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.