as usual. Reading Niall Ferguson's Ascent of Money, it shows how our Welfare System has been so badly thought out compared to even under developed nations in South America as we are the most highly insured nation in the world by individual cover yet we have so little benefits at the tail end. It seems the money just goes into a massive sump - much of which and more was consumed in the bail out frenzy but a great deal of which funds a very uneven balance toward the public sector remuneration.

There isn't a great deal of time to sort the issue out. This year the population grew to 61.4m in Britain and for the first time in a long while it was births which accounted for the growth rather than immigration as mothers gave birth, on average, slightly younger than usual to far more babies than the rate of deaths in the UK. The old are growing older.

The problem of pensions, benefits and, now, unemployment are issues which are right at the head of the agenda but no one can see it.

The Public Sector Time Bomb

I can wax lyrical on the recent revelations on MP Expenses which I firmly believe are just the thin edge of the wedge. There are over 600 MPs in the main House alone who are running personal and departmental expense budgets larger than the total budgets of a great proportion of Britain's raft of small businesses, who are currently struggling so hard to survive this recession.

But that really isn't the half of it - by a long, long chalk. This recession has crippled British business and the private sector has taken almost the entire brunt of it. This week, Teachers will be the next sector to demand a 10% pay increase and they are getting peaky already over other issues like Sats for 7 year olds - if they can strike for that, then surely striking for pay is a short hop. Meanwhile out in the Neverland of council workers, The Tax Payers Alliance revealed this week that many Council chiefs received pay rises of above 10% last year, while over 1,022 public servants earn in excess of £100,000, a number which swelled by 27% in a single year, and 16 of these people now earn above £200,000 a year - a salary that not even Gordon Brown enjoys.

We can get uptight about these figures indeed - the inefficiency of public sector organisations is just stupid - and it isn't just salary bills. Many public sector organisations, the total of which now account for 1 in every 4 jobs in the UK, employ a raft of contractors through 'outsourced' contracts for certain work rather than directly employ them plus many new infrastructure investments like the NHS database have an enormous number of external 'consultants' swarming over uncontrolled and spiralling projects. You would then start shuddering at the rise in the number of politicians we directly fund in the new tiers of Government from European Parliament and the Commissioners down to Assemblies and Councils and other related bodies we just don't think about.

Sharing The Pain

Largely all those jobs have continued as normal with just a few minor cuts here and there. As the burden of Unemployment increases on the Welfare System due to the raft of workers laid off from private firms, and the ever-increasing sums being pumped into our sorry financial system, the Budget Deficit is rising alarmingly, much faster than anyone thought from Government to research institutes. About the only place that got it right was the IMF who all along said this was going to hit Britain harder and for longer than most other places.

It is easy to see why when such an enormous proportion of Government spending goes on keeping politicians and civil servants in jobs. But these are not just any jobs. These jobs have the most lucrative pension schemes outside of Fred Goodwin's. A 10% rise in salary in one year for Council executives earning so much has a truly massive effect of the requirement to fund the same people's future pension dues.

In the recently published accounts of the NHS alone, the pension deficit is currently running at £212 billion.

The whole Public Sector pension requirement is a ticking Time bomb of nuclear proportions and it is not included in any of our borrowing requirements today. But you can be very certain of one thing, we will have to pay for it.

Pension Hurt

I am one of the vast number of people in the UK who regularly saves a significant proportion of my earnings, while my employer also contributes. However, my current outlook on any future pension is looking as dreadful as our general economic position. But it is actually far worse. As one of the private sector workers, I will be paying disproportionately more of my money to fund not just the salary increases of the Public Sector but the vast rift between what the Government has set aside for pensions and what is needed to pay them. It means that my future earnings will be far less in order to pay for this and I don't think much of that has been factored into the current gloomy talk about public finances, national borrowing and future tax liabilities.

The Institute of Fiscal Studies (IFS) paints a very gloomy picture about the rise in the budget deficit after the release of lower tax revenues and higher bail outs. Adding it all up, the IFS reckons that UK debt will be 77% of GDP by 2013.

The Time Bomb

While we talk of ever increasing amounts of spending, at some point the whole issue of public finances has to be sorted out and right across the board. Right now, we have too many jobs in too many places in the public sector which are just superfluous. We have too many uncontrolled contracts with third party firms which are sumps for money with no visible results. We have, across the board, a pension and benefits scheme for public workers which is wholly out of kilter with the private sector (with few exceptions depending on your position) and we have a private sector that will be called on in ever greater amounts to pay for this.

We are developing a 'Ruling Class' of bureaucrats akin to the latter day Soviet Union which makes sure those who are employed by the state are more protected in terms of job security, money, expenses, pension and the law than the rest of society who are at the grunt end of generating the GDP. The similarity is beginning to grate on me - privileged jobs with spanking benefits and allowances, international travel for fact finds, expense fiddling goes unpunished and peers who transgress the law are treated better than everyone else.

The picture of modern day Britain is far from the 'Cool Britannia' we were promised unless you are employed by the State.

The Green Shoots

The Centre for Economic and Business Research (CEBR) tells us that the VAT cuts have actually boosted our economy with over £2.1 billion of increased sales since 1 December 2008. It argues that the 2.5% cut which is due to expire in January 2010 should be extended for 6 months. The CEBR argues that annual growth in retail sales was higher than expected and this can only be attributed to the VAT decrease.

If, like me, you have consciously reviewed your finances and selectively decreased your spend then the rise comes as a bit of a shock. As a small businessman, I can certainly say that the VAT decrease has no effect on my sales at all while I have cut back on unessential purchases. I would expect in the business-to-business sector this is exclusively the case - VAT is just a money collection service on behalf of the Government for small businesses, in fact due to companies extending payment terms unilaterally, I have had to fund VAT payments through the business cashflow in the last quarter - it has actually cost me more.

The CEBR findings don't seem to fit the observations of most who are experiencing this recession, unless those who are losing their jobs are actually spending more.

Of course, such effects may be short lived. The Government plan was to actually raise VAT to 20% and it has an upper window of 25% allowable by the European Union. Will they use the full scale of charging for the future?

Well someone has to pay for all those public service expense accounts and pensions. As anyone would tell you in the Private Sector, there is no such thing as a free lunch.

Marketing In A Recession

I am not a classically trained marketing person so my comments are not based on professional or academic expertise but I know enough to make a comment on this subject and invite views. I am specifically talking about two campaigns and a product launch which have caught my eye.

In a recession, one of the first budget lines to get slashed is marketing - there is a logic that says that if people aren't buying so much there's no point in communicating with them, plus it is usually a budget line that has not been all spent so there can be some actual savings made. Training is another budget line that gets hammered early for the same reason on savings although the logic is different.

So here are two campaigns which are very high profile in the UK right now and I thought it apt to highlight them. Remember, this isn't just a recession, but we are in the grips of a financial meltdown with the stock market going like a roller coaster and pensions getting walloped because of it and Quantitative Easing.

1) Aviva/Norwich Union

For many in the know, Norwich Union, a bastion of the British insurance and pension market, got taken over by insurance giant Aviva a while back. Until recently, Norwich Union had remained under its own brand as it had such good position in the market. So in the teeth of a recession and credit crunch, Aviva has taken the opportunity to change the name of its UK dominant brand from Norwich Union to Aviva.

And not just with the odd brochure - this is as subtle as a housebrick through the window.

The first wave of adverts used the likes Ringo Starr, Elle McPherson, Alice Cooper and Bruce Willis to demonstrate how stupid the public are in that we would not have taken these people seriously if they had not changed their given names to their stage names. Some may be pedantic and say changed from their 'real' names. It is pretty much in your face stuff as the names are so iconic and the stars so recognisable, and subtly international - perhaps. It certainly got my attention.

The point being that these people had to make the name change to get where they are or simply get on in life. The interesting risk to the point of the adverts is that the vast majority of the world's population, and many famous people to boot, have not changed their name and still thrived. I would argue that it is not mandatory to change your name to become successful, but in those specific cases highlighted in the advert, it has worked for them. I suppose that in each case, they feel that we, the public, are so fine tuned in our tolerance range of names that if Alice Cooper had not been called Alice then we would not have heard of him or rated him. I would suggest that he became prominent for biting the heads off live chickens during his gigs which did that - but what do I know. I honestly don't think that it makes a jot of difference to Elle McPherson that she changed her name - she would still have been one of the most attractive people on earth. Ringo Starr, though, may have a point.

Famously, when asked if Ringo Starr was the best drummer in the world, John Lennon replied that he wasn't even the best drummer in the band.

A subsequent advert goes on to give us the real message. Norwich Union clearly felt that people were just numbers and did not cater for the individual - Aviva in contrast does and this name change proves it. We get the same icons in Starr, McPherson and Willis telling us how they want to be treated in a series of role plays and then we get the rather forlorn figure of McCauley Culkin who moans that he 'Just wants to be known'. The sulky looking McCulkin's career seemed to have peaked too early after the immensely enjoyable 'Home Alone' franchise and he has certainly struggled to gain our attention since. Aviva has sorted that out.

Clearly the advert was not made in the UK and it seems awkwardly American in its slant and I may be wrong in guessing that this advert was made originally for the US market. It makes it all the more risky from that viewpoint as we Brits are stuffy sorts when not having adverts tailored to our way of life.

Let's take a look at the second before my comments.

2) Nat West Bank

The new Nat West adverts courted early controversy, I am told by an industry insider. Apparently the originals featured wording either in the advert body or the small print that no one reads on the screen, that Nat West would be giving impartial advice. This clearly was never going to be true so a complaint was made and upheld and the word impartial was changed to helpful - allegedly.

We see a string of scenes where bank advisers have been mobilised and are visiting people in their homes to sit them down and give them advice on their future plans involving savings etc. All very nice and friendly.

It does not escape the cynical amongst us that Nat West is owned by Royal Bank of Scotland who are at the centre of a storm on one person's investment advice, namely their former CEO Sir Fred Goodwin, who left with his formidable pension after clocking up a UK record for corporate losses. Of course, had RBS itself led with this advertising then we would have all fallen off our chairs, mouths frothing and spitting vilely at the TV at the audacity to show such hypocrisy as it is very unlikely that anyone watching the adverts would ever be treated so generously by the Bank.

Such is the genius of marketing people, that RBS had a brand that was still functioning well and had not been caught up the controversies surrounding its Board, although I dare say it contributed some of the losses to the group. It has been handy, in this instance, that the Nat West brand has not been assimilated and turned into RBS, as ABN AMRO has.

Bold Moves or Good Money After Bad?

It is an interesting argument on marketing spend in a recession.

Clearly, it is not wise to stop spending money on brand, image and general communication to the outside world in a recession - that only damages the company in the long term. Most would advocate being wiser on marketing and use different, perhaps lower cost methods to keep the momentum going and certainly not spending any more than necessary. So in Aviva's case, this is a huge gamble. There is a lot of cynicism out in the market particularly about the largess of banks and institutions generally. The insurance market has weathered the storm well as long as you discount one of the biggest of that fraternity, AIG. But there has been a belief by a number of economists that insurance stands at a precipice and that should there be many more body blows to the financial industry then insurance could become part of an inevitable domino effect.

Aviva not only flies in the face of this but they have actually done what could be described as, in the vernacular, corporate self-gratification. That a company should think so much of itself that by changing its name we will believe it is good is just bloated self-confidence, it could be argued. Certainly, to do it in such a gaudy way with household names of high standing telling us how good it is to change your name, we get to know that they have spent a fortune on this one thing.

Here's the rub - by using household names to tell us, they have missed the obvious point that the Aviva brand is virtually unknown outside of the insurance inner world and it is not a household brand name in the UK the way that Norwich Union was.

So the question must be asked of the Board - was this the right time to blow such a vast amount of money just to announce a name change? There wasn't even a single comment on there to tell us what to buy - it was all about self flagellation and it seems so inappropriate.

Or is it?

The risk for NatWest is unquestionably whether the public are clever enough to make the connection between Nat West and its troubled, disgraced parent, RBS. I did and I shouted out loud frightening the dogs and stormed around the room in a lather. It did not help that just over 3 years ago I changed all my bank accounts, personal and business, from Nat West after a series of appalling calamities, lack of service and the fact that they certainly did not value my custom. There were plenty interested in calling me to sell things, though.

I think this, again, is a gamble by Nat West. they have been clever enough to keep the brand alive despite being part of RBS and keep its own strand of image, very different from the more corporate looking parent, although I dare say there are many customers in Scotland that have banked with RBS for many years who have difficulty recognising the new RBS.

I suspect that Nat West have weighed all this up and concluded it's worth it. However, talking of savings in the current climate is actually a bit dodgy given the dreadful run on the stock market and low interest rates and given my own IFA (and I stress the I is for Independent) advised to liquidate some of my ISA assets prior to the crashes. Interestingly, the advice is to buy ISAs now in readiness for the inevitable upturn, not cash ISAs though as the returns look pitiful.

It will be interesting to see how the two companies do as a result. One thing is for sure, in the glossy world of marketing, measuring the return on corporate image campaigns on TV is notoriously difficult and full of flannel - worse still in the midst of a recession. It could be a bold move or a very silly one by each company.

And Finally - Ta Ta for Tata?

It's launch time for the world's cheapest car, the Indian Company Tata Motors built Nano. It measures 3 metres, has no radio, air conditioning, air bags, or power steering but it does come with 5 seats, 4 doors, a massive 33bhp, a 624cc lion of an engine at the rear and a wheel rather than satellite navigation for guidance.

All for the paltry sum of 100,000 rupees or to you, guv, £1,366.

You may think this is a stroke of genius by its makers in the heart of a recession, particularly when one of the associated stories tells us that a chauffeur who has driven many a swish vehicle for his employers, has in fact never been able to buy a car for himself. However, Tata is also taking a horrendous gamble.

The firm is struggling heavily under a mountain of debt and falling sales and made a loss of 2.6bn rupees for the quarter October to December. It is also having a problem getting a further $2bn of loans on top of the $1bn it borrowed to buy the Jaguar and Land Rover brands from Ford Motors as late as last June - they could not have made a more worse mistake in terms of timing. Worse still, the Nano is 6 months late and there has been associated problems with production after Tata got into a spat over the site of its proposed factory in West Bengal and switched to the site to a new one in Gujurat. That new factory will not be available to produce that car for another year and so production is at a reduced level than anticipated from its other factories.

The real problem is that the numbers simply don't add up. Even if it were to sell 250,000 cars this year, it will only add around 3% to the company's revenues. Further, at the bottom line, it is likely to take 5 to 6 years to break even on the product.

As they say, there is such a thing as bad business and revenue is vanity, profit sanity. While the car may well revolutionise the lives of a lot of Indian people who have never afforded transport in the way we take for granted in the further developed world, it is perhaps another ill-timed strategic move for a firm already in the grips of financial hardship.

It really could be a gamble that ruins the company.

Paying The Price

If you have steadily put money aside for your future in something like a pension, ISA or savings account, have had a relatively secure job over the last 10 years and are due to retire in the next 5 to 10 years, then you are probably bearing the brunt of the financial mess the country is in.

With interest rates at 0.5% and the stock market behaving like a lead-weighted yo yo, prudent savers have been amongst the worst hit by the financial fiasco. It is also likely that the same people will be the major port of call for solving the long term borrowing problems that the Government has bought for the future.

The Pension Pain

If, like me, you have seen your potential earnings in retirement trashed inside of 18 months, it is pretty disheartening to watch the massive monies being spent which we will have to pay back in the future. It can only mean one thing - higher taxes which will probably mean that we will have to work longer in order to save enough money to retire while the burden in retirement will be higher.

The reward for sensible financial controls and diligence by individuals is to have a shorter and less comfortable retirement.

The problem is very serious and there is no longer any real solution to it. The stock market may recover over the next 5 to 10 years but that will for many just get their pension pots back to some kind of parity to the value just ahead of the Crunch. How galling then to see Fred Goodwin lose billions and walk away with a highly lucrative and secure pension from the age of 50 for the rest of his life. But then again, how galling to see rafts of Civil Servants and Politicians get the same benefit but paid for entirely out of your pocket in current tax payments.

Making Pensions Pay

The serious outcome to all of this is that there is a greater potential for people to retire and move abroad to where tax regimes are kinder. Cyprus is currently a country that offer a superb climate, is very anglophile, and has a tax rate of just 20% on pensions. Properties are still reasonable value, the infrastructure and law mimic the UK, English is widely spoken and you are never far from a beach. For the homesick, there are branches of Debenhams to get the essentials like HP Sauce.

I am sure there are many other places, hopefully, that will keep such status despite the onslaught of the EU and 'harmonisation' which is not the process in which Harriet becomes first PM and then President of the United States of Europe - what a terrible nightmare that would be.

But certainly, this is a very real problem for the future and threatens to be another blow to the Government's plan on paying back its borrowing. If less people in retirement stay in the UK, then again tax revenues will fall - particularly if they take their estates beyond the borders of the UK and out of range of Inheritance Tax.

This Government has systematically ignored the growing problems of providing an income in retirement unless you are a Civil Servant or Politician where the fabulous pensions are paid for in current taxes - a nice 'Ponzi Scheme' for those in it. With better than 1 in 4 jobs now in the Public Service, more of our tax will be paying for these pensions as time goes on while we get nothing in return from the Government.

Personally, I think guaranteed, end salary schemes for Civil Servants and Politicians should be stopped immediately and make them carry the same burden as the rest of us and stop us paying for lazy bureaucrats' retirements funds.

Next up - Public Servant Expenses Accounts.