There ought to be an extra class of vulnerable customer in the FCA’s definitions – “the wealthy fool”. We all know that a fool and his (and it generally is a his) money’s easily parted but we have the Equitable Life, St James Place, Woodford and almost every SIPP that ever was to prove it. If you think you’ve found a way to alpha – you are chasing the philosopher’s stone and should be condemned to read, watch and imbibe Ben Johnson’s Alchemist – fool’s gold.
The play shows how the wealthy were conned as the poor in the 17th Century by the prospect of what today is called “alpha” and then was called alchemy.
Fortunately we have learned enough in this country to protect ordinary people from the excesses of over-charged, over-engineered and over-trading products and have capped workplace pensions at 0.75%.
Within this cap, clever companies like LGIM have been able to construct defaults that do everything from reviving fallen angel bonds to introducing infrastructure (more on this later this week). 0.75% pa of our money appears quite enough to manage our savings without resort to alchemy.
However, the wealthy, including the nouveau wealthy with money transferred out of guaranteed collective pensions , are condemned to learn the lessons of everyone from Sir Epicure Mammon to the Equitable Life’s Policyholder’s group. If it looks too good to be true – it is.
This rant is occasioned by news that European Pillar 3 pension are underperforming (according to Better Finance and reported in today’s FTfm).
The commentary is bleak
Just one in five pension savings products outperformed a simple 50/50 pan-European equity and bond index over the long term, …… Fees and commissions are one of the main factors eroding the performance of retirement savings plans.
Charges for packaged personal pension plans and unit-linked retirement products sold by insurers carry fees that are often complex and opaque, which makes their damaging impact on long-term returns difficult to understand for many uninformed investors.
What we can do now to protect our savers from the Alchemists.
British savers are protected by the 0.75% charges cap but there is no such protection for savers who transfer into self-invested personal pensions for drawdown. For them, the ugly truth is that there is no charge cap and the cost of decumulating in a tax-free environment is every bit as expensive as the non-capped pillar III pensions that Better Finance are talking of.
The sooner we can make workplace pensions a means of drawdown the better. That’s why I am supporting the investment pathways initiative , due to be with us (with the help of the FCA in April next year). But there are still big problems for people as they move outside the “charge- capped perimetre” and that’s what happens if you move into a wealth management solution.
Investment pathways should be the default ways people move towards cashing out, drawing down or annuitising their retirement savings. But FCA stats show that what is actually happening as people approach retirement is not an orderly process of triage, as the FCA would have it, but a disorderly rush for the door.
We have still to find a way to reach those people with small pots who are cashing out their pensions because they don’t know or don’t trust anything different. These people are not the wealthy fools but those without advice or the financial capability to DIY and we are surely storing up social problems for decades to come by failing to develop a proper system to convert savings into pensions.
Collective scheme pensions from CDC arrangements is the sustainable alternative
I challenge those who run our great master trusts, Helen Dean, Patrick Leuthy , Andrew Evans and Patrick Heath-Lay to discuss with us their plans to help their savers and future savers spend their retirement pots.
I do not think they see investment pathways as anything more than a halfway house. I think they can all see the commercial advantage of managing customer’s money to and through retirement, but I think they are all running scared of what management consultants call the “bleeding edge”.
No one wants to discuss the very obvious advantages emerging from the legislation set before parliament in the pensions bill – which enable master trusts to offer scheme pensions under CDC as a default decumulation option. Well not yet.
It is up to blogs like mine to lay down the challenge and it’s up to said individuals to take up the challenge. If the Patricks, Helen, Andrew and their strategy teams would like me to convene a meeting of minds, I will. I will bring to that meeting enlightened master trusts like Salvus, suppliers like Alliance Bernstein and Allianz and the academics and polemicists that have worked for the past ten years as friends of CDC.
We will not see real progress in sorting out the problems that face the wealthy and the unadvised savers , till we accept the importance of collectives in providing mass-market default solutions. We have in Britain accepted that in saving for retirement we need defaults with clear charge caps and we should now do the same for the spending of those savings.
The alternative is more of the chaos we are seeing at the present, and the long term consequences thereof
People are not using their retirement savings to provide themselves with pensions , they are using them to provide a financial buffer in their bank accounts, pay off debts and buy caravans (a most common use of tax-free-cash). They are not buying Lamborghinis.
But 62% of savers in occupational schemes told Aon they were saving for a pension which they described as a wage for life. 61% of savers surveyed by Tilney said the same.
This massive alignment between what people want and what they get cannot go on – so let’s get down to some proper discussions about how we can increase awareness, engagement and ultimately improve the long-term spending outcomes for all this money.