We save for certainty – what LDI can learn from Funeral Plans

BeholdIstandatthedoorandknock

Stand and the door and knock!

 

There’s controversy over the management and sale of Funeral Plans this morning. Fairer Finance report that many plans are simply no good and that this is often because they pay commissions of up to £1000 to those who sell them. Funeral Plans , though they meet an investable need, are not covered by the FCA but by the Funeral Plans Association. Those who buy them have no ombudsman to complain to.

If Funeral Plans were a quiet backwater of personal financial planning , this would not be a front page story, but they’re not.

Funeral plans.jpg

Thanks to BBC and Fairer Finance

 


So why are funeral plans so popular?

  1. Funeral plans meet a defined need – they are an insurance.
  2. They are sold as a “last gift to loved ones” to those who buy them
  3. But they address a fundamental fear, “no-one will remember us”.
  4. Funeral plans are affordable, most older people underspend on themselves
  5. These plans are unregulated making them cheap and easy to sell.

This may sound brutal, but as a salesman myself, I know that it’s the cheap and quick sale that’s the one that will pay my bills. There are a lot of half-trained financial salesmen left over from pre RDR days who can’t sell PPI no more.

It is easy to sell to need (1), pity (2), fear (3) and price (4). These simple triggers have worked for 200,000 of us, the vast majority of whom are in retirement. The plans may be poor investments but they rely on those purchasing not looking under the bonnet. There are few IFAs attending on the needs of the people taking out these plans.


Harsh lessons for us all

I fear the blinkers with which people purchase funeral plans have been applied elsewhere. In the eighties, we saw spurious liability driven investments such as school fees plans and long-term care plans which employed the same triggers. They met with varying degrees of success.

School fees plans were more popular than long term care because – like funeral plans, they were brought for others but were a vanity sale; and like funeral plans they met a specific need which- in the final analysis, was one people felt comfortable with. We may not feel comfortable with dying, but the idea of a good send-off’s great. Most parents see the paying of school fees as good for Johnny and an entrée into a new social club.

These recurring themes of defined needs, vanity and pseudo-altruism at a defined cost were the very things that long-term care plans could not provide. The costs of care were indeterminate, the reality of a nursing home- too awful to consider and the fact that you were spending money on you and not others meant the LTC sale was a dead duck from day one.


Easy-sell products have short-shelf lives

School Fees Plans didn’t last. They were exposed because good financial advisers were able to peel off the packaging and show better.

Long term care plans didn’t last because they just weren’t sexy enough, they pulled none of the triggers.

Funeral Plans are a bubble that is about to burst. Fairer Finance may prick the bubble with just one report as we are familiar with the toxic cocktail of sales features that funeral plan salesmen employ.

But as soon as the Funeral Plan bubble bursts, the sales teams will have moved on to find another quick win. If I knew what that was , I’d be as “smart” as them- thankfully I’m not!


LDI – an institutional funeral plan?

Not as far fetched as it sounds. Liability Driven Investment most of the features of a funeral plan. Most importantly, it is a means to send off a Defined Benefit plan to a better place (a bulk annuity rather than a funeral parlour but you get my drift).

Secondly it secures the welfare of others at the expense of the purchaser (a scheme argues that buy-out offers members something post cessation that cannot be achieved in life – life is a liability!

Thirdly it panders to the intellectual vanity and fiscal responsibility of its purchasers. The LDI product is a box of tricks as opaque as a funeral plan, but like the funeral plan, it gives its purchaser a (sometimes spurious) financial capability.

Let’s hope that like the school fees plans of the past and the funeral plans of the present, LDI does not leave its inheritors with a nasty and unexpected debt at the death.

I wouldn’t want to compare investment consultants to funeral plan salesmen, but they might want to look at their practices and ask whether there may not be some in common!

For like the funeral plan salesmen, those consulting on LDI are facing imminent regulation by the FCA.

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 pensions and tagged , , , , . Bookmark the permalink.

One Response to We save for certainty – what LDI can learn from Funeral Plans

  1. I have never met a funeral plan salesman but have noticed.an uptick in plans being promoted along with the Michael Parkinson type Over 50 style whole life plans designed to pay out a modest lump sum on death, but the good news is you get a free pen for enquiring and a ‘free’ gift for starting one of these expensive overpromoted plans. I once met a salesman selling a Health Cash Plan and thought like Henry that ex-financial advisers were perhaps now looking for a ‘one trick pony’ to sell after regulation made selling other plans impossible.

    Transparency on balance sheets illuminates the volatility of funding of DB plans as measured on accounting bases and current actuarial bases. This potential impact to profits in the short term is alarming to directors chasing shorter term incentive plans and it is not surprising an easy sell has surfaced to protect those incentive plans. Or a drive to self sufficiency rather than buy-out, but not to protect members, to protect balance sheets and incentive plans.

    It is interesting to note that some entrepreneur owned businesses with a minority float take a different longer term view. Here the major shareholders are in it for the long term and will often invest accordingly taking the volatility on the chin as they believe in intrinsic value over market fluff pricing. Quality will out itself, but you need to have the stomach for it!

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s