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Financing later life: why financial capability agendas may be problematic

Populations all over the world are ageing as fertility and mortality rates fall. Fewer babies are being

born and fewer people are dying at each age, meaning that the proportion of older people in

national and indeed the global population continues to rise (UN 2013). In the United Kingdom, in

2012 the UK population over 65 comprised 17 per cent of the population, but projected to increase

to 22 per cent by 2030 (ONS 2013: Table A1-1). There are many myths about the costs of these

ageing societies. For example whether national health costs rise with rising proportions of older

people is a deeply contested issue (Martín Martína et al. 2011), projections for patterns of care in

the future are more uncertain than is popularly understood (Pickard et al. 2012), and variation in

pension provision across countries is mostly dependent on what proportion of GDP a government is

prepared to commit to its pension system. The Pensions Commission (2004: Appendix D) for

example reported variation from just under 4 per cent of GDP in New Zealand to almost 12 per cent

of GDP in France as more to do with the structure of the system than because France had a much

older population than new Zealand. You could, however, be forgiven for thinking that the direction

our population demography is taking is apocalyptic and will lead to financial crisis, since this is the

most common rhetoric that we read and hear around us (Walker 2012).

In this article I consider the language with which the government frames one of these core issues,

namely financing later life, by labelling it a problem of ‘financial capability’ among its citizens. I ask

what this language means, and question why it is important. The concept underlying this analysis is

that governments are powerful social actors. The way government frames issues determines what

gets discussed, what policy gets made and the means by which it can be resisted (Rose et al. 2006).

These things in turn affect citizens and advisers in how they think about themselves and their role.

The new pensions policy and income in later life

This issue is currently especially pertinent in the UK. There is a coalition government in power, with

a Conservative/Liberal Democrat political alliance. This has led to a neo-liberal turn in UK politics

(Taylor-Gooby 2012), meaning a core belief that markets and the private sector are the best

providers of goods and services, including welfare, rather than these things being provided by the

State (Harvey 2005). This has become especially apparent in a rapidly changing environment of

pensions policy. In March 2014 (HMT 2014) the government announced a particularly radical

change that has been described by one leading commentator as ‘truly revolutionary’ (Bee 2014).

Prior to April 2015, if people (or their employers) had invested their money in a pension during their

working lives, for which they would have obtained considerable tax advantages through the life

course, then when their pension matured, they would have been required to invest the whole of

their accumulated pension pot into an annuity with an insurance company, or be paid an annual

pension by their former employer. If they bought an annuity, this meant that an insurance company

would take all of the pension pot money and in return give them an annual pension for the rest of

their lives, however long they lived. A pension up until now has therefore been a very special and

important form of life insurance. If you died soon after taking the pension, then the insurance

company made a considerable profit, but if you exceeded your life expectancy then this would be

very beneficial to you.

This compulsory purchase of annuities will however soon be abolished. One reason for the

government’s disillusionment with annuities is that there were very substantial problems with this

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annuity market: concerns that insurance companies were making too much money from them or

being very inefficient and expensive, and not giving customers a fair deal (FCA 2014c). Furthermore,

even with the best provider behaviour, in a climate of very low interest rates, annuities give a very

poor return on money. Led by the Conservative Chancellor of the Exchequer, George Osborne, the

annuities market has been decimated by the announcement that from April 2015, people will simply

be able to withdraw their pension pots. In announcing the new policy, the Pensions Minister, Steve

Webb, went so far as to say that if they wish to, they can purchase a Lamborghini (BBC 2014) and

leave themselves with no money for the rest of their lives, perhaps in poverty, and/or dependent on

means tested benefits from the State. The policy has therefore become known colloquially as the

‘Lamborghini’ pensions’ policy.

It is notable in this context that the Pensions Minister, Steve Webb, a Liberal Democrat Member of

Parliament, is known as an ‘Orange Book Liberal’1 – he is a libertarian Liberal believing generally

speaking that the best way to deliver welfare is through private industry and markets, and that the

optimal political system is one where people have maximum freedom from state control (Marshall

and Laws 2004). This proposed policy has generally been positively viewed by the public who may

be thinking about the things they might do with the money rather than buy a pension, and some of

these are very sensible things, like pay off debts or redeem their mortgages, take a much deserved

holiday, replace their old appliances, or help their families financially (Rickard Straus 2014). This

then is where we currently are in policy for money in later life. As a result, there is widespread

concern at how ordinary people can reasonably be expected to manage their finances for and in

later life - perhaps their entire pension pot of tens of thousands of pounds which will now be taken

in one go at the point of retirement.

When thinking about this policy and its consequences, it is important to note that this is a highly

individualised policy. Citizens are being returned the money to do with what they will. It is up to

them, as individuals. They are not being asked to give money to the state and in return have the

state look after them, which is essentially what a State Pension does, and might be called a more

collectivist solution. It is a matter for their individual responsibility, and it is this aspect of the policy

that I focus on in this article.

Financial education, advice and capability

There is much to say about this policy but here I aim to discuss the cultural assumptions that lie

behind this way of government thinking since we rarely think about these. If we examine the public

debate that has emerged since the budget announcement, it has focussed very heavily on the

degree of financial education and advice that people will need in order to be left with a reasonable

income in later life. The fear is that left to their own devices under this policy, citizens may not have

the financial acumen to enjoy a reasonable and comfortable retirement. Of special concern is that

they will waste their money or even if not waste it, fail to invest it wisely or even spend or lose it

altogether through bad luck or bad investments. They may, at worst, be conned out of their money

by scammers or extorted by financial abuse by people close to them. To prevent this, the political,

1 Marshall & Laws (2004) The Orange Book: Reclaiming Liberalism written by a group of prominent British

Liberal Democrat politicians including Vincent Cable, Nick Clegg, Edward Davey, Chris Huhne, Susan Kramer, Mark Oaten & Steve Webb. The book promotes economic liberalism especially the role of choice and competition in delivering social policy, including for public healthcare and pensions.

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expert and public debate is centering very heavily on what advice, information and education the

public needs to make sure that they will be self-sufficient in later life rather than suffer financial

hardship, poverty or financial abuse.

The underlying and necessary question to ask here is, what sort of citizens, what sort of people, is

the government imagining that those governed by it are, or at least could become, for this kind of

individualised policy to work? If government policy is to leave peoples’ lifelong financial welfare up

to them and the markets, taking it out of state control and away from state pensions and state

provision, then the government is imagining that it is possible for each citizen to amass money and

invest it wisely over the whole of their lives so that it grows and provides for them. They are

necessarily imagining that this is possible whatever has happened in their lives, however long they

may live, and whatever happens in the world around them. Fundamentally, they are imagining their

citizens to be very different from the low earning, low saving, over-indebted, people that many of

them are; sometimes overly cautious with money, sometimes spending too much, and generally

struggling to find any such thing as the right investment (MAS 2013). They are imagining that with

the right education, the right advice and the right support, all citizens can become prudent savers,

wise investors, watch their money grow and be financially comfortable for the rest of their possibly

very long lives.

Is this ‘Political Imaginary’ possible?

Since this vision is fundamental to the current direction of financial policy in later life, we need to

consider it carefully. In contemplating this question, I turn to focus on two areas. First, how does

government go about fulfilling its vision? And second, what implications does that have for public

policy and public debate?

In trying to turn us into the type of citizen that they want us to be, the government is tapping into a

long tradition of political influence on cultural change. They want us to be different and to change

our way of life. They want us to have a different relationship with money, with housing, with

savings, with debt, with consumption and spending, with intergenerational exchanges of money and

assets – all these features that make up our everyday money and family practices. Governments are

indeed very powerful players in effecting cultural change. Margaret Thatcher, former British Prime

Minister who is credited with marked effects on British culture in a host of domains, and who really

understood this phenomenon of cultural change, famously expressed it this way in an interview with

The Sunday Times in 1981:

...it isn't that I set out on economic policies; it's that I set out really to change the approach,

and changing the economics is the means of changing that approach. If you change the

approach you really are after the heart and soul of the nation. Economics are the method;

the object is to change the heart and soul.

(Butt 1981)

Indeed, if we reflect on the context for what the government is now trying to do, it is very complex.

Since the 1980s, money, finance and investment has played a much greater part in the lives of

ordinary people, with the right to buy council houses, substantial increases in home ownership and

mortgages, sell offs of the privatised industries, many more financial products for savings, insurance,

investments, increases in house prices, and ever rising consumer debt, with increases in credit cards

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and loans (Finlayson 2009). But we have also experienced a series of scandals in these financial

industries (Soin and Huber 2012), difficulties in predicting life expectancies (Dowd et al. 2010), and

inefficient markets in many areas of financial services, with overpriced financial products, lack of

transparency, and a bad deal for consumers (FCA 2014a, 2014b, 2014e, 2014d).

In this context by the late 1990s there was growing concern about very high rates of pensioner

poverty, with a third of pensioners living below the official poverty line (DWP 2014). One

consequence of this was a greater level of investigation by the government, revealing now quite

familiar but then quite alarming new statistics, such as a Treasury report in the year 2000 revealing

that half the adult population had less than £750 in savings and 10 per cent no savings at all (HMT

2000). Investigations such as these led to far greater public and political awareness that the financial

markets for the provision of money in old age did not seem to be working well. One of the

important policy solutions settled on to accommodate these problems fitted neatly with the political

and ideological vision that market based welfare could work and needed to be made to work,

namely: that the public better must become better financially educated. This led to the birth of a

comprehensive financial education programme and a new regulator in (what was then) the Financial

Services Authority.

Before turning to consider how this policy of financial education has come to assume such a

powerful place in modern society, it is worth reflecting on the wider question of to what extent a

policy of education and advice might assist with problems of financial inequality and poverty. A

financial education programme sounds so sensible in today’s consumerist and market-driven world

that it seems odd even to consider presenting an argument against this policy direction.

Nevertheless, it is important to ask what we already know about inequality and poverty in later life,

from a very large body of research.

A number of things are important to note. First, there is no evidence that financial education has

any substantive long term impact on financial outcomes (O'Connell 2007, Willis 2009, Hastings et al.

2013). Second, the key determinants of poverty and low income in later life are things like the

design of the state pension, health and care systems, social class at birth, gender, ethnicity,

education levels, occupational history, how many children a person has and at what ages,

employment history, marital history, family status and health history (Glaser et al. 2009). Third,

employer welfare like wages and pensions and other support crucial for late life welfare is often an

almost random factor in people’s lives and one over which they have little control (Meyer and

Bridgen 2008). Fourth, the location of housing (rather than the decision to buy) and other intangible

factors determine the growth rate in that most important asset value – a matter of geography and

psychology rather than financial decision making; indeed, economic models are extremely weak at

predicting house prices (Smith 2011). Fifth, factors having nothing to do with financial decisions

made by ordinary people and over which they have no power or control are most important in

determining their financial welfare: for example, average stock market returns, interest rates and

the price of gilts (Clark et al. 2009). Very importantly, no-one can predict in their 20s, 30s or 40s

what their own or the global situation will be like in their 60s, 70s, 80s or 90s. This has little to do

with financial education and will mostly be influenced by things over which they have very little

control.

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This means that it is interesting to note that the solution to individual money in late life that

governments of various colour over the last two decades have fixed on – education and financial

capability – seems quite far from the structural causes of the problem. But since the start of the

new century, the ‘ability’ or ‘capability’ of individuals to act as informed consumers has assumed

new political importance. What we observe clearly emerging through the 2000s in government

policy documents is two complementary but both dominant discourses of ‘financial capability’. The

first is that the solution to structural problems in the provision of late life financial welfare and in

market failures is to educate individuals and create even more differentiated financial products for

them to choose from. The second is that people (rather than governments) as individual consumers,

could act as market regulators, through using their consumer power, if they were sufficiently

‘financially capable’.

This is, then, the highly individualised discourse that has carried through into the ‘Lamborghini’

pension policy, and the implications of it are important. By presenting the problem of accumulating

sufficient income in later life as one of lack of education and advice, this enables government to say:

‘if we give our citizens enough education and make them financially capable, then if they do not

have enough money in later life, it is their fault and not ours’.

How does government express these ideas?

In this section I explore how the subtle use of language in everyday policy documents, leads to this

form of thinking. We see these two strands – the solution of education, and consequently citizens

playing a role as market regulators – in one of the Financial Services Authority’s earliest documents:

…the aim of the consumer education strategy is ...to help consumers make informed choices

and manage their financial affairs better. It should also, through growing consumer

pressure, increase competition in financial services markets, leading to innovation, better

quality and better value for money …

(FSA 1999: 3)

While this extract sounds quite sensible, when it is examined closely, we see that it is individuals that

must change their behaviour to meet the needs of the market, rather than the other way round.

They are no longer citizens of equal value to the State but now consumers who must play their

various responsible parts in the functioning of the financial services industry. It is language like this

that serves to construct failures in the government project for the provision of financial welfare in

later life through the private sector not as the result of flawed government policies, but rather a

result of flawed people. Following the logic in extracts such as these, if the financial services market

does not work efficiently, does not lead to innovation, offers poor quality and poor value for money,

it is not the fault of government in designing the system, but of individual ‘consumers’ for not being

sufficiently well informed.

The language that failures are the fault of individuals rather than systems continues across multiple

policy documents throughout the decade. Here we see it in an extract from a Financial Services

Authority report in 2003:

Consumers are grappling with worries about their pensions and saving, insurance protection

and build up of debt. There remain high risks to consumers from inadequate understanding

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of financial concepts and products, and this at a time when consumers are increasingly being

asked to take on more responsibility for their own long-term financial planning.

(FSA 2003: 3)

In analysing this kind of comment, it is notable that the political and economic environment which

has shrunk state provision and created the observed high risks to consumers is not the subject of

comment. While the high risks are recognised, these are here interpreted simplistically, and

wrongly, as resulting simply from the ‘inadequate understanding’ of financial affairs by consumers.

As noted above, risk to money comes from many places, mostly well outside the control of

individuals, such as interest rates, investment rates, currency exchange rates, stock market returns,

the value of capital, recessions, changing markets, unemployment, family structures, poor health,

increasing longevity and so on.

The failed consumer is observed in many places, as in this extract from a Treasury report from 2007:

... People do not shop around for financial products, they are insensitive to price and can

often end up buying the wrong thing; either failing to understand the financial risks they are

taking or insuring risks that they do not face...

(HMT 2007: 6)

We again see that government discourse is highly individualised. The citizen consumer is blamed for

failures to secure long term financial welfare over the life course because he or she continually does

“the wrong thing”. Government’s role is simply absent. The implicit solution to the problem is to

become a ‘better’ citizen. According to extracts like these, that will mean avoiding the

consequences of doing “the wrong thing”, which is the counterpoint to “the right thing” that

implicitly would be done if citizens were more financially capable.

Consumers doing “the right thing” is also key to Otto Thoresen, a leading figure in the financial

services industry who led government thinking in advising on a generic financial advice system in the

2000s, and has just been appointed as Chairman of NEST, the national workplace pension scheme.

Thoresen poses the solution of creating more capable consumers in this way:

... For consumers, doing the right thing with money will be easier because they will

understand their options and be able to approach the industry on a more equal footing...

Making the right financial decisions means that more people will enjoy the financial security

and independence of having saved and having protected themselves and their families from

the unexpected events in life that can tip almost any of us into financial crisis…

(HMT 2008: 2)

We once again in this quote see that the problem is framed so that if citizens take the “wrong

decisions” it is their fault if their families and children fall into ruin. There is no room in this language

for us to think that perhaps it is the State that should be providing safety nets for individuals and

families. But most importantly also, there is never any analysis of what “the right thing” is. Who

decides what this is, and when do we judge? The Thoreson report was written in 2008, the

beginning of a global financial crisis that saw equities tumble, banks fold and widespread recession,

none of which was foreseen by the financial advisers who presumably, under this construction,

ought to have known was “the right thing” was. It is unclear in the context of the 2008 global

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financial crash what even the most financially capable person was supposed to do, since there were,

effectively, no options. Similarly for those who have saved all their lives but have been forced in the

last few years to turn their pension into an annuity at a time of historically unprecedented low

annuity and interest rates, what was the “right” investment? These are matters that were

unavoidable and outside their control.

The “right thing”, especially when thinking across the whole life course, is a myth. Even people who

have tried to conform to government expectations, been prudent financial planners and responsible

savers, have endured falling interest rates, poor returns on savings and investments, and capital

losses in financial markets. Complex lives, contemporary history and economic times have left them

with dwindling money and few options.

Since the global financial crisis with its devastating effects on people’s prospects and incomes, had

nothing to do with the skills, knowledge or attitudes of individuals but was instead about global

events outside their control, this may have been an opportunity for governments to consider more

collective solutions to the problem of financing later life. However, there has been no sign of this

happening. We continue to observe explicit attempts to make us think this is an individual problem,

for example in this recent quotation from Caroline Rookes, the Chief Executive of the Money Advice

Service, the UK statutory body for financial capability and a key player in delivery of the new pension

reforms:

We are all vulnerable to events around us, from a global financial crisis to a personal health

issue, events that can be completely unpredictable, opening or closing a huge range of

doors. To be capable of dealing with those events effectively we need the right skills and

knowledge, appropriate attitudes and motivations, and opportunities to act.

(MAS 2013: 1)

Although at first blush this, as ever, sounds sensible, underlying this sentiment is the core idea that

with the right financial education citizens can individually, regardless of what has happened in their

lives, financially overcome such problems as the global financial crisis, or a catastrophic stroke, or

the onset of dementia, or even unexpectedly and against all odds outliving their life expectancy

perhaps to extreme old age such as 110 or 115.

Conclusion

By using this language and framing the debates in this way, a number of effects can be noted. Most

importantly, the dominant debate in these spheres is about how to educate people to make the

system work better. Very little else gets discussed. By controlling the discourse, non-market-based

discussions of welfare are closed and any need for examination of the structural causes of inequality

in old age is made invisible. The discourse prevents critique of the individualisation of risk and

market provided welfare and service delivery, and failures of policy become the failures of

individuals as regulators as well as their well-established failures as consumers. The dominant idea

of delivering adequacy in personal finances via the financial services industry is unchallenged, and

any analysis of social inequalities in later life is marginalised.

When considering these important policy arenas it is important to consider not only what

government and other powerful policy actors say and do, but how they say it. The discourse

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determines what gets done and how we respond. It opens up some “allowable” conversations, and

closes down others. In this context, by making the conversation one about the education and skill of

the public, market based solutions are the only solutions discussed. Not only are collectivist

solutions sidelined, but it also means that means that when things go wrong, this is conceived of by

all as the fault of individuals rather than the fault of government.

Implications for Practice

There is a high level of enrolment of professionals and service providers in the financial capability

agenda, even those who are not directly involved in giving advice about benefits, pensions, debt and

money. Increasingly, those working with older people in other domains such as healthcare, social

care, housing and more widely in the voluntary sector are expected to provide and promote the

financial capability agenda. As more and more social participants and actors are drawn into this

government agenda, there is less and less reflection and critical appraisal of the effects of this

agenda on public debate, nor on how people come to view themselves and their lives. It prevents

our thinking about the much bigger political picture, the much wider societal structures. It prevents

our asking whether, by agreeing and enthusiastically participating in the delivery of financial

education, advice and support, we are perhaps unwittingly promoting policy directions that may not

serve the best interests of older people more collectively. It also engages professionals and service

providers in the culture of blaming individuals for their perceived shortcomings and failings if they

have money problems, rather than seeing these as the outcome of structural and institutional

problems in wider society.

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