Consumers are urged to engage in voluntary long term saving by expanding tax deduction rights. The Consumer Agency supports these plans for improving competition and facilitating easier comparisons between savings products.
According to the Agency, consideration should be given to extending the right to use such savings from retiring from working life to also cover situations of serious illness. Easing the condition regarding unemployment, which currently requires that unemployment has lasted for one year, should also be considered.
According to the Ministry of Finance's proposal, tax incentives for long-term savings would be extended to cover not only pension insurance, but also other savings products. Individual pension insurance products are currently an expensive alternative for consumers looking for savings options due to the high fees charged by insurance companies.
Competition between insurance companies has been minor, as costs are high across the board and changing the service provider during the savings term is not possible. The proposal includes the right to make that change. The Consumer Agency supports the proposal, as it would increase competition and thereby be likely to improve the quality of savings services and decrease the prices charged for them. Reducing the costs of managing savings would increase the amount of money the consumer saves every month and, as such, significantly improve the level of future pension security due to the long savings terms and resulting high multiplier effects associated with such schemes.
The Consumer Agency finds it necessary to draft a general legislative framework to govern long-term savings. Among other things, this would help prepare for situations where, parallel to pension savings, there might be a reason to consider directing tax incentives to other fixed long-term savings such as those for illness or treatment expenses. A general legislative framework would facilitate the technical implementation of these reforms and make the rules of long-term savings more familiar to savers as well.
Tax deductions also for savings linked to securities, mutual funds or an account
According to the proposal, savings under tax incentives could in the future also be invested in shares and mutual fund units. This would facilitate effective diversification of savings and varied investment strategies with high potential returns. Due to the higher risk associated with shares, savings could only be invested the shares of companies which are continuously traded in public markets and on whose financial standing there is sufficient information available as required by law. Long-term savings on a traditional bank account could also be supported by allowing tax deductions in the future.
A broad selection of products available for investing savings would facilitate the offering of varied alternatives for the varied needs of different savers. There is also demand for low-risk, simple products, which may have lower expected returns. Opening up competition as proposed is likely to ensure that markets will in fact offer appropriate investment products for all types of needs.
Savings put to use in case of unemployment or illness?
Reforming the taxation on long-term saving is closely linked to pension savings: as a rule, savings could only be withdrawn when the individual reaches retirement age as specified in the Employment Pension Act and withdrawing them prior to that time would only be possible in the same exceptional circumstances as stipulated by current legislation. The Consumer Agency proposes that the preconditions for early withdrawal of savings would be re-evaluated in terms of the condition pertaining to unemployment. Particularly in these times of economic recession, many pension insurance savers who have lost their jobs have found it unreasonable that they can't access their savings until they have been unemployed for one year. The ability to use one's savings after a shorter period of unemployment could help these individuals cope with problems brought about by the recession and would be equally justified as the need to use savings to provide for additional income during one's retirement years.
The Consumer Agency further proposes that falling seriously ill would be deemed acceptable grounds for withdrawing long term savings in a similar fashion as reaching retirement age. The ability to use one's savings to get treatment for a serious illness would be in line with the legislative proposal's basic principle that tax incentives should be increasingly directed at savings which serve the saver's personal needs. The ability to have a serious illness treated with the help of funds from long term savings even before reaching retirement age could have the effect of pushing back the saver's actual retirement age and, as such, would be consistent with the general objectives of pension policy.
Poor financial awareness among consumers calls for responsibility in marketing
Along with several other agencies and actors, the Consumer Agency is concerned about the fact that consumers have insufficient knowledge and awareness regarding finances in general and the financial products and services offered to them. This tends to make decision-making regarding these types of matters too random. Choices and decisions are often made purely on the basis of information and marketing materials received from service providers, despite the fact that many consumers do not have an actual ability to critically evaluate them and compare the various products offered in an objective manner. The problems that have surfaced are equally prevalent in the context of private pension insurance schemes and other savings and investment products. Responsibility in marketing should be called for even more than at present.
Fixed long-term savings are just one of the many savings and investment alternatives offered to consumers. Consumers also have needs for shorter-term savings. Due to this varied demand, markets are likely to continue featuring a multitude of savings and investment instruments, the choice between which is often quite challenging to consumers. If the selection of long-term savings products with tax incentives were restricted, the consumer would face the same challenges in making other savings decisions. The rules should be as similar as possible regardless of whether the consumer chooses a fixed long-term savings product or a shorter-term product.
Putting extensive restrictions on investment options available for long term-savings products could create new problems, for example, in the sense that permitted investment products might be perceived as somehow more secure from the saver's viewpoint and as having lower risk than other forms of saving. If, for instance, currently offered investment-linked pension insurance schemes would continue to fall within the sphere of tax incentives, this assumption of security would be unfounded.
As consumers generally lack the kind of awareness and knowledge that purchasers of modern savings and investment products should possess, the problem should be approached with broad-based solutions rather than single restrictions. This matter has recently garnered attention in several different forums and new methods for improving the situation are being developed, among other things, through international cooperation.
Costs and key information to be expressed more clearly
One of the most significant problems with current pension insurance agreements is that cost comparisons are difficult. The proposals for legislation on long-term savings regarding cost-related information and the ways in which information is communicated are seen by the Consumer Agency as being well justified and likely to have the effect of making the cost structure of savings products more open and transparent.
The Consumer Agency considers it important that the legislation governing long-term savings includes a separate provision, as proposed, on the marketer's contractual liability for information given in marketing in a similar fashion to what was done for insurance products in the Insurance Contracts Act. The basis of liability must be clear and similar across different savings products.
The proposal still requires further work. For instance, the capital adequacy requirements on businesses offering savings services with tax incentives are not covered at all in the proposal, despite the fact that the matter is significant and raises a lot of questions. The legal requirements regarding obligations to disclose information should be as consistent as possible across the various forms of long-term savings products. The law should clearly specify these obligations to disclose information based on the model applied in drafting the Insurance Contracts Act.
The government is presently preparing a proposal, which is expected to be handed to the Parliament in the early autumn. The intention is to have the new legislation in force from the beginning of next year.