It’s a tough question in any walk of life. There is always someone who will answer that question because they are, but most of us will find ourselves out when answering it. We’re not – and if we were all special, there would be nothing special about the word.
Alistair Cunningham asks this question of his clients when they come to him with the question
“should I transfer my defined benefits into my own personal pension”
Most people want to be flattered
One of the few chants that Yeovil Town can sing with much conviction starts (and ends)
“You’re nothing special, we lose every week”
Most people like to think that winning comes naturally to them (football fans come naturally). Nonetheless they recognise that for every winner, there is a loser- it’s just not going to be them.
I see this insanity in all walks of life. It’s what drives punters to take on bookmakers, it’s why most people invest in actively managed funds. It’s why people take transfer values. People think they are special and they can do things better themselves.
A good behavioural economist – or even a charming one (Gregg) could give me the name for the behavioural bias I am talking about. By the way, if you are bored for half an hour , read this list of cognitive bias’ and work out which you’ve been subject to (I recognise the lot).
I’m not really talking about the mis-wiring of the brain. If we had perfect behaviour we would have perfect markets and the state could run things. We have entrepreneurs because people recognise stupidity and reckon they can make a buck from it.
That essentially is why we have transfer value and why people bet against the collective pension schemes, reckoning they can do it better themselves.
Alistair Cunningham challenges his customers to explain what makes them special.
Special needs
I recognise that some people have special needs, and I’m not being patronising or rude,
My friend Nick has been given a life expectancy of two years, true that was eight years ago but he still lives every day as if it were his last – (which makes him special to me).
I know a couple who have a firm plan to spend now and live out their later years in poverty. I believe they will do this, they are crazy but brilliant.
But most of us think we are special for reasons that make no sense at all. We underestimate our capacity to survive on this planet, we think of our worst behaviours and convince ourselves we will die of them. We suppose there will be a terrorist bullet with our name on it, that Korea will drop a bomb on us, we fear the future to the point we deny we will have one.
Then we say we are special needs. We want the freedom of having money in the bank, or under the management of an IFA or there for our kids.
Most of us do not have special needs. Just consult the actuarial tables. If you make it to retirement, you are (actuarially speaking) going to live a long-time and the chances are you are nothing special – you will.
Special powers
We may not believe we have special powers, but we are only too happy to grant them to third parties. “I know this brilliant…IFA/wealth manager/stable lad etc.”
I don’t know why we do it, I might go back and consult my list of stupidities again. I’m sure there is a cognitive bias towards creating genius in your own head.
The fact is that most active managers do not beat the index over time (especially after you’ve paid them, most stable lads are having a laugh and your IFA is probably suffering from the same delusion as you, he simply trusts his mate and takes the plaudits for himself. I use the male gender as I really think that the assumption of special powers by IFAs is a male thing.
IFAs do not have special powers, if the statistics suggest that you will struggle to get a return of CPI +3 over ten years and if you think CPI is 2% then think gross return of 5% – less the 2% you pay for someone to manage your money and you are likely to get 3% pa.
Your IFA may believe he can get 8% and can show you someone who has, but he is unlikely to have special powers – nor is his mate – and you are likely to get what everybody else gets (CPI+3). This is why actuaries build prudence into their calculations, they know that everybody suffers from irrational exuberance, they just turn down the heat (which is what I have to do with the bacon right now).
Right – bacon sorted; how about transfers?
If you, a member of the BSPS, believe that you are special and – with 95% of the cash equivalent transfer value you should have had, can beat the market. It is for one of three reasons
- You have special needs – or think you do
- You have special powers – or have a mate/IFA./stable lad with them
- You think we have a special market.
We’ve covered 1 and 2 and I hope I’ve asked you to ask yourselves some questions about those special powers. I’ll finish with a few words about special markets.
We are – without doubt – at the end of an unusual period in our countries economic history. Never before has a Government – let alone a collection of governments, taken such radical concerted action to reshape an economy as the past three Governments have (with quantitative easing). The low interest rates we have today are artificially low and the economic stimulus will – as with “austerity” eventually disappear.
We will return to normal (revert to mean) and we’ll see higher interest rates, lower transfer values and people will turn round to the actuaries at BSPS and say – where did all the money go. They may say that 95% should have stayed at 93%, they might even say the trustees should have blocked transfers altogether.
People around British Steel will think BSPS was special, just as I think that being a Zurich pensioner is special. We all want to think we are special and that we are in a special market.
But even if austerity and QE unravels and 2017 was seen as a high-water mark, I do not think I – or you are special enough to bet against the UK economy , let alone the world economy. That transfer value was set against the expectations of a firm of experienced actuaries and what they thought you need to meet the promise given you. True that promise is not going to be around in the same form after April 2018, but it was made to you as 95% of the cash equivalent value of your benefits.
If you think you have special needs, if you think you have special powers, if you think you have a special adviser or if you think you understand a special market, then you will take your transfer.
But if, perhaps after reading this – you doubt any of these things, and you accept that there is nothing special about BSPS – no conspiracy theory against special old you, then you will sit tight and work out whether you’d be better off in BSPS 2 or PPF.
And if you aren’t in BSPS, count yourself lucky you don’t have to make these decisions by the end of the year. I’m off to Lady Lucy for the final boating weekend of the year, I’m nothing special either, I took my pension , turned down my CETV and didn’t even take my tax-free cash!
Clearly deciples of “someone else will pay” believe sponsoring companies to be immortal and never think that they will die before members.
Most quality advisers who give the work to administrators take less for the innovative work and ongoing advice than those trusted to do what the law forces the client to do
Incidentally we reviewed our ongoing IFA charges this week and found them to be 0.3% so maybe the 2% referred to needs bringing up to date in the bias list.
An interesting article but a flawed argument. Following Alistair’s logic, no one would ever invest in Equities as long as interest rates were at 3%. The realty is that the best fund managers do beat the index (and better CPI +3) and the best platforms charge nothing like 2%. So if your CETV has a break even return of 3%-5% (including CPI) and your comfortable with the risk (= have access to alternative sources of income/capital), then the decision is a no brainer. I do wonder if some IFA’s are ducking the decision.