I had one of those moments yesterday when you realise what you are actually doing and are able to explain it with blinding lucidity. Like Paul had on the road to Damascus
We’d been labouring through chart after chart , trying to explain what we were up to and someone in the room asked that searing question “so what makes you any different?”.
So there was quiet as us “experts”, were forced to confront our own self-confidence. then with blinding flash that made Paul both blind and a “see-er”, it came to me. What’s different about the way I see pensions (and the way those around me see pensions) is “investment“. And we had been so stupid as to have put this out of mind.
It’s much simpler than we ever thought
So I said it. I said that what was different about our solution to the problems that pension schemes are facing is always the same. Invest your money better.
And of course most of the problems that “beset us round – are dismal stories”, stories of failure that pull us back. That is why the lifestyling of people’s savings declines to bonds and gilts – because of dismal stories about the failure of longer term assets to provide superior returns, because of the siren calls for liquidity and because of the false prophets who propose tax structures as the answer to every need.
What is needed to succeed in pensions is investable capital , the means to invest and people will the courage of their conviction. It’s much simpler than we ever thought.
Complexity is the enemy of action
When I look at the lack of action in pensions I could weep. There are literally trillions of pounds available to the UK economy right now , languishing in unproductive assets or put to work in overseas markets where the beneficiaries of the investments will have nothing to do with the capital held.
We are giving our money to some organisations so awash with capital that their best idea is to give us the money back by way of share buy-backs.
Not only are we not investing but the companies we have invested in in the past, have stopped investing too!
Rather than building plants and creating the machinery to do more, they are inventing ways to chop the workforce so the business does less. This in the name of de-risking.
So complex is the power of the financial economics, that organisations struggle to take any long-term decisions, citing the all important 3-5 year time horizons over which their efforts will be judged. This leads to complex decision making that leads to inaction.
Cutting through the crap
The basis of any long-term plan is investment. Investment is the process of deferring gratification today, for rewards tomorrow. Much as I enjoy listening to conversations about tax and insurance and structures and engagement and safeguarding and de-risking, all of these concepts are peripheral to the main event, which is the long-term investment of our money in long-term assets which bring us tangible benefit.
To suppose that timeframes for this to happen are 3-5 years, as I hear all the time – is crap. For an investment plan for our retirements to come together , the timeframes need to be ten times longer- we should be thinking of the benefits of what we plant now, as harvestable in 2050 to 2070. Sure we can pick fruits off the branches of the trees between then but a tree does not reach maturity in years, it takes decades. Many of our great forests have been growing for centuries and are now yielding timber from seeds that germinated in the 18th and 19th centuries. Forestry is a good comparator, trees grow away from the crap, so should pensions!
No need for fancy charts on this blog!
At this point of a blog, I’m tempted to load up some fancy chart showing the benefit of investment by looking at the last 200 years, or comparing how the bond and equity markets have performed. We all know those graphs and what they tell us.
And then we go and do the opposite , believing that what we should be giving people is their money back in 3-5 years.
Nope, the basis of what we are doing is “long term investing” , by “we”, I mean the people working in the common endeavour known as Pension Superfund and my personal endeavour to create a pension SuperHaven to get corporate and personal pensions back in shape.
You either believe in investing or you don’t. If you do, you must recognise that short term money management tools like bonds and cash deposits are not investments, they are merely financial instruments to take care of short term problems. Investment is like the vision that Paul had, so blindingly obvious that when it hits you between the eyes, you get blinded;- as Paul was – as I was.
Henry Like St Paul you need to begin the journey with the end in mind. I suggest that this is the State Pension providing a high % of the living wage. National Insurance to be earmarked to provide the state pension, higher education and the NHS. NI one rate paid by employee and employer above nil rate band.
VAT to be increased to 30% to curb retail therapy ( waste) with the current exemptions.
Pensions tax relief to be limited to basic rate by salary sacrifice managed by employers. No contribution allowed by employer maximum contribution 20% of wage.ISA to remain with limit of the living wage per annum. Retirement allowed from 55 with the State scheme starting at age 70.
.The current system of options and company buybacks outlawed as this robs British industry of investment capital benefiting a few executives who focus on short terms personal enrichment.
Allow pension funds to convert commercial buildings to housing for rent in partnership with local councils
The present system is on the road to Dagenham so you are right to change the destination
“Invest your money better”
Yes yes yes. Investments are the means of turning contributions into bigger pensions. A vital difference between different forms of pension provision is having the freedom (or lacking it) to invest well.
Henry, pensions have always been about long-term INVESTMENT. It is just that over the last 30 or so years since The Goode Report that safety, security, guarantees, regulation, de risking, have crept into the pensions environment and strangled DB pensions, to the point of destruction of a system that has been a massive benefit to the baby boomers but sadly is being lost to generations X, millennials and Z.
It is not prudent to have a short term prespective on pension fund investment. Short termism makes pensions unaffordable. Lack of investment foresight will mean future generations will have to rely on future governments means testing policies such as pensions credit being maintained, with the prospect of a greatly reduced overall standard of living for the majority or continuation of work well into their mid 70’s.
Totally agree Henry. I’ve been railing against this flight away from higher expected return assets for years, but most pension leaders and regulators decided they wanted ‘low risk’ rather than higher returns and kept switching into supposedly low risk, but also lower expected return assets. What a waste of capital and a waste of the massive amounts of taxpayer funding that has subsidises pensions and the pension industry each year. Pension funds should be investing in higher expected return assets, to deliver long-term returns and I believe, having abandoned our own financial markets in the quest for lowest cost portfolios, we must also now build up a greater emphasis on UK assets. This can boost returns for all in the UK and also drive better support for investment in real assets across the UK economy which are so badly underfunded right now. Mansion House reforms have no requirement to invest anything at all in UK growth companies or UK productive assets – all that money can just go overseas.
This is such a wasted opportunity. But of course DC does not well suit illiquid investing – another reason why they should have exposure to closed ended investment trusts which are listed and bring liquidity to illiquid assets. Sadly, they are being destroyed by flawed regulations that lump them together with open ended funds that are not the same at all and should not be compared as like for like. Open ended funds have different long-term characteristics and different shorter term risks, with potentially multi year initial lock ups and then risks of mass outflows that damage remaining investor interests. The trouble is that discounts caused by pension and retail fund manager selling pressure has been stoked by misleading figures suggesting only UK investment trusts and REITS have very high costs charged to investors for holding the shares, while these are actually management expenses of the company and all other countries have reocgnised that, so funds are switching out of the UK into those listed overseas, starving the UK of capital on a false premise, but creating a vicious cycle. Regulators and/or Government know this is flawed but the sense of urgency has been lacking. Shame for us all
We’ve been complicit it and witnessed “the great confiscation” these last 2 decades. The net effect of unfettered unsupervised Regulatory overreach is that our pension schemes swapped c£1.2-£1.4trn of productive investment for gilt funding on the false alter of de-risking. It’s the same economic effect as if the Govt had confiscated that £1.2trn of such assets for gilts.
I had the opportunity to put this to a former cabinet minister recently, who could only but accept the effect of the before and after assessments, but acknowledged that no one at cabinet had ever had this impact of TPR driven funding policy explained to them in this way. And that is why we have now ended up with chronic low productivity and chronic under investment in our own industries by UK actors, given that the UK TPR views investment as being akin to a potentially criminalising risk and encourages / coerces Trustees to do anything rather than invest. UK pension scheme own but 1% of the FTSE.