Blog: Who pays the price of long short-termism?

by Susan Murray, DHI Director

Today, Storm Ciarán is turning people’s lives upside down.  For some people, the impact has been devastating and will last long after the news cameras move on.  

Photo credit: Eileen Groome

The increasing frequency of storms has got me thinking about building standards and transferring of risk.

Again and again advisors have recommended stronger building standards to cope with the effects of climate change – higher wind speeds, heavier rainfall and intense heat to name just three.

But we have seen little change in those standards. A strong industry lobby against any changes has argued that changes would drive up costs.  

But who really pays?

Our weather is changing and we need to prepare our buildings for the changes. A series of papers from 2013/4 from the National Building Standards are fascinating.  They deal with everything from excess heat, drought, wind, flooding and subsidence - if you get that sinking feeling, it could be a sinkhole as we will be seeing more of them.

So why are our buildings not more resilient and providing safe refuge in a storm?

Reading the NBS papers, comments jump out like “Consideration should be given to specifying single car-width garage doors in preference to double car-width – the increased size can enhance wind deflection… and the roof can be subjected to additional uplift action, thereby increasing the risk of the roof being damaged.”  

Do you think all the people buying shiny new homes with double garages know that they have a higher risk of their roof blowing off?

Long after the developers have moved on to new sites, some home-owners find they are carrying the risk of the lower standards and any resulting repair costs. Even with the current standards, increasingly there is evidence of “weak compliance” and “indifference around build quality” according to the Hackitt Review of Building regulations. 

A new industry is emerging of professional snagging companies, one of which is now a hit on social media after capturing their horrifying findings on youtube and TikTok.  However, not everyone can afford a professional snagging company.

Standards matter. 

But if the current regulations are not being enforced and politicians continually bow to pressure against raising standards, this will cost us all more in the long run.

I was introduced to a new acronym this week NIMTO – not in my term of office.  Building standards might not be seen as a vote winner but they matter. We need to end this long short-termism and face up to the challenges ahead or ultimately the state will be picking up the pieces of shattered lives.

Further reading:

UK Housing - Fit for the Future, Climate Change Committee

The Hackett Review: Independent Review of Building Regulations and Fire Safety, Uk Government

Blog: Stressed out - the cost of shifting risk from institutions to individuals

by Shelagh Young, DHI Engagement Lead

Do you do a good day’s work after a poor night’s sleep? Do financial worries stop you focusing on the other things that matter in life - on family and friends, on your health or your job? 

Stress and anxiety have been the leading causes of lost working days in the UK for some time. But, despite increased productivity being seen as an essential component of economic growth, the impacts of stress and anxiety on the productivity of people who feel well enough to still go to work is comparatively less well measured or understood. 

Last month we reported that more than one in four Scots are losing sleep over their finances. In July the ONS reported the weakest annual growth since the first quarter of 2013 (excluding the Covid-19 pandemic period) and the weakest productivity output of worker per worker since 2009.

Are these two dismal facts related?

We think so. The research charity Centre for Mental Health calculates that mental health related  presenteeism, defined as being present at work but not fully functioning, costs the UK economy at least £21.2 billion a year in lost productivity. 

In the light of this it is obvious that government needs to lead on reducing stress and anxiety in order to boost wellbeing and therefore productivity. It cannot offload all of this responsibility onto employers, especially as not everyone is employed. Employers can rightly be held to account for reducing work-related stress and anxiety but the wider causes are not theirs alone to solve.

One of these sources of stress is the impact of what the Institute and Faculty of Actuaries (IFoA) calls The Great Risk Transfer. This is best described as a shifting of the burden of risk, such as ensuring our workplace pensions yield sufficient returns to keep us out of poverty in retirement,  from institutions to individuals. The IFoA argued that significant changes relating to pensions, work, health and insurance are placing more of the burden of risk on individuals with potentially socially and economically undesirable outcomes. 

We will be exploring our  research on this topic in a forthcoming lecture at the University of Edinburgh Business School. This work, which was supported by the IFoA,  found that the changes the IFoA identified were often poorly understood by the people most affected and not always their top priorities. For example, while the IFoA included precarity at work in its exploration of risk transfers, our research revealed greater front of mind concerns about precarity in housing.

We found that most people had a very partial understanding of the financial risks they were facing but that did not mean they were unaffected by financial risk-related stress. We heard a lot about the stress of coping with financial responsibilities and that was before the cost of living rose so dramatically. This matters because stress is not just a problem of presenteeism or individual unhappiness. Chronic stress causes long-term and profound health problems including weight gain, heart disease and strokes. All of these are a major concerns when it comes to costs to the public purse. 

We will be following up on our work around risk soon to find out more about what could be done to enable people to cope better. But the one thing we know already is that, while actuaries are professionally trained in risk-management, most of the rest of us are not. We need people to stay healthy enough to be at work but we also want their minds on their jobs for the sake of productivity. It is simply not good enough to design and implement policies that overload people with ever greater and more complex responsibilities which mean, as the FT described it earlier this year, we all need to be actuaries now.

ENDS

Click here to book for our upcoming event in partnership with the University of Edinburgh Business School.

Press release: New research finds risk overload

28th September 2022

Risk overload and a deep lack of trust are storing up future financial problems, new research finds:

We have become a nation of overburdened sceptics when it comes to managing our financial wellbeing, which is storing up massive issues for the future, according to a new study by the David Hume Institute. 

As few as one in ten (11%) “entirely trust” the UK Government when it comes to getting advice or guidance on financial matters – with levels of trust in the Scottish Government faring no better.  Only two in ten (21%) trusted “companies which provide financial products such as pensions” as a source of information.

Through a series of one-to-one online interviews, group discussions and a commissioned survey of over 1000 people living in Scotland, the research also found that 36% of people surveyed said they did not know who they could trust for advice or guidance. Of particular concern were those immediately affected by recent pension reforms, with 28% of over 65s and 32% of those aged 55 to 64 stating they did not know who to trust. 

Following a clear shift in responsibility for financial security from government and institutions to the individual, another 32% did not know what advice or guidance could help them.

Sources of advice which were praised in one-to-one interviews for their quality, trustworthiness and independence included Martin Lewis and Citizens Advice Bureau, while over half (52%) in the survey identified family and friends as their source of reliable information.

However, the study, The Great Risk Transfer, also found that stress, fear, stigma and embarrassment were holding back many people from seeking guidance and undermining their ability to absorb relevant information about the matters that affect their wellbeing, be that pensions, insurance, future health provision, housing or employment.

Consequently, the report concludes that financial risks are intensifying, creating an unfair and increasing burden on the individual. Government policy built on the premise that more choice is always good now needs to be reviewed: many people do not have more choice, just much more risk and less of a safety net should things go wrong in their lives.

Commenting on the study’s findings, Susan Murray, Director of the David Hume Institute, said:

“Trust is clearly a barrier to seeking advice but there are also other cultural and emotional factors at play, including stress and embarrassment and lack of knowledge that stop people from dealing with the financial risks that impact their lives. 

“The research highlights how governments and employers have shifted the burden of financial risk increasingly to the individual who is expected to understand and manage the many choices they face when it comes to pensions, health, housing and employment. Yet in reality, circumstances can not only limit choice but can also mean that many do not know the myriad of decisions they have to make. Indeed, a good choice today could easily be a bad choice tomorrow and without government safety nets, a huge problem awaits us all in the not-so-distant future unless we begin now to talk more openly about money and re-evaluate where the burden of risk is falling.”

“Many of the participants in the research described the barriers but most expressed a strong desire for improved access to relevant information and guidance. Trust in non-profit sector providers, especially Citizens Advice Bureau, was significantly higher than the most trusted financial services providers. So, while the answer is not simply more information, long-term stable funding for the most trusted providers must clearly be a strategic priority if the goal is to better equip people to manage financial risk.”

The research was commissioned by the Institute and Faculty of Actuaries (IFoA). Nicholas Chadha, who is part of the Scottish Board of the IFoA, said:

“This is a powerful independent report from the David Hume Institute based on rich research and compelling individual testimony. While primarily based on evidence from Scotland, the challenging recommendations clearly have wider application and resonance.  As part of our public interest commitment, we look forward to a vigorous debate on the findings at a time when the challenge to individuals and communities to understand and calibrate risk is so vital to their financial wellbeing.”

ENDS

Watch the recording of the research launch event:

Notes to Editors:

• The Great Risk Transfer: have we got the balance right? was part-funded by the Institute and Faculty of Actuaries Scottish Board Endowment Fund.

Press coverage: Unlucky generation face risk of poor retirement

David Hume Institute in The Times

26th September 2022

Successive policy decisions by Government and employers have created an “unlucky generation” of workers in the UK labour market, who face far greater financial risks in retirement than their predecessors and are less well-equipped to deal with negative consequences.

Less than half (45%) of 1,000 people surveyed across Scotland recognised or understood the increased complexity of the choices about how to invest and when to access their pension pots, nor how this could affect their lives. 

The survey also suggests that younger workers and those from lower socio-economic backgrounds are potentially most at risk from investments underperforming. Just three in ten (31%) 16-34 year-olds were aware of the amount of financial risk people have to manage in their lives as a result of fewer employers offering final salary (defined benefit) pensions. This is compared to 60% awareness in the 55-64 age group. 

There was also a split between social groups, with only 37% of C2DE workers saying they understood these risks. This compares to half (50%) of more affluent ABC1 workers acknowledging the choices involved.

Yet while the increase of risks people face is the result of deliberate policy decisions by Government and employers to encourage more individual consumer choice in the pension market, the survey suggests most people still expect Government to safeguard their wellbeing if things go wrong. 

Over half (52%) of people surveyed said that Government ought to be “entirely” responsible for ensuring that everyone, including vulnerable people, has a living income and decent standard of living in retirement. Only 23% placed that responsibility entirely on individuals. 

Shelagh Young is one of the authors of the report, The Great Risk Transfer, which exposes the increasing burden of risk that is falling on the individual. She commented:

“Despite the fact that a majority of people clearly expect Government to take responsibility for making sure retirement incomes are sufficient, comparatively few understand that Government expects them to live by their own choices – even if, as in the case of pensions, there is now a far higher chance that things will go wrong.

“Our research showed that many over 50s often described themselves as being part of a ‘lucky’ generation that has benefitted from better access to affordable housing and better returns from employer protected pensions, contrasting an ‘unlucky’ cohort in their mid-forties and younger facing considerable risk to retirement income.

“As the cost-of-living crisis ramps up and financial pressures for workers grow, we need to see ministers working closely with businesses on steps to help people de-risk retirement. Failure to do so may result in the millions of those who miss out squarely blaming government for a failure to safeguard their future livelihoods”.

ENDS

Link to online article

The Great Risk Transfer was commissioned by the Institute and Faculty of Actuaries. It will be published on 28 September 2022 with an online debate hosted by Susan Murray, Director of David Hume Institute held on 3 October. Watch the recording of the event below.

DHI teams up with the Institute and Faculty of Actuaries

Press release from the David Hume Institute

15th February 2022

The David Hume Institute and the Institute and Faculty of Actuaries are teaming up to learn more about how people in Scotland are managing financial risks.

We are pleased to announce a new partnership with the Institute and Faculty of Actuaries (IFoA) exploring the ways in which people think about and manage financial risks and the practical measures that might help them.

The IFoA has been campaigning since early 2020 on what it calls ‘the Great Risk Transfer’ which is the trend to transfer risks from institutions – such as employers, the state and financial services providers – to individuals who are often not well equipped to handle those risks.

Drawing on examples already explored with IFoA stakeholders, including changes in pension provision and access to affordable insurance, we are working with groups and individuals to better understand their perceptions of the risks they face. We also want to find out what helps people when they make decisions and take practical steps to mitigate risks.

Nicholas Chadha from the IFoA Scottish Board said:

 “We think there are opportunities to ease the burden for consumers, who are not often well-equipped to manage complex risks by shifting prime responsibility for certain risks back towards institutions. New products and services are also necessary to help consumers to make informed decisions which lead to better outcomes for themselves and for wider society. 

 Our recommendations focus specifically on pensions and insurance, in which actuaries’ skills and experience enable them to contribute to solutions. They include the development of Collective Defined Contribution schemes, investment pathways for drawing down pension pots, and defining a minimum level of insurance protection needed by all.

 Working in partnership with the David Hume Institute will help us further develop our thinking and our policy recommendations in this area.”

 Susan Murray, Director of the David Hume Institute said:

 “The Great Risk Transfer reflected much of what we heard from individuals during our previous research on The Action Project. We heard from households that the ability to plan for the future is severely compromised by the pressures of everyday financial challenges. 

 This partnership allows us to explore the implications of that for the IFoA’s policy recommendations as well as enabling us to reach out to a diverse range of people. Our work will focus on finding out what people consider to be the most important areas of financial risk for them, the ways in which they have addressed or plan to address them, and what barriers they might face.”

Insights from the research will be published later this year.