FEPI Secretary General
The Savings Revolution
Household financial savings are making headlines today. This is hardly surprising, given that everything seems to revolve around these savings, from the financing of pensions to the development of a more sustainable economy, the very survival of old Europe and our ability to resist unbridled financial capitalism...
Whichever way you look at it, household savings, which are already very high in Europe today, are set to grow further. The ageing population, which is undermining pension systems (whether the pay-as-you-go pensions, dear to the heart of the French or Italians, or the funded pension schemes developed in other countries such as the UK or the Netherlands), is pushing households to increase their savings to protect themselves in the face of uncertainty.
At the same time, pension reforms already under way or still under discussion are pointing to longer working lives, and it is precisely in the late phase of their working lives that households save the most.
Finally, shorter-term uncertainties, such as the COVID-19 crisis, are pushing households to further increase precautionary savings, both for their own short-term needs and to prepare for future tax hikes when the cost of stimulus packages will have to be paid.
All in all, we are seeing a growth in household financial savings, and these savings are being held for longer and longer: the holding period of a life insurance policy in France already exceeds the duration of the average marriage...
In the face of this pressing consumer demand, the industry's response is not (or no longer) self-evident. Indeed, we are witnessing the end of traditional endowment products. For decades, savers were able to rely on tax-advantaged products, which offered reasonable returns and guaranteed capital; these products in turn directed their savings towards Treasury Bonds, helping to finance the State budget. And providers (insurers) made a nice profit in the middle without taking much risk.
Interest rates have fallen steadily over the last twenty-five years, as we all know. Throughout this period, the steady decrease in rates has fuelled regular capital gains on life insurance funds, contributing to the good performance of these financial products.
Today, with these rates being very low, traditional life insurance contracts no longer provide any return to savers, who see the value of their savings fall, after fees and inflation, and realise that they are no longer protected in the manner they thought they were.
For its part, the State can access financial markets directly, raising funds at a low cost and having less need to tap into household savings.
Insurers are caught between falling rates and capital guarantees. For fifteen years they have been looking for a product that can replace euro-based funds, but no financial innovation has been or will be able to offer both returns and capital guarantees. This was a historical anomaly, driven by the convergence of rates and the long period of regular yield reduction across Europe, but it seems to have reached its natural limits.
Asset Managers also need to reinvent their offering, with less focus on ‘performance’ and more on building solutions tailored to the needs of savers and investors, in terms of time horizon and risk profile.
Today, savers must regain control of their savings, and in particular set themselves the risk/return ratio that suits them, according to their plans, their attitude towards risk and their investment horizon. Indeed, there is a difference between investing for a long period of time with solid reserves and investing for a short period of time when one has a vital need to access one's funds at a moment’s notice.
In order to regain control, savers must be able to rely on their advisors, whether independent or within banks and insurance companies. These advisors can no longer simply 'push' their products with tax arguments - there is no ‘magic’ answer any more, and clients must be able to make their own choices.
Taking refuge in a technocratic expertise could discourage many clients from making the necessary decisions, and would be likely to put the advisor (or his network) in a very delicate situation on the day that this expertise fails, which will inevitably happen in an area as complex and unstable as the financial markets.
The key for advisors will be to succeed in engaging their clients in a genuine dialogue around their needs, their projects, their time horizon, and their perception of risk, to enable them to make their own decisions in full knowledge of the facts.
And to do this, advisors must be able to rely on systems that support them in their mission of advising customers, not robots that would take their place, but proper tools at the service of their profession.