Very “interest”-ing

For millions of savers, the most important piece of financial news over the past few weeks has not been about the impact of bond yields on pension liabilities or their mortgage interest payments or the state of the stock market. It has been the announcement from Santander yesterday that it is cutting the interest rate on its 1-2-3 account from 3% to 1%. In advertising terms – Jessica Ennis-Hill has gone from gold to silver.

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Some of my readers may find Martin Lewis’ reporting a little over the topMartin Lewis’ reporting a little over the top. But he is read by more ordinary people in a day, than this blog is read in a year.

Money Saving Expert (MSE) is the first place for financial information (and education) for those who don’t rely on financial advisers and this is his advice for savers.

“Many millions of savers across the UK will feel like they’ve been kicked in the teeth. Santander 123 has been a beacon, shining out for those with a decent chunk of cash, as at 3% it pays decent interest. Now it’s halving that, meaning for those with £20,000 saved, it drops from roughly £600 to £300 a year.

Both Lewis’ – Martin and Paul, realise that their readership are more interested in savings rates than mortgage rates and both refuse to endorse the payment of dividends from shares as a way of increasing the income a saver receives.

This is ,of course, because they understand that savers cannot live with the idea that their capital is at risk from a downturn in profits (or that the source of the dividend payments may go out of business).

“Interest”-ing indeed.

Just as savers are digesting Santander’s move, so institutional investors are mulling over a report published this morning from the actuaries LCP. This tells us that companies have been paying too much interest (dividends) and suggest that the money might better have been paid into pensions (though pension schemes rely in part on high dividends to pay out pensions!

The report is timely as it reminds us that had Philip Green spent BHS profits on bolstering the pension, jobs and pensions might still be intact. In BHS’ case – not even other pension funds benefited from the dividends which simply went to buy the Green family a good lifestyle.

The institutional debate is about priorities and the headline from the LCP report is that UK companies pay five times as much to shareholders as they do to their pension schemes.

For hardliners like John Ralfe, any thought that the guarantees within pension schemes could be weakened (as proposed for Tata Steel) is unthinkable

“Why should pension scheme members lose out when shareholders continue to be paid cash dividends? It can only be fair to members if dividends are stopped and they can only start again once the full RPI lost is paid to pension scheme members.


So Santander is being pilloried by Martin Lewis for not paying enough interest on 123 while corporates are being pilloried for paying too much interest – ALL IN THE SAME DAY!

I’ve said it once and I’ll say it again, the proper place for pensions to be invested is in assets linked to the economic prosperity of pensioners. Sticking money into 123 is all very well but the interest is subject to the vagaries of a Bank’s marketing policy.

Companies have a duty to reward shareholders first and their pension schemes should share in the economic prosperity of our companies through dividends. Pension Schemes should not be strapped to the arbitrary returns of the debt market as their sole source of income (much as John Ralfe would like that).

Pension Funds should be free to own equities; executives should be free to reward shareholders with dividends (unless in special circumstances such as BHS, there is no general share ownership). Private Investors should wake up to the fact that they are retired for a long time and that depending on savings accounts such as 123 , is a risky long-term proposition.

Not confusing at all – it’s all about time.

Einstein called time the fourth dimension, time (or duration as investment people call it) is the key dimension for investment. Savers have time to be invested in shares which deliver steady returns through dividends. Unless they need the capital, in which case they are not long-term investors, they can afford to ride out the ups and downs of the stock-market.

Like pension funds, savers looking for interest need to think beyond cash or gilts and consider shares.

Pension funds are being herded into a cul-de-sac where all they can invest in is cash and bonds and they are missing out on dividends as a means of staying solvent. We need to target good outcomes – we cannot guarantee them

Savers are being herded into accounts like 123 and anywhere else where rates are high. They would be better off investing over the long term in blue chip stocks paying regular dividend incomes.

The “Far Off”

Everything comes down to the extent of your vision. If you go to to the Georgia O’Keefe exhibition at the Tate, then you can see how she paints what she calls the “far off”. The Far Off for O’Keefe seems to be a landscape concept , though you sense as you walk the rooms that she is also talking about old age and the spiritual speculation on what happens on the other side.

These are precisely the considerations that we should be having about our long-term savings, especially about our pension savings.

Encouraging investment for the “far-off” means investing in things- investing in the means of production – in land, physical property, infrastructure, businesses and intellectual property. It doesn’t mean jumping from one high interest account to another, or trying to pin the tail on the donkey by tying pension schemes up in derivative contracts designed to limit the downside of interest rate rises (aka LDI).

The Far-off is fundamental- we are all living longer- durations are increasing. We are increasingly investing for the “near-term” – a function of mark to market accounting , capital preservation, loss aversion – investor funk – CALL IT WHAT YOU LIKE!

A new vision needed

I will say it again, we need a new vision for retirement investing which allows people to benefit from the long-term growth in economic prosperity, which aligns investment to company performance so that one fuels another.

This cannot be achieved by rate hopping or by LDI, it requires people to accept capital to be at risk and that pension schemes can- at times- live with more risk than is currently acceptable. It may even mean that some pension promises are conditional on stock market conditions (principally the size of pension increases).

Whether our aim is to make DC savings more certain, or DB schemes more sustainable, we need a new vision which allows investors to benefit from equities with the security that comes from collective endeavour.

I am a Friend of CDC, this is part of the vision of the Pension Plowman. Throw your computer at the wall, if you don’t agree (or better still- comment).

We need the debate.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Very “interest”-ing

  1. Phil Castle says:

    VERY well put. Thanks once again Henry. This should be compulsory reading for all FOS and F-pack staff too as advisers are getting scared to recommend what they think right due to FOS staff not understanding the risk of cash.

  2. John Mather says:

    Henry for those cleitns who are concerned at market levels of both bonds and equities and the poor returns available on Corporate bonds generally we have a 3 year covered bond paying 2.9% Our economist feels that the turbulence in the coming months might be worth avoiding. For those who wish to have a long view (18-19 years) we have an old issue now trading at 3% +RPI if held to maturity, the counterparty is top quality. This is seen as a better bet than gilts in the current market. You know my views on the Repression objectives of the central banks which is not widely shared but then in a few years time it will be self evident.

  3. DaveC says:

    Wasn’t there a time when cash was bought at retirement to ensure stability?

    A time when a huge cash lump sum at retirement, invested in high return bank accounts, could have left you enjoying a happy retirement.
    But why would you when an annuity would provide you with even more.

    A time when stocks and shares were held for the potential appreciation in value, rather than the return in dividends (which can go up and probably down)

    A time when bonds were bought for a known return on investment, rather than an appreciation in value (against a backdrop of lowering bond rates it pushes older issued bonds to higher values)

    Is it any wonder todays pensioners want to be in cash? They’re probably baffled and scared that their entire financial futures rest on what appears to be mayhem in the entire financial system. Does anyone know what will happen from one year to the next any more?

    My solution would be for government to sell annuities to pensioners. Provide them at rates that essentially take away all the major risk factors and make them the ‘default’ that they would once rely upon in the private annuity market a few decades ago.
    Properly ring-fence the funds they receive, offset them against the ‘national debt’, and save billions in interest payments each year to pay for the ongoing pension payments.

    There is no better way to do “collective endeavour” than to do it the right way, and that is directly via the “collective endeavour” government which society formed to provide it with security and surety in situations exactly like this.

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