Don’t put your swaptions on the stage Mrs Redington!

daughter on the stageThis post has been prompted by the very progressive @redingtontweets feed which recently asked it’s excited readership (Well me!)

Would you be interested in a lower return on your #DC#pension in exchange for a perpetual floor of 80% of your #asset value?

My knee jerk response

no! Keep nasty banking products out of #pensions please. No caps no floors!

prompted a thread of tweets between us and @pjzoulias which, it being Christmas, were generally fired off with a couple of sharp ones on board!

So in the sobriety of a Sunday morning, I’ll reflect on why I don’t want derivatives on the stage – at least in the public eye.

  1. The public , if they think of derivatives , think of banking scandals, credit derivatives that were at the heart of the 2008 crash, more recently the sale of interest rate swaps to SME’s and more generally the perception that any product that is created by an investment bank is driven by banker’s bonuses rather than the general good. Pensions can ill afford association with such crummy malpractice. SO KEEP YOUR SWAPTIONS OFF THE STAGE!
  2. Derivatives are already a key part of our financial strategies, though we do not know it. If you are invested in an insurance companies’ with-profits fund or an ETF or a passive pooled fund– which you almost certainly are, then your return is being managed in all probability by derivative. BUT, these products work because they are off-stage, put these nasty banking products into the public view and you’ll soon lose your audience SO KEEP YOUR SWAPTIONS OFF THE STAGE!
  3. Do not use filthy language on twitter. Further in the thread, I come across this
  4. actually a ratchet floor is extremely valuable the curtailing of downside drawdown significantly enhances long term value

  5. Now I know it’s Christmas but there really is no place on twitter for this kind of talk.      I’m not quite sure who @Redingtontweets is but I suspect I know him or her and he or she is better than that! KEEP YOUR SWAPTIONS OFF THE STAGE
  6. My suspicion is that the big investment banks are looking at UK pensions with a mixture of rapacity and regret. Rapacity because the collective assets flowing into the system from AE will be colossal; regret because so far the bankers have had relatively little opportunity to make any money. Auto-enrolment was not invented to keep bankers in bonuses nor LDI consultants! KEEP YOUR SWAPTIONS OFF THE STAGE!
  7. BUT HERE IS THE KILLER! The idea that we need to sacrifice pension for certainty as someone saves for their retirement is ludicrous.

we believe the best way to generate sustainable long term returns is to control #volatility#uncertainty

This is fallacious thinking! Controlling volatility on your retirement savings is not the best way to build long term returns. The best way to do that is to invest in suitable assets and not mess around with any type of trading in derivatives which create these perpetual or ratched floors.

The mistake that Mrs Redington is making is to assume that lesser mortals (like me) who save for their retirements through default funds, cannot stand uncertainty and need a perpetual floor of 80% of my asset value to “sleep at night”.

People like me are happy to swap uncertainty and volatility for uncapped growth in our fund, at least till we get close to drawing down our pension.

We do not want to be tucked up in bed by our friendly local banker, or even the employed nanny- MRS REDINGTON!

But it’s Christmas, and I want to wish my friends at Redington the best. If you want to engage in discussion in the new year, we can start by looking at how glide path technology might be used in the decumulation phase of people’s pension planning (which is a clumsy way of saying “how we get our pensions paid”). But that is not a discussion I’m going to have ON STAGE MRS REDINGTON!

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, auto-enrolment, Bankers, pension playpen, pensions, redington, social media and tagged , , , , , , , . Bookmark the permalink.

6 Responses to Don’t put your swaptions on the stage Mrs Redington!

  1. Martin says:

    It is hard to imagine a well managed and well diversified pension fund suffering a permanent loss of assets of over 20%, save in the event of some global catastrophe. But should that happen this insurance is only as good as the strength of the counterparty, and as was seen in the 2008 crisis, even the apparently strongest institutions can tumble.

    • henry tapper says:

      Thank you for that Martin.

      DGFs certainly didnt do their job when called upon in 2008.

      There are lots of examples of ordinary people suffering paper losses which they ride out. Negative equity in their houses, share options under water , ISAs in freefall. These investments might have needed to be liquidated at short notice whereas most people’s retirement savings accounts are years from decumulation.

      Why are we so obsessed with smoothing the returns on DC savings pots and why do we pay so little attention to the post retirement problems we have with annuity purchase?

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