Pensions opinions from a non-pensions expert

Education on pensions and investment should almost be compulsory for citizens, says John Finn of Treasury Solutions

There is a significant onus on government in the area of pensions education, especially given that 50% of citizens have not invested in a private pension.

Although my work does not include pensions advice at its core, my world of Treasury and financing indirectly overlaps with the pensions industry to a large extent. Interest rates, economic and political factors, foreign exchange, banking and general business trends are all relevant. 

So, my thoughts below look at issues and opportunities within the pensions industry over the coming months and years from a risk perspective albeit not in the way that many in the pensions industry might consider. I have looked at the sector under four headings: fees, education, current trends and future dynamics and actions.

1. Fees 

Fees are payable normally based on a percentage of the assets held in the underlying pension fund of the individual. As they are paid from the fund/trust itself, the advisers never have to raise and invoice and wait for the cheque to be cut. 

It’s a great business model! In the past I have struggled to obtain a very simple annual summary from my pension fund managers showing the movement between opening and closing fund balance between contributions made, investment return and fees deducted. 

The last point (cost) being of particular interest to me in assessing the second last point (performance). The challenge here is that if one does as one is advised and assesses performance over many years, it will be many years before consistently poor performance is identified – the cost to the investor in that scenario being not only the fees paid but, more importantly, the underperformance of the fund in the hands of said investment managers.

In an interesting article in the FT number of weeks ago, it suggested that where a particular fund tracks the benchmark index, such fund manager does not require an active manager payment. In the case of equity investment, delivery of outperformance deserves reward.

 If one was to assess the total management in the context of performance above an easily tracked benchmark, the cost of stockpicking could be very high indeed.

 Passive management can be undertaken in a relatively cheap manner. So maybe consider the scale of management fees in the context of index outperformance. Advisors may concentrate more on generating fees from sound financial planning advice in future?

2. Education 

It has always struck me that we spend up to 20 years of our lives learning and studying to get a job and a source of income that will see us through a working life of 40 years.

 However, with increased longevity, workers can easily expect to be at least 20 years retired at the end of their working life. But there is little or no learning or studying to ascertain how one can have adequate sources of income for those 20 years of retirement. 

Why? Arguably, as in our later years our level of independence diminishes/level of dependence increases, the ability to fund retirement is at least as important as funding our working life.

John Finn, managing director of Treasury Solutions, says there is an onus on Government to help educate the 50% of citizens who do not have a pension.

The very existence of and need for pensions regulation in itself is a very uncomfortable truth: it’s to protect ordinary citizens from being ripped off in one way or another by those to whom they entrust saving for their future livelihood. It also creates unnecessary cost and grief for those pensions industry players that operate to high ethical standards.

In my opinion, there is a much greater need to make pensions advice and investment available in an educational manner. I would go so far as to say that it should almost be compulsory for citizens to study such matters. As in so many other facets of life, knowledge is power. The knowledge is clearly skewed in favour of the industry. 

There is an onus on government in this area. 50% of citizens do not have a pension. But if they were made aware in their working lives of the tax efficiency of such arrangements and the likely outlook for their post working lives in the absence of bad or no pension investment, I believe that more people would invest in their future financial well-being.

 The transfer of knowledge would also demand higher standards from the pensions industry and/or (more importantly) weed out the minority in the sector that cause a disproportionate amount of trouble for the managers and advisers that operate to high standards.

 The provision of this education should focus on those who are on lower wages as they also tend to have lower standards of general education and therefore require higher levels of support. Ultimately the objective in the space will be to help people to help themselves. And a modest investment by government could materially reduce the massive future liability in the form of public sector pensions and age-related social welfare payments.

3. Current trends 

Other parts of the supplement will deal with this in more detail so I will list some observations very briefly.

Impact of mega companies. The S&P 500 was up about 6% this year in the middle of September but stripping out the performance of the five tech superstars, the figure was down 2%.

A few weeks ago (according to the FT), Apple was worth more than the entire FTSE 100 index!

Bond yields are so low that one large investment bank estimated that the global bond market (including high risk high yield and emerging market bonds) is now yielding just 1%.

A low interest rate environment shifts the focus onto higher risk investments in seeking returns. But is the risk/reward trade-off balanced?

Watch liquidity. The biggest concern in the development in funds and ETFs is the illiquidity either of the assets themselves or potential illiquidity in the event of a major sell-off in particular shares or bonds. In theory, bonds are very liquid but who is going to buy them if trillions of euros of investors want to sell out at the same time?

There has been a recent increase in investment trusts. A lot are being established to invest in private companies, infrastructure and real estate. By definition, they are not liquid but that doesn’t mean that they are not good investments. They may need to be added to your portfolio in order to broaden risk but be careful about having too much of your portfolio invested in such products.

The last is the emergence of what are known as SPACS (special purpose acquisition vehicles) where founders raise money through a listing on a stock exchange and then find businesses to buy within a set period. Could be good but watch the fees and governance I would suggest.

And on that last point of governance, there has been a tendency for some flotations to allow people with minority shareholdings to still control companies. Again the FT carried stories recently about both Lagardere where the managing partner controlled the group with only a 7.3% stake and Planatir where three investors/cofounders “are effectively guaranteed long-term control of the company, even if their personal shareholdings dwindle to almost nothing.” Even if it is not illegal, is this the sort of governance that you want to buy into?

4. Future dynamics and actions 

This is the crystal ball gazing bit but maybe some or all of the following are worth considering. Impact of China is going to continue to grow. This week Chinese government debt has been added to world bond indices and given their appetites to invest abroad, the impact of China on both debt and equity markets in the years ahead will be material. Secondly, consider constructing a portfolio around those that are best in class. 

Best in class companies tend to weather storms better than their competitors so small investments in a broader range of the best may make sense. 

Thirdly, need to consider if specialists are the way forward (as they ought to permit outperformance) or if they represent a risk with their narrow focus? 

Again, maybe construction of a portfolio with several such specialists is worth considering. Fourthly, the impact of ESG on investment trends is here for the long term and, in general, is a welcome development. 

Certainly, the need for transparency and ethics in business has never been greater. But both retail investors and consumers underestimate the power that they have in shaping companies’ behaviour in the future. 

Lastly, given that savings ratios are at all-time highs and, taking on board my suggestions on the education front above, there may be an opportunity for “ordinary people” to invest in certain types of projects. 

By way of example, there is and will be a continuing need to invest in infrastructure projects of the future (water, energy, etc). How about considering letting ordinary investors through credit unions invest in such projects thereby giving them a return through share ownership in something that the society in which they operate requires? For too long the best investments have always been available to the best connected (and probably the richest). 

Given the need for fairness in the wealth distribution stakes, maybe it’s time to empower more people to have a direct stake in the wealth generation of the next few decades.

The above is an opinion piece, represents views for consideration and does not constitute advice of any nature. Professional independent advice is recommended prior to making any investment decisions.