Investment choice, like tariff choice - can be overcooked.
Confused? You now have the choice not to read on, or the choice to concentrate!
In this (long) piece, I talk through how we ever got to thinking that getting everyone to make regular sophisticated choices about investments and savings was a “good thing”.
I conclude that we let ourselves get sidetracked by idealogues who have valued the choice of outcomes above the quality of outcomes.
People do not need to make investment choices to have a happy retirement. It is strange how this seems a “new idea”.
How can something so obvious seem radical?
How can we have moved so far from common sense for common sense to seem a new idea?
We have become victims of a dodgy teleology (look it up!).
The history of western thought is plotted by free-thinkers who redefined how we see things;- Copernicus and Galileo, Wittgenstein and Einstein, Darwin and Newton. The challenge of a genuinely new idea on “how things are” is generally met with brutal rejection from those who guard the status quo.
The words that we use to label such notions – “heresy”, “sedition” and ”blasphemy” assume a world order from which deviation is evil. The moral and religious language that supports orthodoxy has faded in the past fifty years. We have moved from absolute certainties to localised belief systems -”Western Democracy” is one example of a phrase which is a short cut for a belief system. Another such shortcut is “Financial Capability” which defines the capacity of people to take sensible decisions about their financial welfare.
When I worked for Eagle Star, I and a colleague responded to a Government consultation on stakeholders by pointing to research by the late lamented John Shuttleworth. This demonstrated that stakeholder plans couldn’t even aspire to the efficiency of State Pensions (and hinted that a revamp of SERPS would be a better solution than an extension of personal pensions).
For this we were soundly reprimanded and told that our views were not only non-commercial but also “anti-social”!
Those who challenge a State supported belief system shouldn’t expect any less. The labour party marginalised Barbara Castle and in doing so demonstrated how deeply Financial Capability has influenced mainstream political thinking.
Financial Capability is a concept that supposes a degree of collective financial literacy.
Financially capable groups of people will take rational decisions individually.
Individual decision making is good not just because it empowers the individual but because it absolves the group from blame if the outcome is not good.
In this world order, there are no risky outcomes as even bad outcomes are properly chosen and result from the Financial Capability the Group has assumed its participants possess.
If you notice a certain circularity to this logic, do not be surprised! It’s part and parcel of the teleological approach.
The other way of taking decisions works the other way round – and it has a much longer pedigree.
Some call it Fiduciary Management , some call it “trustee” or “collective” governance. It is an approach to financial decision making which depends on those with the greatest expertise and sense of leadership volunteering to take decisions for the Group.
We know this system best as the way that organisations have chosen to organise our retirement planning over the past 60 years. In fact Trust Law goes back to the start of the Anglo-Saxon legal system.
There have been various attempts of late to marry the big idea of Financial Capability and the established system of trust based decision making. We see it at work in the management of occupational defined contribution pension schemes.
A hybrid approach is for the trustees to organise the financial products used to get people a healthy replacement income in retirement but for individuals to select which of the products they use through the carious stages of their working life cycle.
The trust-based occupational DC scheme is in fact the mutton of Financial Capability dressed as the lamb of collective decision making. It is small wonder that this bastard son of trust law consistently produces even worse outcomes than the contract based “personal pension”.
People just don’t seem to want to play ball and take the right choices!
The obstinate failure of people to play their part in the process is a source of great confusion and frustration to those pursuing the Financial Capability agenda. Nowhere is this frustration greater than with default strategies.
There is nothing that so peeves evangelists for Financial Capability than when,with every conceivable fund choice on the table , they see 95% of a group of people taking no choice and relying on a default option.
You hear various arguments put up to abolish default positions and make sure people take their own decisions. On the one hand, there are those wishing to protect an organisation from litigation who argue that default positions suggest that advice has been given and choice suppressed; they argue that the default represents a risk to the management of the group because they could be seen as acting in a fiduciary way - delivering a definitive course of action.
On the other hand we hear the argument that “no decision equals no engagement”. “Without engagement”, the argument runs - ”those within a sponsored arrangement cannot value it”.
Some consultants have gone as far as suggesting that the measure of the success of a defined contribution scheme is the extent to which people vary from the mean solution - the default. The wider the scatter plot of differing decisions, it is argued, the greater the degree of engagement.
To my mind, both these arguments lack common sense. Common sense tells us that we will take a personal decision on something only if firstly we feel qualified to do so and secondly we are comfortable that we can live with the worst outcome from that decision – (hence the question “what’s the worst that could happen”).
If we don’t have answers to those questions, common sense tells us not to take any decision.
But even if we are capable of taking a decision and reckon that we could live with its consequences, we don’t feel any great incentive to do so - provided there is an expert out there who we feel we can rely on. There is a huge appetite among us all to rely on experts whether financial or spiritual or whatever. We are happy to follow their recipes, tips, strategies and creeds.
It’s not surprising, we are not infinitely capable and most of us prioritize other capabilities than “Financial Capability”. Indeed, thought of like this, it’s hard to understand why we ever thought that people would want to thoroughly understand all the hundreds of fund choices presented to them in most personal pensions let alone the “bells and whistles” that surround product design. The imposition of meaningless choice, referred to by Todd Rupert as “the wish to make us all our own CIO” is one of the great failings of th Financial Capability agenda.
In practice, most of us are willing and capable to engage with financial matters only not all the time. This is clear from the studies of internet usage to use information to do with a DC pension account. Activity tends to surround certain events the start of the investment, life changes - changing jobs or occasional financial reviews and the point when retirement is met and accumulation turns to spending. hardly anyone, it would seem, has the wish to check the progress of an investment over the timeframes of a retirement plan on a more regular basis.
However, those who have selected their own investment strategies , rather than exercising the default, have more or less committed to reviewing those strategies. Since the default strategy is a hands-off approach, “self selected” strategies ae by definition “hands on”. What is deeply problematic is that the majority of self-selected strategies become hands off strategies because they are never reviewed.
This is why we hear from annuity brokers that the vast proportion of funds to purchase annuities today are the funds that members started out with - equity based funds sold as appropriate for long-term investment, but entirely inappropriate to the years preceding annuity purchase.
The disastrous state of affairs for those annuitising today is that they have shot funds (because of the equity markets) and no annuity purchasing power (because of quantitive easing). By comparison, those retiring from lifestyled defaults are enjoying strong performance from their long-dated gilt fund and no exposure to falling equity markets. At this moment, default strategies are doing their job and the Financial Capability of the self-selected is being found wanted.
So there we have it. One portion of the “financially incapable” slope off throw in the towell and abandon themelves to the mercy of the tax-payer.
A second group keep the faith but fail to manage their affairs, ending up disillusioned by rubbish results.
And there’s a final group, the professional complainers who make up the bulk of the Equitable Life Action Group and many class actions beside. These have learned to play the system. Claiming to be Financially Capable, they play the game - reap the rewards if success comes their way and litigate if things go against them, They have learned just how rotten the system has become and learned how to exploit it.
There will of course be winners, we see them smiling at us from the covers of the insurance policy brochures. Doubtless they live in a parallel universe where the sun always shines, suits are freshly pressed and markets behave rationally!
If you’ve followed this tortuous argument from the beginning, you’ll recognise that I am heretical, blasphemous and seditious. It’s taken me a long-time to work out why I think this way and it wasn’t till my Road to Damascus moment with Debora Price last Friday that I fully understood my own position.
Now I have my terms of reference in the right place and my moral and financial compass properly aligned, I’ll stop gabbing clichés and say it straight
“choices should only be offered where they are meaningful, timely and can be taken in the full understanding of both up and downside”.
- Who cares who manages our pension funds? (henrytapper.com)
- Pensions Bindweed- pretty and deadly (henrytapper.com)
- Sherbert Dib Dabs for Breakfast ?? (henrytapper.com)
- Japanese Knotweed – the spread of passive defaults. (henrytapper.com)
- Pensions shake-up for jobs movers ‘may lead to impoverishment’ (guardian.co.uk)
- Send in forensic actuaries to sort out these “rip-off” pensions! (henrytapper.com)
- Are your junior staff’s finances any business of yours? (henrytapper.com)