Beyond nudge

I’ve just attended a very interesting seminar at the Policy Exchange on how to encourage a more sustainable savings and investment culture. There was a lot of technical expertise in the room and I was left somewhat floundering. But I could see that everyone agreed the ‘nudge’ of auto-enrolment in personal pension schemes, something that comes into force in the UK in 2012, was a good idea.

I’ve just attended a very interesting seminar at the Policy Exchange on how to encourage a more sustainable savings and investment culture. There was a lot of technical expertise in the room and I was left somewhat floundering. But I could see that everyone agreed the ‘nudge’ of auto-enrolment in personal pension schemes, something that comes into force in the UK in 2012, was a good idea.

There also seemed to be a general consensus around the need for long-term cultural change with regard to savings and investments. That is, we need to become a culture that values them rather than one that does not. ‘Nudges’ will only get us so far, and it is not even clear what their long-term effects will be. If default enrolment becomes the norm in a non-saving culture, isn’t there every chance that opting straight out will become the norm for those that don’t save now?

Here are some ideas about how to change the culture around savings and investments.

• Education – teach kids about the different kinds of investment and savings and the reality of the situation they will face in terms of pension provision. Connect this to how they think about their own Child Trust Fund. Treat them by default as savers not spenders.
• Public campaigns should make people aware that the average middle-class earner is perhaps two or three months’ pay cheques away from homelessness. People should be afraid of having not saved. This awareness should be communicated in simple emotional terms, not in terms of reams of legalistic information.
• People should also be made to feel a sense of opprobrium if they don’t save. It is often said that the social welfare system disincentivises saving. But this is not necessarily true. Germany has one of the most lavish welfare systems in the world yet Germans still feel that not saving is somehow wrong.
• Create a moral narrative about how saving is good. Moral norms are the most powerful and once bedded down in the culture the most long-lasting and self-reinforcing. Think of drink-driving – people don’t get drunk and then drive because they think it is wrong, that they are not the kind of person who does that. It’s also a publicly enforced norm – if you’re down the pub, chances are your friends won’t let you drink and drive, as they will all find the idea abhorrent. Moral norms are also the simplest to communicate effectively.
• When creating moral norms think of what is already there – don’t try and reinvent the wheel, tap into existing norms such as the British people’s valuing of self-reliance.
• In terms of investment, create a connection between it and the real economy. Issue bonds that actually capitalise UK companies rather than ‘leaking’ abroad. Create bonds that connect to local communities, focussed on certain sorts of investments.
• To recreate trust in investment, intermediaries are going to be all important. They will also help to simplify investing. Investment schemes should be as easy to understand as mobile phone tariffs, and the companies that provide them should seek to establish an ethos the small-time investor can identify with and trust – a Co-op scheme, a Virgin scheme, a Tesco scheme etc.

But most of all, in order to save, people have to spend less. Credit that is not for investment should be harder to get than it presently is.