“It’s our old friend being economical with the actualité.”—former Minister Alan Clark to the Matrix Churchill trial, October 1992
Those in charge seem to have become similarly flexible when taking care of Joe Public’s financial futire. On November 9th, Michelle Thomson MSP hosted a reception at the Scottish Parliament to launch a report from the David Hume Institute partnered with the Institute and Faculty of Actuaries (IFoA), titled The Great Risk Transfer: have we got the balance right? Its purpose was to discover how much people in Scotland understood key risks affecting their long-term financial health. A précis of the report is available here
With the dictionary definition of an actuary being “a person who compiles and analyses statistics and uses them to calculate insurance risks and premiums,” this would seem a dry and unpopular topic. However, Michelle Thomson may be the most business-savvy member the SNP has in the parliament and knows a financial issue when she sees one. As a result, over 60 people, not all of whom were actuaries, filled a large committee room.
The IFoA had been exploring the ongoing trend of transferring risks from institutions—such as employers, the state, and financial services providers – to individuals. They describe their results as the ‘Great Risk Transfer’ because it poses significant, social, financial, and political challenges that are, as yet, little understood. The report asserts:
“Far greater responsibility is being placed on individuals for managing their lifelong financial wellbeing than has been the case for most people living in Scotland since the establishment of the modern welfare state.”
The research shows causes of this trend to be complex, including increasing life expectancy, technological advances, changes in financial regulation and political choices. Four important areas of risk transfer were identified: Pensions; Work; Health; Insurance. The financial risks of needing to fund their own social care were a recurrent worry. As the report itself puts it:
“After the Second World War, there was a realisation that we were all in this together and there was an absolute need to make sure that everybody was provided with the minimum […] the [idea] the state provides support for all of us together
in all kinds of ways has been steadily eroded. Year by year, decade by decade. […] the 80s was the storm, whereby the state was withdrawing from all kinds of things in the aim of reducing state expenditure.”
This erosion of reliance on the state was supposed to be compensated for by the rise in private pensions, encouraged by schemes such as ISAs. Faith in this did not survive the raids made on private pension schemes by the likes of Philip Green and Robert Maxwell, to the point that the government was forced to introduce the “triple-lock” on state pensions. Though their value had been eroded, this did allow more stable retirement planning for the decade when inflation was trivial. That is now history.
Exploring people’s awareness of current trends and their personal ability to manage and respond to financial risks revealed two interlinked themes which policymakers need to consider.
- Cultural – what people know, how they feel and what they do to manage risk
- Structural – the wider social and economic system
Inflation recently grew to levels not seen since the early 1980s, with rapidly-increasing fuel, energy and food prices dominating. At a time when wages and social security payments have not kept pace a significant rise in the cost of living has been inevitable.
This result is not just an inability to plan financial futures, but ignorance of the tools by which they might do so. They focus instead on immediate financial challenges that recently intensified: heightened housing costs; insecure tenancies; insecure jobs, stagnating incomes; growing debt; living on a fixed income. The report tries to illustrate several relevant factors:
- Knowledge and awareness of risks to financial wellbeing
- Trust in information providers
- Stress, fear, stigma and embarrassment
- Inability to access and understand guidance and information
As all of the above demonstrate, the reliance any individual places on the state, employer or anyone else knot personally known to them renders financial planning and the risks involved unavailable to many.
So, while the state can be said to be “economic with the actuarité”, these difficulties are compounded by the absence of education in the tools people require to take up the slack. While mathematics and computer science may provide a grounding, aspects of commercial life must be picked up “on the job”. This may work for those going into Fintec, it leaves the bulk of people—from farmer to plumber— exposed to the Great Risk Transfer.
The full report may be found here.