I have two specific aims with The Right Side. First to show you investment ideas that can offer interesting and profitable opportunities.
Secondly – and just as important – I aim to blow the lid open on how the financial industry really works. I believe it’s deeply misunderstood and in need of some transparency.
And nowhere is there greater misunderstanding and lack of transparency than with pensions.
This week pension minister Steve Webb has been busy trying to identify ways of improving the lot of pension savers. And he talks a great game.
Webb says savers are fed up putting money into pensions without any guarantees on what they might get out of them. And he’s right. It’s something we’ve been saying too. And it means savers are paying less and less into these esoteric schemes.
But Mr Webb’s prescriptions on how to solve the problem will miss the target. And it just goes to show that it’s not just investors that don’t have a clue about how pensions and the financial industry works...
It’s the guys in charge too!
The pensions industry is all smoke and mirrors
I’m sorry to be the one to point it out, but it’s true. In fact, the financial industry isn’t really an industry at all. I mean, nothing is produced... nothing at all!
I’ve said it before, and I’m sure I’ll say it again: Financial savings are nothing more than a collection of promises. Your shares, your bonds, your government pension, and even cash... they’re all just promises. And as for the finance industry, it’s nothing more than a brokerage system – taking promises from one group of people and passing them on to another. And, might I add, skimming fat commissions in the process.
There’s one fundamental truism: each financial promise is predicated on the assumption that somebody else will deliver on it. Be it an interest payment on a bond, a dividend on a share, or a return on an annuity – there’s always a risk that the promise will be broken.
How does that relate to pension promises?
Well, pensions minister Steve Webb wants employers, and the (crackpot) industry to provide savers with more certainty about what they’re going to get in retirement. He says “I want industry to innovate and think hard about this.”
But the minute you hear words like ‘innovate’ in the context of the finance industry, you should start to worry. The first thing you’ve got to consider is who’s on the hook? Can they keep their promise?
I remember when Equitable Life, the UK's oldest life assurer, made promises it couldn’t keep. It had cottoned onto the idea that people wanted to know how much income they’d receive upon retirement – so it gave many members a guarantee. But ultimately it couldn’t afford to make good on these promises. The business went bust! And all the members were worse off for it.
Mr Webb wants employers to make promises too. He wants them to offer guarantees for what a retiree will get.
But once again, such promises have in the past driven firms into insolvency. And I expect more to come as businesses with over-sized pension schemes drag companies down. It’s getting increasingly costly for employers to make open-ended commitments to workers, which is precisely why they don’t do it anymore.
And anyway, many of these businesses are owned by the pension funds themselves. If you take cash from shareholders and give it to retirees, then the shareholders suffer. And that includes the pension funds themselves!
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Loading up different bits of society with promises seems a laudable ambition. But in reality it’s likely to prove very costly. Remember, by complicating financial promises, you always lose something in the bargain. Any promise brokered by the industry will eat up fees and will have a deleterious effect on the fundamental value of the promise. (Don’t believe me? Just look at annuities).
Any government-created schemes that force businesses into bad promises will sap energy out of the firm too. And that’ll leave a weaker business, less able to make good on its existing promises – not least of which is providing employment.
This is yet another case of counterproductive government interference. I guess we shouldn’t be so surprised. It’s the job of the planners to create, shift around and ultimately destroy promises.
What you want is a reliable promise
As savers, what we want and need are promises that can be relied upon.
In a world where financial promises are getting more dubious by the week, month and year, this is an issue that’s never been more relevant.
Only yesterday we saw the central planners deliver more quantitative easing (QE). In this case, they are breaking the promise that stands behind cash itself. And that is, that cash should not be counterfeited!
Mervyn and his team are merely shifting around promises. Largely speaking, the promise that was made to savers is watered down. Debtors benefit. And all the while, the financial industry skims commissions on all the new money sloshing around.
Ultimately, QE devalues the promise that backs our currency. In that sense, we all lose.
Three things you need to do
• Try to take charge of your financial destiny wherever you can. Always bear in mind that any promise made by the finance industry is likely to cost you. So avoid them whenever it’s safe to do so.
• Assume the worst and collect the best and most reliable promises you can get. I’ll try to give you some ideas along the way.
• Have a decent slug of savings outside the financial industry. Hard assets are savings. And what’s more, they’re not reliant on somebody else’s promise.
If you are starting out, then I highly recommend that you take a look at the new email that MoneyWeek have put together. It’s called MoneyWeek Basics – a free email that is dedicated to helping private investors take control of their own investments.
Twice a week, you'll receive a comprehensive email from John Stepek, Merryn Somerset Webb, Phil Oakley, or one of the other top writers at MoneyWeek, explaining all the essentials that a private investor needs to know, in simple, clear English.
It sounds like a great idea to me.
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• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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