Sometime in 1993 I was advising a bunch of traders at Yamaichi Securities a now defunct Japanese trading house in the City. The Japanese equity markets were in a tailspin (from which they have not recovered) but the markets they were trading – primarily other world equity markets were showing a relentless upwards trend which would continue for another 7 years.
Talking with the lads (they were all male), there was only wanted one thing – financial certainty. The pension was final salary, the AVCs should be in cash or at riskiest invested in “with-profits”.
One guy who created “structured products” told me then that the small investor had no chance. His view was that pensions needed to be organised by Governments or at worst by large organisations, the idea of a personal pension was for him – a joke.
This was distressing to me. Why should a rocket scientist challenge the assumptions on which my business was built. At the time, my financial projections I would give my clients showed up to 10% real returns (above inflation). I could point to the achieved returns of world markets and joke that the 13% absolute returns (net of fees) that FIMBRA (pre FSA) allowed me to use were if anything conservative. For heaven’s sake- you could pick up 6.5% guaranteed from some with-profits policies without talking about discretionary bonuses.
The expectations that I created for my clients in those days, shock me now. If any are reading this today, I apologise. It was not like I wasn’t being told – and told by a rocket scientist from Yamaichi Securities.
The mentality that I had allowed myself to adopt in those days was so thoughtless and carefree that I could happily recommend clients transfer guaranteed benefits into equity based products. Indeed, the Government were urging me to do so, incentivising my clients to leave the State Earnings Related PEnsion Scheme for personal pensions with tax-payer support.
The entire model for financial advice was based on the long-term equity premium and on the right of the person to assert his right to manage his investments independently of any collective organisation.
Today, the opportunity to get a guaranteed benefit from mutual pooling has almost disappeared. Yet the wish to return to those guarantees underpins almost every conversation I now have with clients.
I remember that guy from Yamaichi. He was in those days, the age I am now.. He taught those guys around him to be prudent with their financial futures as they gambled their livelihoods from day to day.
The news this morning is of state aid to prop up property prices (we cannot be an Ireland or Spain). The State seems to have assumed itself guarantor of the great housing equity bubble of the past thirty years.
Meanwhile the pensions that we set up in the 80s and 90s are maturing. Equity markets on which our projections were based are lower than they were 1o years ago. Annuity rates are half the levels they were at in the early 90s. Those who had defined benefits- whether State or privately funded are relatively lucky but whether through the cuts in SERPS, the switch from RPI to CPI in revaluation or through the near collapse of corporate enthusiasm for DB sponsorship- these benefits are not going to feed through to my generation.
The funded and unfunded pension promises that were made for us and we made ourselves are yesterday’s news- like Yamaichi Securities. But the retirements they were supposed to fund are still to come and pretty grim they look.
For many, their houses are the one remaining source of financial solace and it’s easy to see why the Government clings to the maintenance of confidence in housing equity as the bedrock of its strategy to retainconsumer (and voter) confidence.
But like the equity market (and heaven help us the Japanese equity market in particular), a house built on sand is no security for long-term planning.
It’s taken me a long-term to recognise the value of the advice that fellow from Yamaichi was giving his team- and me.