Don’t put pensions into equities

Posted on

I have written quite a lot of late about pensions – and in doing so have made clear my concerns about the new compulsory government pension scheme – called NEST.

I am delighted to note I am not alone. Merryn Somerset Webb, editor-in-chief of Money Week, has written in the FT identifying three fundamental flaws in this scheme – which was designed in he days when it was still assumed financial markets worked. As she says:

The third is the risk. The odds are that the bulk of any money that workers don’t manage to opt out will be shovelled into the equity markets. Yet not much has been said by the architects of Nest about the general failure of equity investors to make money.

Earlier this year, Tim Price of PFP Wealth Management explained the situation. If you look at the annualised 20-year returns from the UK stock market over the last three centuries you will see that the results cluster around an average long-term return. That’s pretty much as expected. What is not as expected – and what I assume the Nest architects do not know – is that “the median real annual return from UK stocks broken down into smaller 20-year durations is approximately zero”.

The past is no guide to future performance but 300 years’ worth of data should be enough to offer a hint of the likely outcome of the next 30. Which rather suggests that forcing people to give you money, which you then invest in the market on their behalf while telling them that it will demonstrably increase their wealth, might be little less than idiotic.

I agree.

Except it is worse than that. As I have written:

To date pension funds have been an almost perfect example of what Keynes described as ‚Äòthe paradox of thrift’ – saving that sucked demand and well being out of the economy. We need something very different now. We need pension funds that can build economic will being for the present and the future. The recommendation in this report show that sensible reform of pension funds and the tax subsidies they enjoy could make pension funds the engine for economic regeneration in the UK. No reform is of greater importance than that.

NEST will exacerbate this problem. Money will be sucked out of our economy at the time that we need to invest in new jobs, infrastructure, products, services, education, and on, and on and on.

We cannot afford this mistake.

We cannot impose this charge on people who cannot afford it.

We must realise that this pension arrangement was designed by people who believed in the  Efficient Market Hypothesis and in rational expectations.   Both are fundamentally wrong. Both contributed to the financial failures in 2007 onwards. We cannot replicate this error by creating a new pension scheme that is wholly irrational now, but that is what we are proposing to do.