I got the typical reactions from right wingers for suggesting that the investment of auto-enrolment pension funds was inappropriate yesterday. Comments included the claims that these investors had a choice of funds, so that if they wanted a green fund they could already have it. And it was claimed I was trying to impose my will on people. Additionally, I was apparently seeking to distort markets. And why should I demand people invest in low risk, and so lower return options when more aggressive, height risk alternatives are available?
Notably, not one commentator addressed the macroeconomic concerns I raised in my piece, which was that these funds actually invest in nothing at all, and are mere extractions of cash from the economy to promote saving largely using second-hand quotes shares or commercial property as the medium for doing so. The concern was all about how I would impose my will on these poor people. That the State has already imposed its will on their employers to require pension contributions was ignored: all focus was in the desirability of freedom for the funds contributed to be invested at maximum return. This, it was clearly assumed, was the only rational thing to do.
The trouble with that claim is that people are not rational and to assume they are is, then, utterly illogical. If they were rational they would not need to be nudged into saving at all. But the whole point of this arrangement is that this is necessary.
And as a matter of fact people cannot, on issues such as this, usually make good decisions. The information asymmetries between the suppliers of these products and the people who buy them are staggeringly big. And the consumer, knowing that, goes with the ‘mixed fund' option they are told is the best, having no real way of knowing if it is or not, but accepting that if this means that their employer will effectively increase their pay by 5% then this has to, to some extent, be true.
Do they then check whether it is actually true? No: the evidence is that almost no one ever does. These people had not decided to save before being auto-enrolled so they are not going to actively engage after they have joined.
What do they do instead? They live in hope, but little expectation. The whole point of the story to which I originally referred was that current contributions, usually at 8% of salary, are insufficient to buy an adequate pension. So the auto-enrolled pensioner has already has low expectations, and probably expects poor performance and high product costs. They will not, of course, be disappointed in any of those particular aspects of the product. And I pointed to the opinion of an actuary of such a fund, expressed to me, who shared that concern.
So where do we get? To a point where millions of people invest what for them are significant sums in expensive financial products that are known to not meet need. And which do reduce demand in the economy. And do not replace that demand by promoting any real investment, at all. Which is the type of negative multiplier effect which is bound to assist the under-achievement against the promise that these products have inherently built into them.
So what have we actually created? I would suggest it is a lame duck financial product costing 8% of the salaries of millions of people that cannot deliver anything like a reasonable pension. It joins a long line of oversold financial products from endowment mortgages, to pension opt-outs, to PPI. I have little doubt these products will join that list in due course. Just give it time.
And why can I be so sure? Because these products seek high returns not from investment - because none takes place - but from speculation. They simply ride the bubbles then, always assuming that they will net, overall, win.
Except now they won't. And why not? Because we are facing a seismic change in the economy created by climate change. Oil and other mineral-based companies are massively over-valued at present as a result: most of what their value represents simply has to stay in the ground or paying pensions out will not be an issue: there will be no planet left for us to worry about. And the same applies to a great deal else of what we call value now.
So I suggest that at least some of these funds be required to be invested - by which I mean actually be used to fund real economic activity. And it so happens that this is very hard to prove in the case of most so-called investments now because almost all those used for pension saving do no such thing. Which is why I do think green bonds are vital to the future of pension funds.
Sure the yield is low. But there are five advantages.
They will preserve value, because they will be government backed.
They will pay something.
The pensioners will gain from them.
And the pensioner will understand them.
And the macroeconomy gains.
Try claiming that for anything else at all.
In which case there is another advantage. There won't be a scandal. And a lot of people will be grateful for that.
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In these pages, there is much discussion about how few people understand that banks create money, and do not have chests full of fivers in their vaults with which to fund our mortgages.
Similarily, I find that few people recognise that most ‘investments’ are not really investing in the sense of building the infrastructure we need, or creating new wealth and jobs. They are merely speculation in assets (housing, land, art), buying the right to future revenue streams (equities) or pure speculation (hedge funds and derivatives).
I’ve long argued that investment banks should be had up under the trade descriptions act as they do next to no investment. Speculation Banks would be much more accurate.
There is indeed a lot of education to be done
Absolutely right Robin
When auto enrolment started where I work the green or ethical fund you could choose was still investing in tobacco and oil firms. That obviously isn’t green or ethical and is a joke which gives the illusion of choice.
No one else I spoke to looked at the different choices or cared which fund their money went in.
Precisely
This all strikes a chord. My main employer’s auto-enrolment scheme did not offer an option to enable me to avoid fossil fuel companies or weapons manufacturers, to name but two. I opted out, knowing I would lose the employer contribution as a result, and have set up a SIPP for my relatively modest income (with a lot of time spent researching suitable funds). It’s not an ideal situation, and I’m sure few others did the same. (After all, what kind of idiot turns down ‘free money’?)
I would certainly be interested in government backed green bonds for the reasons Richard articulates, because business-as-usual will prove a dead end for human civilisation. The perennial ‘Are we smarter than yeast?’ question springs to mind…
Thanks
Don’t you just love it when financiers complain that a suggestion is going to ‘distort the market’.
The market is so distorted it has it’s head up it’s arse so far the people who work the financial markets cant see it.
How it can take quite so long for the markets to go tits up is one of life’s mysteries, but tits up it will go again. And then who’ll complain about government distorting the markets to bail the bastards out again. It is the job of Governments, central banks and the IMF to distort markets to make up for the stupidity of the speculative pillagers and ensure that once again they don’t lose and also get to keep the spoils accumulated to date.
Agreed.
We all know how current market based investment works right?
You have people with pound signs in their eyes looking for easy money going to others with pound signs in their eyes because of the nice big fat fees and incentives they will get and well……………………hmmmmm. Yeah. What a shame.
‘And it was claimed I was trying to impose my will on people.’
‘So I suggest that at least some of these funds be required to be invested’
If you can’t even be consistent in the same article, how can anybody, except your coterie of financial luddites, take you seriously ?
Who do you think presently builds the roads, and the houses, and the bridges, and the precious infrastructure you seem so keen to dictate to others can only be funded by a government quango ? And where do you think the capital to fund these projects came from ?
I now realise that you think your comments yesterday represented some sort of victory on your behalf, when to anybody with any experience of the actual industry at hand, you humiliated yourself. Piling on further evidence of your paucity of understanding today will hopefully help people understand whatever relevance you may have once had is now gone.
In the words of somebody else, you are wasting my time.
Apart from needing to satisfy your daily quota of ad hominems, why are you here?
You have no argument
And if you really think that conditions cannot be attached to tax relief you have a very odd idea about the entitlement to reliefs. After all, no one needs tax relief to save. If you want it applying conditions is wholly reasonable. But maybe not to you
@Vern
Roads and bridges? In England, isn’t that Highways England?
This is what H.E. have to say about themselves: “We are the government company charged with operating, maintaining and improving England’s motorways and major A roads.”
To paraphrase: “If you can’t even be accurate in your comment, how can anybody take you seriously?”
Just to be clear, I enjoy following the threads here which include alternative views as they usually lead to finer dissection of how stuff works. It’s not the difference of opinion I am jumping on here but the sheer inaccuracy of what has been said.
I really don’t like people spouting obvious inaccuracies and believing they can just end arguments that way. That type of behaviour is lazy and deserves derision.
Vern said
“Who do you think presently builds the roads, and the houses, and the bridges, and the precious infrastructure you seem so keen to dictate to others can only be funded by a government quango ? And where do you think the capital to fund these projects came from ?”
You wouldn’t be suggesting that letting Carillion run these things was a good idea, would you?
Cos that worked out well, didn’t it?
Muppet.
The only cost effective and rational way to provide a reasonable pension for the average person is for the state to do so. The existing largely private UK system is really largely enriching the financial services industry while almost certainly failing to provide anything very much to most of the folk expecting a pension.
What you have to is to separate in your thinking the entirely artificial and human construct of money from the actual goods and services that people want and need. Nobody other than a few nutcases wants money per se – they want the things that money can buy. So people saving up financial assets now is, in most cases, going to make little difference to the actual real amount of goods and services that are available to purchase in say 2040. Whatever pensioners in 2040 may get will come out of the supply of goods and services that are available in 2040. Pensioners cashing in financial assets in 2040 will sell them to non-pensioners in 2040 and use the proceeds to claim a share of the real goods and services available then, That quite obviously reduces the share available to non-pensioners (unless the economy has unemployed resources and can increase output). What that means is that pensions (or indeed support for the disabled, children, etc) is always paid for in goods and services by those in work at the time. The only way that could be different is if you physically filled up the garage with tins, camping gas etc and then lived off the stockpile in retirement.
It does not really matter whether pensioners take 30% of the available goods and services in 2040 because the state gives it to them as a state pension, or because they have accumulated financial claims that they cash in and buy the 30%. The end result is the same. That is not to say the distributional effects would be the same – almost certainly not as it would be a uniform state pension compared to a wildly varying private pension / savings.
So Richard is right that if saving for a pension is to have much purpose and practical effect then it does need to result in actual investment in productive capacity. In other words the cake in 2040 needs to be larger than it otherwise would have been (or actually still be a cake at all given climate change). Speculation in derivatives, house prices, FX, etc adds nothing to output but does alter who gets how much of the cake.
We are in very close agreement Tim
Agree entirely about the ‘negative multiplier effect’!
A further point is that compulsory enrolement in a private pension provides additional income for the financial services industry so is effectively a form of state directed rent extraction on behalf of the financial services sector – for life.
We also know there is no national insurance fund as such and it’s just another tax – it was originally created in 1911 when we were still on the gold standard!
I think we ought really be calling out our so called state pension ‘entitlement’ as just a basic income for retired people.
‘Vern’
According to history Luddites were those who wanted stop progress – wanted things to stay as they were because of their concerns.
Speaking for myself as one of the ‘accused’ I want change in the financial system , I want modernisation and new ways of thinking. And I want more fairness.
You poor scorn on it all and won’t even – it seems – give any new ideas a chance!
The only Luddite here by definition, is you. Yes. You.
I’m a bit confused as to how Green Bonds are any different to Government Bonds (gilts) which have a specific purpose I think the Netherlands have just done this to an extent.
Can you explain?
If they are just gilts issued for green investemnt thresher is little difference, expect there is a mandate for their use – which is vital
Issue them from a green investment bank and they become like KfW bonds – and that is different, albeit a government guarantee can be added, if desired
All these things are always subject to discussion, negotiation and agreeement. That’s how finance is
[…] Cross-posted from Tax Research UK […]