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In her book Creating Character Arcs, K.M. Weiland describes the animating principle of great fiction: “the lie the character believes”. Ebenezer Scrooge is convinced a man’s worth is measured by money; Jane Eyre thinks the only way to earn love is through servitude; the Wolverine of Logan believes caring for people leads to suffering. The lie prevents the protagonist realising their potential – more than any external hindrance, it stands in the way of progress.
Professions, too, have lies they believe. Most often, they show themselves in meetings. The topic touches on an issue that is large and difficult to handle, the conversation slows and circles, and then, with the unerring instinct of a protagonist avoiding psychological pain, someone steps forward to tell the lie. “Rather than confronting this question, why don’t we agree to believe something we wish was true?” In the public sector, that lie is the power of education.
For decades, governments have responded to everything from obesity to drug abuse to fake news by treating public awareness and understanding as an all-purpose silver bullet. Sometimes, this works. The introduction of high-quality relationship and sex education helped reduce teenage pregnancy in England by 55 per cent between 1998 and 2015. Fifty years of drink-driving campaigns cut deaths by 90 per cent. But these sustained, cross-political successes are rare. More frequently, the effort increases the burden on teachers and students, without producing noticeable results. Few examples illustrate this better than saving for retirement.
One of the most profound yet overlooked social shifts of the last 20 years has been the decline in defined-benefit company pensions, which have been replaced by ones workers must fund themselves. Whereas in the past, the responsibility for saving and managing retirement funds fell on firms, now it rests squarely with the individual. Which raises a problem, because people aren’t very good at managing their finances.
Part of the difficulty is the UK’s pension system, which is so fiendishly complicated that even the Bank of England’s chief economist confesses to “not being able to make the remotest sense of pensions”. But the more fundamental issue is the UK population’s desperately poor understanding of basic finance.
According to the Financial Conduct Authority (FCA), 46 per cent of UK adults have “low knowledge” about financial matters. This doesn’t mean they don’t know how a debt security is structured; no, this is the kind of confusion which makes it hard to understand what "no-claims discount" means, or why buying a car upfront is cheaper in the long run than getting a loan.
If similar ignorance was revealed about the works of Shakespeare, say, or the history of the Second World War, there would be instant, harrumphing outcry. Instead, quietly and repeatedly, people with insufficient knowledge or experience are asked to handle complex, risky, multi-decade financial instruments, with life-changing consequences if they get it wrong. The result is a looming crisis, to which no-one can proffer a solution.
To understand how we arrived in this situation, it helps to revisit the recent history of pension reform. This means going back to March 2014, when Chancellor George Osborne shocked the pensions industry by announcing that he was giving over-55s the ability to take their pension in cash rather than buying an annuity, which would guarantee a secure retirement income.
The aim was to stimulate the market in pension products – and retirees jumped at the chance to do something different. Three years on, taking a lump sum is “the new norm”, as a recent FCA review put it.
The initial fear was that pensioners would squander their savings on cars or holidays. In practice, the biggest problem turned out to be not too little caution, but too much. Rather than shopping around for the best investment, those that do take their pot are blindly selecting the default “drawdown” offered by their pension provider – a riskier option that often comes with higher charges.
Many don’t even know what they’re doing: fully 25 per cent of people who’d accessed a defined contribution pension in the last two years told the FCA they weren’t sure how they’d done so.
Additionally, over-55s are being targeted by scammers, who are taking advantage of their disorientation to cold call them with investment hoaxes. In the past three years an astonishing £43 million in pension savings has been stolen, according to official figures, with £5 million of that taken in the first five months of 2017.
So what’s the solution? When the Work and Pensions select committee discussed the issue last year, it reached for the lie policymakers believe.
Alongside measures such as banning cold calling, the committee and its expert witnesses repeatedly emphasised the need for “advice and guidance”, backed up by “an increase in the level of financial education”. What went unmentioned was that this plan was already underway, and was already failing.
From September 2014, financial education became compulsory in all state schools as part of maths and citizenship lessons. But, three years on, the impact is non-existent. Research from the London Institute of Banking and Finance in 2016 showed 58 per cent of 15-to-18-year-olds did not receive any form of financial education. Two out of three teachers told the Money Charity their school lacked expertise in the subject. (Inevitably this prompted calls for, you guessed it, more education.)
The problem isn’t the ambition: the UK’s level of financial understanding is a national scandal, with a stream of ruinous consequences. It’s the way this vague promise of education – implemented, as so often, without extra money for schools to improve their expertise – is used to obscure and postpone real action on the most pressing social problems.
Such is the persistence of the divide between rhetoric and reality that the most plausible explanation is not political, but psychological. The promise of education allows more sensitive politicians to believe that something is being done, whereas the tougher-minded can reassure themselves that, if people fail, it’s their own fault for not making the most of the lessons that were available.
In both cases, the lie serves to justify existing market arrangements – or, as in the case of Osborne’s pension reforms, their expansion. The evidence may show that people are not the constantly vigilant, fully-informed consumers of neo-liberal theory, but, through the semi-mystical power of education, is it just possible to hope that they may become so. The lie conceals the failures of market discipline, even – perhaps most of all – from the people enforcing it.
There are other ways to do post-defined benefit pensions. Rather than attempting to make investment decisions themselves, workers could pool their savings into “defined ambition” schemes, so that the costs and risks are shared. As the Work and Pensions Committee put it recently when it announced an inquiry into the idea, these collective schemes “take the big central decision of pension freedoms out of retirement planning, and also much of the risk.”
But even if this policy is implemented, and it is supported by the Labour Party, it still leaves ultimate responsibility in the hands of the individual. The days of guaranteed retirement incomes are over. We must spend less, save more, and manage our own money – a task for which we are profoundly ill-suited.
No wonder politicians prefer to believe in the power of education. Faced with this range of options, it at least appears to hold out hope of a permanent solution.
But now, for the first time, technology is supplying an alternative. Not for all the multifarious policy dilemmas education is expected to solve, but in personal finance, where the combination of defined goals and accessible data are making it possible to automate financial decision-making.
A major step towards this future took place last weekend, when the long-awaited Open Banking regulation came into force. The initial scope is narrow and the system may be initially hard to use. But the directive – which forces the nine biggest UK banks to open up their transaction data to third parties – has the potential to revolutionise the industry.
Take bank account switching, the dental flossing of personal finance; something we should all do, but invariably let slip. For years, governments have attempted to educate consumers about the importance of shopping around – and, for just as long, they have failed to produce any effect. Since 2013, only 5 per cent of UK account holders have changed bank; by comparison, in the same period, 44 per cent of marriages ended in divorce.
By opening up data on products and transactions, Open Banking makes it possible to bring this often cruel charade – sadly, the more someone is exploited by hidden fees, the less likely they are to switch – to an end. It’s not just that you’ll be able to see the differences between bank accounts. You’ll also be able to use your own data to find out which one is best for you – then make a change at the press of a button.
That's just the start. If you're taking out a loan, or buying insurance, or gas and electricity, the same principle applies. Instead of being forced to act without knowledge, we can delegate to a system that knows us better than we know ourselves.
This might sound fanciful, but in a small way it's already happening. Apps such as Chip and Plum look at your spending patterns, figure out how much you can afford, and save it automatically. Brolly, an insurance startup, is using the data it collects from customers and providers (such as when a company gives its premiums their annual hike) to create an automatic policy switcher, which launches in March 2018.
"Paying too much for insurance is not a rational decision, it’s usually a factor of the cost of switching - a mix of inertia, lack of understanding, complex products, bad UX," says Brolly co-founder Phoebe Hugh. "By using technology to understand the customer’s needs and scan the insurance market, we can transfer the burden of decision-making away from the customer."
Brolly's system still defers to the customer for final approval. But eventually, you might let this kind of finance software take over altogether, auto-switching your motor insurance or refinancing your mortgage. Why not? It’ll undoubtedly do it better.
Read more: To change how you use money, Open Banking must break banks
Open Banking may yet fail to bring meaningful change: with the banks missing deadlines and briefing against it, it will need continuing government support if it is to deliver on its promise. Nevertheless, it provides a model for regulatory reform. Open up data; make it secure; give people control over who has access to it. Create a market and let businesses do their work.
This approach could be used in utilities across the board, from mobile phones to water to energy. But the most obvious target is the pension industry, which suffers from such intense fragmentation that an estimated £400 million in pensions lie unclaimed, simply because people don’t know they could be taken.
Work on this is already underway. In October 2017, the Department for Work and Pensions approved the “pensions dashboard”, a scheme to integrate pension data from companies and the National Insurance database. But although ministers described it as “revolutionary”, the project is long overdue, and many expect its 2019 deadline to slip or its final form to contain omissions (for instance on public sector pensions). Like Open Banking itself – which has not been advertised or explained to the public, despite affecting nearly every single person in the UK – it seems unclear whether the government understands its potential.
No doubt some of the confusion can be explained by the technical complexity of the project. But, after such extensive delays – “Do you think in your lifetime you will see the Pensions Dashboard?” the chair of the pensions committee plaintively asked minister Guy Opperman – it is possible to pinpoint a more fundamental resistance. The men and women who run government think about creating better consumers. They see technology as a tool of market education, rather than something that can replace it.
This is why the automation of economic decision-making is so profound: because it offers an alternative to this consensus. No longer do we have to maintain a belief in the arrival of the fictional homo economicus. Instead, the market can be policed by tireless, hyper-rational machina economicus, which never forgets to save, and always hunts down the best deal.
This approach brings its own kind of problems. How do we ensure robo-consumers find fair deals? How do we prevent companies exploiting unprofitable customers? A great deal of work needs to be done to ensure they are more accountable than Google and Facebook (or, more to the point, uSwitch).
Yet, for all its flaws, this approach has one huge advantage: it is honest. It faces the problems it’s designed to solve directly, rather than evading them through an elaborate self-deception.
Everyone should believe in the power of education: it is, in a sense, what makes us human. (Literally: as homo sapiens, wisdom is our defining characteristic.) But if we are to help learners of all ages flourish, we need an education system that is focused on the task. Teaching students to read, think and live is hard enough, without having to form rational consumers at the same time. Let robots take care of that – after all, they may be the only entities that can.
This article was originally published by WIRED UK
