As 2024 closed out the UK Treasury took the unusual step of asking the country’s main financial markets regulator, the Financial Conduct Authority, to reinforce financial inclusion as part of its remit.
The Treasury said the FCA “should have regard to reinforcing financial inclusion . . . to enable individuals to access the financial services and products they need to fully participate in the economy”.
But there is a contradiction here.
While there is growing evidence of the Starmer government’s willingness to think about the investment infrastructure of the economy – the proposed national wealth fund, the push to build AI infrastructure and an initiative to merge local pension funds to create ‘mega’ funds with a broader investment remit – there has not been enough focus on households and promoting true financial inclusion for them.
This missing investment pillar, that of household wealth, if executed, could help fuel the economy and build financial security for households through the long-term.
This is especially crucial given that last year’s Scottish Widows annual report on pension savings revealed a rise in the percentage of people not on track for retirement, increasing from 35 per cent to 38 per cent – an additional 1.2mn people facing financial insecurity.
It was therefore unfortunate when the prime minister, early in his term, said ‘working people’ are not the sort to be involved in stocks and rental income. As a sentiment it seemed disconnected from a modern society characterised by a diverse labour market and aspiration.
Nor does it reflect well on a government whose central task is to elevate the trend rate of growth in the economy, partly, we are told, by the unleashing of a national wealth fund. Instead, Labour should embrace the goal of democratising the process of creating wealth.
Median household wealth in Great Britain was £293,700, according to the latest Office for National Statistics figures (2020-22), and the UK is the one country where the number of millionaires is expected to fall significantly in the next five years, according to the 2024 UBS Wealth report. This is a stark finding, in a country where wealth creation is integral to British culture and ‘growth’ is the current mantra of the government.
Helping women to invest more is one way of countering the pensions gap.
Economically, the prospect of a greater pool of savings getting directed into companies, infrastructure and even government bonds is good for output. More importantly, the possibility that a broad swathe of the population can build wealth from an early stage will help to alleviate the well-known problem of ‘working people’ not saving enough for their retirement.
Socially, a pro-wealth approach can have many dividends. If executed properly such a policy can greatly alleviate the stress of financial planning and contribute to much improved financial literacy.
Gender financial equality is also important. Women, for many reasons, invest less than men and they typically have less access to capital with which to do so. The OECD estimates that across Europe there is a 26 per cent plus gap in what women receive from pension systems compared to men. Helping women to invest more is one way of countering the pensions gap.
Changing the culture
So, if it is such a good idea, how might the new government support the rise of a broad wealth culture in the UK? There are several steps.
The first is education – led by straightforward pillars such as financial planning, planning for generations, the notion of building a portfolio and a sense of the long-term behaviour of asset classes, as well as their relation to the underlying economy. This should start at the secondary school level.
A second more difficult task is to provide the structure for people to invest – the Post Office might pioneer an approach where people can access low cost, diversified portfolios built from liquid ETFs, with a planning tool that helps them contribute to these portfolios over time, and a tax regime that penalises ‘trading’ and rewards a holding strategy.
In time, select private asset classes – from infrastructure to venture – can be added to core assets like equity ETFs and bonds, in controlled amounts. Equally, a new approach to household wealth can also be built on the back of the Isa programme.
People should be helped to understand and model their wealth with respect to their property holdings.
Research by professors Elroy Dimson and Paul Marsh shows that equities outperform property in the long run (when all transaction costs are accounted for). This would produce a more balanced view of wealth, and potentially alleviate the sense that households need to over invest in property.
If the above building blocks can be put in place, especially with the benefit of a pro-wealth tax regime for ‘working people’, the UK will be better off, with a more secure, prosperous household sector and a brighter future.
Mike O’Sullivan is chief economist at Moonfare
