“Whether we’re up or down”- what the terraces teach us about finance

Fans3

 

The reference is to a line in “Yeovil True” which celebrates our fan’s relationship to the club.

On Friday the club’s men’s team did go down to League Division One, this time last year we went up to the Championship- “Yeovil True” is about consistency, not changing things unless you have to think about the long-term.

 

Constancy is not something you hear much from the financial services community. There is always something new coming over the horizon. The latest “new” is the one year bridging annuity which has been the subject of violent debate on twitter initiated by @rosaltmann.

As Ros is keen to point, doing nothing and remaining true to your pension fund may be a better idea than sinking your pension savings into a one year bridging product and then starting all over again in 2015. I am not sure about the tax implications, but the fact that Aviva are staying out of this suggests that they smell the whiff of consumer detriment in the air.

One particular comment of Ros’ caught my eye – “why can’t people just stay in the fund?”. This may well become the rallying cry for those of us who are more interested in outcomes than sales  and would like to disassociate the pension brand from financial engineering (or financial innovation as John Ralfe is now calling it).

Of course we do need innovation to make the New Annuity Framework – work. Some of these are tax reforms – removing the technical obstacles to people “taking it all at once” being the obvious one.

But we don’t need to make reform hard work for people!

Yeovil Town will not be sacking its manager, we won’t be ripping up season tickets. People approaching the end of their pension savings career, need not be doing anything very radical either.

In fact the 30 minute guidance session which the Treasury wants to guarantee people should be for many a reassurance that they don’t need to worry rather than a call to action.

Most people should, and I believe will, maintain their funds in their pension savings account and draw income and capital sums from those accounts over time. This assumes that the providers can adapt their systems to pay out rather than simply accept “monies in”.

This should be the default position and it would have to be the individual’s decision to make a move somewhere else- to a specialist drawdown product or an individual annuity or to cash. Whatever intervention people make will have a cost- advice -transactional -tax. These risks will need to be set against the upside of making a move.

This is innovative stuff (John Ralfe). It will mean that insurance funds which have so far (through lifestyle) have targeted annuitisation and cash, will in future target income and cash (much as occupational pension funds which pay pensions to members have to already).

There are some  investment vehicles better suited to this than others. The target dated fund, which carries the pension savings of people looking to start their pension spending from a certain date (2028 is mine), can manage this process very well. These funds can serenely move from building up pension savings to paying out pension savings without much disturbance at all.

It is also possible for the apparatus that supports lifestyle to be adapted to transfer people into funds that pay-out rather than build up (though this is a little more messy and will involve some costs in terms of paperwork, explanations and the frictional costs of buying and selling units -which shouldn’t go on with target dated funds).

Again the footballing analogy should be helpful, Yeovil will start the next season as it did the last and the one before – our fans are true-whether up or down.

Why this is so innovative is that for the first time in my lifetime, the interests of the financial consumer are being put above those of the financial services providers. At least they are in my little world – which I hope is getting to be a slightly bigger world due to people like you reading articles like this.

The default position needs to be established and established soon. The default position for someone with an average sized DC pot is not going to involve Lamborghini purchases , annuities or individual drawdown policies (with financial advice). All of these will be choices but I don’t see them as the default option.

If people can approach their Guaranteed Guidance session, confident that there is a simple and easy to manage default to fall back on, I’m sure these sessions will be a success.

But if people approach them, as many seem to want them to be, as a wake-up call then people will not be happy. People are fed up with being “woken up” to the scaremongering of the financial services industry.  We live in permanent fear of missing out on something or other which is about to be abolished or withdrawn or whatever.

The success of occupational pension schemes has largely been down to their providing people with a decision-free experience. Short of having to choose whether to join or not, most people in defined benefit schemes make no financial decisions from the day they join till the day they die.

If we take that as the default template for “success” , the question is then how do we replicate the success of these “do-nothing” DB schemes in an era when we depend on a DC pot.

The change in the paradigm will happen when we accept that “doing nothing” may be the best policy. We’ve already accepted this for DC accumulation. There may be a little more intervention from people needing to adjust the level of spend from their pension pot, but turning up the dial from GAD 100 to GAD120 shouldn’t be much more difficult than adjusting the microwave settings.

Where we need to work hard behind the scenes, is to make sure that the decumulating funds people are spending from , don’t suffer from pounds cost ravaging (see recent blog). However that is a financial services industry problem, not a problem for the consumer.

I am with John Ralfe in saying that too often, the financial services industry has blown the opportunity to meet a challenge like the one facing it now. But never before have they had to come up with answers that will be subject to scrutiny  as they will today. Not only have these products got to pass muster at the Regulatory level (tPR and FCA), they need to be sanctioned by IGCs and the new beefed up DC trust boards) and finally they are going to have to get a tick from the consumerists- Ros Altmann, Mick Mcateer, Pension Plowman et al.

So if the likes of State Street think that they can continue to operate in this market, they are going to have to seriously up their game, reduce their margins and stop stealing money from people through milking transactional costs. If these products are to be structured, we will want to know precisely what is being taken out by those providing the guarantees.

Clubs like Yeovil survive and prosper because the fan-base is  loyal and true. Nothing much changes at our club- whether we’re up or down.

That is the lesson from the Huish Terraces to those who run insurance companies, fund management houses and banks. It’s the message to the FCA and tPR, the DWP and the Treasury.

Most people want as little disturbance in their finances as possible, people want to get on with their lives and to trust that the system sorts them out.

Most people want and need fiduciaries who will act in their interests and allow them to get on with what they really want to do- live their lives.

 

 

This post was first published at http://www.pensionplaypen.com/top-thinking

 

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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