I’m talking  as a financial adviser-ten years as an IFA, fifteen years dealing with members of the public in corporate pensions. This is what I’ve found.

• People want equity like returns without the volatility
• They do like the concept of money purchase (but not if their savings do them out of state guarantees)
• They expect some form of protection from market forces from some “deus ex machina”
• They have been used to getting this protection, (Examples of protection include company guarantees, insurance guarantees and governmental guarantees).
• These expectations are deeply engrained in the public’s psyche and the industry has been cavalier in expecting public acceptance of direct equity exposure without the public getting disillusioned (not the word that the public uses!)

How did we get to a point when we were so confident in equities that  we were prpeared to move to the minimal capital protection that we see today? (I’m referring to the lifestyle strategies that are all that most people get nowadays).

• Everyone in the pensions industry has acccepted that there is an equity premium which should be passed on to the public.
• The timeframes over which most people are exposed to equities (the working life) have been considered long enough for the capital risk involved in equity market volatility to be ignored
• Guarantees from Government (general), insurance companies (with profits), dodgy investment organisations (various forms of Ponzi) and most importantly those underwritten by employers (DB pensions), have  been devalued.

What is worrying is that the anticipated shift in public opinion away from reliance on protection and towards self reliance on equity saving has not happened and there is little being done to address this problem.

It seems to me we (the nation) have three options

1. We can continue to big up equity participation through the current strategies (equity defaults in DC etc)
2. We can hope for a new form of investment product to catch on (DGF being the most liekly candidate)
3. We can accept that for the foreseeable future the public are not going to buy into equity investment and go for an investment type that provides capital protection (and some form of annuity protection)- in a word “a gilt based strategy”

Alan Pickering is arguing for the third option and he’s doing so very persuasively. Not only is Alan a sound actuary, he’s hugely grounded in the thinking of everyday people for whom equities are not part of their thinking.

My understanding of the problem does not have the depth of alan’s but I have come to the same conclusions.

• I think that the public are prepared to enter into a money purchase contract for retirement savings (providing the moral hazard of means testing can be eased out)
• I think that a gilt based investment vehicle should be provided as the basis for personal accounts (see various blogs on Pension Pounds for the gilt variant I am suggesting)
• I think that there shold be a fundamental accpetance by those in corporate finance and in the investment industry that the general public’s retirement savings are not to be assumed to be heading to the equity markets as they have been over the past 25 years.

Alan Pickering has once again put his finger on the problem, asked the meaningful question and started a public debate to which this is a tiny contribution. I think he’s right.