A commentator on this blog this morning has made an excellent point on pensions:
It used to be the case that most employers' pension schemes in the private sector were defined-benefit schemes. When that was the case, the pension beneficiaries didn't get much of a say in the decisions made by the scheme's trustees. Fair enough- after all, it's the employer that is on the hook if the investments don't perform, the only agreement with their employees is to pay the pension at the agreed rate.
Now though, everything has changed, most private sector schemes are defined-contribution. The risk has been switched from the employer to the employee, so if investments don't perform in the long term, it's the pensioner who suffers if poor decisions are made. Yet, they're still isolated from virtually all the decision making, that all happens at the fund level. It doesn't seem morally right for employees to suffer the consequences of poor long term shareholder decisions, without having any input into what is decided on their behalf.
This would, however, require that the accounting of pension funds be radically reformed. I gave this some thought a while ago, but never published it at the time. Given the topicality of the issue - and the relevance of this context, let me do so now.
What I put together was a checklist of what I would like to see in the accounts I would wish my defined contribution funds would send to me each year instead of the incredibly simple note I get now that says, in essence that I contributed £X pounds of which they lost me £Y and charged £Z in fees, leaving me with a reduced annual pension expectation of £W a year at some dim and distant date in the future. That checklist of what I wanted was this:
Pensionholder capitalism - the information needs
1: Who runs the funds
1.1: The name of the company
1.2: A summary of their accounts
1.3: Full details of where and how their full accounts can be obtained
1.4: The name of the fund in which the prospective pensioner has invested
1.5: Where the constitution of that fund can be obtained from, and how
1.6: The names of the individual pension fund managers responsible for the fund and for each such manager:
1.6.1: Their age
1.6.2: Summary CV
1.6.3: Qualifications to undertake the task entrusted to them
1.6.4: Their remuneration
1.6.4.1: Linked between basic pay and bonuses
1.6.5: Any other appointments they have
1.6.6: Any conflicts of interest they might have e.g. personal shareholdings
1.7: The method of changing the fund managers available to the prospective pensioner
2: What the fund has done
2.1: What its income was in a year, split between:
2.1.1: Dividends
2.1.2: Interest
2.1.3: Rents
2.1.4: Hedge funds
2.1.5: Private Equity
2.1.6: Profits and losses (each stated separately to come to a net disclosed figure) from trading investments split between
2.1.6.1: Equity shares
2.1.6.2: Corporate bonds
2.1.6.3: Government bonds
2.1.6.4: Property
2.1.6.5: Cash related activity e.g. foreign exchange trading
2.1.7: Income from other sources
2.1.7.1: Stock lending
2.1.7.2: Fees
2.2: Volume of trading
2.2.1: Gross purchases and sales of each of the following netted to produce a net movement
2.2.1.1: Equity shares
2.2.1.2: Corporate bonds
2.2.1.3: Government bonds
2.2.1.4: Property
2.2.1.5: Hedge Funds
2.2.1.6: Private Equity
2.2.1.7: Cash held in other currencies
2.3: Costs of trading
2.3.1: Split by category, as noted above
2.4: Movements in value of assets in the year, not yet realised
2.4.1: Increases and decreases in value for each of the following, each then netted to a total
2.4.1.1: Equity shares
2.4.1.2: Corporate bonds
2.4.1.3: Government bonds
2.4.1.4: Property
2.4.1.5: Hedge Funds
2.4.1.6: Private Equity
2.4.1.7: Cash held in other currencies
2.5: Administration and other costs
2.5.1: Salaries
2.5.2: Research
2.5.3: Overhead costs
2.5.4: Management fees to parent institution
2.5.4.1: NB if the previous three categories are included in a management fee an indicative split of the management fee into these categories should be given
2.5.5: Audit fees
2.5.6: Regulatory fees
2.5.7: Other costs
2.6: Surplus for the year
2.6.1: The surplus or deficit for the year allocated by sub fund if appropriate
3: What the fund invests in
3.1: A balance sheet for the fund
3.1.1: Investments
3.1.1.1: See separate notes below
3.1.2: Current assets
3.1.2.1: Split in the format required by Company Accounts
3.1.3: Current liabilities
3.1.3.1: Split in the format required by Company Accounts
3.1.4: Member funds
3.1.4.1: Opening funds plus contributions less the result for the year equals closing member funds
3.2: Investments
3.2.1: Detailed notes required by asset category showing value brought forward, additions, disposals and movements in asset value - to reconcile with notes in the statement of what the funds has done - leaving closing cost
3.2.2: Equity shares
3.2.3: Corporate bonds
3.2.4: Government bonds
3.2.5: Property
3.2.6: Hedge Funds
3.2.7: Private Equity
3.2.8: Other
3.3: Investment analysis
3.3.1: List the top 100 investments by value at the start and end of the year and note the following for each
3.3.2: Name
3.3.3: Type of asset by category already noted
3.3.4: Proportion of the fund invested in the asset and proportion of the asset held (e.g. what percentage of the company invested in is owned)
3.3.5: How the asset invested in generates its income .e.g. what use is made of a let property, what trade a company pursues
3.3.6: Whether the investment is considered ethical, referencing an accepted standard
3.3.7: Whether the investment is in a low tax jurisdiction (headline corporate tax rate of less than 20%)
3.3.8: Value at the start of the year
3.3.9: All purchases
3.3.10: All sales
3.3.12: Value at end of year
3.3.13: Total income received
3.3.14: Income of highest paid director in company invested ion
3.3.15: Whether the fund voted against any resolutions put by the company in the year and if so what on and why
4: Other information
4.1: Future investment policy
4.2: Green policy
4.3: Ethical policy
Now that may look like a lot, but if I pout money in a company I get a set of accounts that complicated, and can quit whenever I like. If I put money in a pension fund I get virtually no data, may be dependent on the outcome for the rest of my life, and have almost no way of quitting. And candidly, any fund must have this information to manage itself.
This would really transform accountability and since now we take the risk on pension funds it's high time this happened.
So which party is going to take this one on?
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Only problem is you may need to run a training course so that everyone can understand their answers. Of course, I’m assuming they’ll be devious in their replies.
Personally, I don’t want all that information, because I don’t want the choice. I just want to pay my contributions safe in the knowledge that when I retire, I won’t be a pauper and will have enough to maintain myself and be safely out of poverty. Very few people have the knwledge and skill to interpret that sort of data, much less the inclination, particularly when the average consumer is also expected to be a competant assessor of their telephone, energy, insurance, television, insurance, mortgage and so many other services. Not my idea of a relaxing Friday night, but this is what’s expected of us as consumers. The last thing I want my half-baked expertise applied to is my pension.
But unless this has to be provided to someone no half baked expertise is going to be applied by anyone to your pension
@fearlessknits
Oh dear Oh dear!!!
And how will you know that the person who “sells” you a “pension scheme ”has skills that are any better than “half-baked expertise”? Particularly if the “plan provider” informs you (in writing) that all the people involved in “marketing” their “plan” are “professional” financial advisors capable of conducting an in depth survey into your individual financial circumstances and aspirations. Did you check your doctor’s qualifications last time you visited him – or simply rely on the certificate hanging on his wall?.
And then when your pension plan proves to be a complete lemon and you discover that it was hawked by unqualified, unregulated, uninsured, unregistered people who have long since “disappeared” what will you do? Complain to the “provider”?
This is type of scenario is happening to people RIGHT NOW.
And the Isle of Man government encourages it!
That’s kinda my point. I don’t need to check my doctor’s qualifications, because they’re in the NHS, and I can trust the NHS as an institution. A similar arrangement needs to happen with pensions. At the moment, I am a member of a union, and trust them to look out for my interests when it comes to pension negotiations. But that isn’t enough, and the unions still get shafted or ignored. So something more is required. I would like to see a complete re-thinking of pensions so they are properly regulated, and minimum standards of income and living enshrined in law.
A number of years ago I read a book called ‘Jennifer Government’, which, at the time seemed like hyperbolic fantasy, but is looking increasingly realistic.
I don’t want to live in a world where I have to look out for people trying to trick me every second of every day. That’s what the law is for – to allow us to chill out and relax when the work of the day is done. Maybe read a book. Or do some knitting. 🙂
@fearlessknits
Obviously few people ever ask to see the credentials of a doctor — this is a result of our placing trust in the civilised community we live in. Unfortunately we are unable to place the same confidence/trust in “financial advisors” – even as you write the protection of a trade union is not enough to avoid being “shafted”.
Remain on your guard until properly regulated pension schemes are enshrined in law. . Until then, in the financial services world at least, there are people out there who are prepared to trick us – a few hundred pensioners we know are testament to this.
Perhaps we may be approaching the situation as described in Max Barry’s excellent novel “Jennifer Government” where the consequences of privatizing everything diminishes government function until it takes little part in the daily affairs of the nation — and everything is self regulated by the corporations; which usually means NO regulation.
Reading books is good and the more relaxed members of our Group are big knitters too! But tread carefully with your pension arrangements. Trust us.
It ain’t going to happen, is it, Richard? The exercise would expose the whole nature of the rip-off and provide the case for public provision of pensions.
That’s why it’s worth making a fuss….
And now cash incentives are being offered, by unregulated firms employing unqualified “advisors” (an activity sanctioned by the Isle of Man government) to “review” the pensions of unwary people with the object of changing them into other “plans”.
Some of these “companies” are pushing investment in Caribbean property that may or may not be built at some infinitely movable date in future, and “pension reciprocation plans” that promise half your fund as an immediate tax-free lump sum regardless of age and tax status. All incredibly high risk strategies marketed as “low risk”.
Thanks to the City of London, where pals regulate pals, the finance industry now attracts some of the worst scum of the earth with their devious, sticky-fingered “plans”.
http://www.ftadviser.com/2012/01/09/pensions/personal-pensions/ifa-concern-over-firm-offering-pension-transfer-incentive-0yAmQPUlJTuDvWaD4nOxaL/article.html
With respect PSG, what does the Isle of Man have to do with your link? Last I heard, compared to here in the uk the IOM Government actively encourage people to take private pensions that they can control (SIPP), allow a larger tax free lump sum on retirement (30%), better options with regard to capital drawdown, and return of capital to your estate if you die. However, the pension funds are uk based, so if you are suggesting uk companies are investing in the caribbean, how is that the IOM’s fault?
Obviously people should be encouraged to invest for their old age by contributing to professionally managed pension schemes (of all varieties) promoted by qualified and established “financial advisors” (as opposed to misrepresented “schemes hawked by unqualified charlatans who disappear once they have grabbed the sales commission) .
The difference between a UK based pension scheme and one based on the Isle of Man is that at the least in the UK there is some semblance of regulation together with consumer protection, advertising standards and fair trading regulations.
Regrettably on the Isle of Man what passes for a “government” shows complete disregard for such niceties and anyone considering basing their pension on this island should seriously think again.
Full details on request.
I agree with Fearlessknits. And if published Company accounts are anything to go by, the more detail you have the less you know what is going on. What is needed is Regulation, but Regulation that is enforced. But that has to be paid for somewhere down the line, and not may people want to pay.I know that because from experience I have found that very few people want to PAY for Financial advice, they like to think commissions are paid for by someone else. Like Governments, you get the kind of pensions that the people deserve!
Private pension schemes are best just as an optional top up for those that do not mind speculating. The main pension must be the state pension, but additional pension provision can provided for.
For those that want it a safer option should be a voluntary scheme but with incentives to pay into national mutual investment funds that lent to the public sector to build hospitals, social housing schools and extra. A little of these funds could be directed to cooperative and other social enterprises. Some hypothecation could be allowed. This is likely be safer investment as the state could guarantee some of it
Capitalism if good in any way might be better guided to this by having a strong and renewed public sector based on economic democracy and market socialism, mutual and cooperative sector added in.
This at best a thought experiment for now!
Read my work on pensions called People,s Pensions and Making Pensins Work which shares these ideas