21 August 2010

Raiding Savings - Good News

Almost a third of adults have raided savings in the past year to cover income shortfalls, according to investment firm Schroders (quoted by the BBC: http://www.bbc.co.uk/news/business-11039316).

Obviously it's not good to have an income shortfall, but given that "life happens" it's much better to have thought ahead and accumulated some savings than to cover an income shortfall with borrowing! And let's face it, there is little incentive to keep money in savings accounts at the moment.

The key thing is to have the strategy to accumulate savings in the first place. A quarter to a third of your annual income set aside and easily available is a good rule of thumb - perhaps up to a half if your income is less certain (self-employed perhaps?) or outgoings are very "lumpy".

12 August 2010

The End of Final Salary Pension Transfers?

Health Warning: This may all sound like gobbledygook! If it does, don't worry about it! If you have any questions about final salary pension schemes we may be able to help.

At the moment it is possible to transfer from a final salary pension scheme into a defined contribution scheme prior to retirement. Although it is not often worthwhile (since the employer guarantees the ongoing benefits), it can be worthwhile if you have doubts about the ongoing viability of the scheme or if you need extra flexibility of income - by transferring to an "income drawdown" scheme, for example.

But it looks like the Department for Work and Pensions are proposing to abolish transfers from final salary schemes into defined contribution pensions from 2012 onwards. Part of the reason may be that final salary schemes are often contracted out of the State Second Pension and "contracting out" will be abolished for defined contribution schemes.

4 August 2010

Financial Services - A Culture Needing a Crisis - Part 2

part 2... (read Part 1 first by clicking here)
I’d have to say that I would have agreed with the view that financial markets should be left to act according to the free markets a few years ago. Ultimately buyers and sellers sort out what works and what doesn’t and how much things should cost. The trouble with the financial world is that it has become global, and it is now far removed from a single buyer and a single seller (or a borrower and a lender in the banking world). Complicated financial products were invented which enabled various high risk debts (particularly mortgage loans for low income families in America) to be packaged up (into things called Collateralized Debt Obligations – CDOs) and sold on to other banks as low risk debts.

Transparency was lacking, and also, since it was in everyone’s interests that this whole financial product edifice worked, no-one acted as the whistle-blower. To put it another way, it wasn’t in the culture to flag up a potential calamity:

  • Politicians were happy – low income families were in “their own” homes which was good for votes (and that goes right back to Bill Clinton)
  • Bankers were happy – their high risk loans had magically become low risk so they could borrow more against them as assets
  • Shareholders were happy – since bank profits increased
  • Bank employees were happy – their bonus structures (thanks to the culture – which I haven’t heard has changed) were based on profits they generated, not on the risks they generated, and after all, the taxpayer could pick up the pieces if anything went wrong (not that I think they actually thought about failure)
That’s why I don’t see any alternative other than legislating on things like bankers’ bonuses. If the culture is to reward profit and not worry too much about loss then an enforced cultural change is needed. I find it amazing that the boss of failed RBS – which has cost the taxpayer dearly – still expected a massive pension payout. As an intelligent person (presumably), one can only assume that he sees the world differently to the average man – and that’s a sign of a culture incompatible with reality. He and many others might well say that they have performed the particular task they were given well, and therefore their full rewards are due to them. The rest of us would say that they failed to see the bigger picture which they were uniquely capable of seeing and therefore they have failed.

In the meantime, the culture continues to generate complication because it looks clever, and cleverness is what counts in the banking world. RBS, for example, are currently advertising a retail product which uses “sophisticated dynamic investment techniques” to monitor an index (which itself they have invented using a combination of other indices) and which then uses various parameters to decide whether to buy long or sell short.... all presented as though that’s a good thing!

One could also highlight the culture within financial services regulation as being significant in getting us to where we are. The Treasury, the Bank of England, and the Financial Services Authority could all say that they did what was asked of them. But collectively they failed to prevent a global financial crisis, or even, apparently, to see it coming. I’m quite sure that nobody feels bad about that because they continued to meet their various targets, while continuing to receive their public sector benefits packages.

Here too, there are signs of a culture needing to change. Sadly, I don’t see the proposed reorganisation of the FSA as making any realistic change, and they will continue to regulate the easy bits rather than the bits that matter; but let’s hope I’m wrong.

3 August 2010

Financial Services - A Culture Needing a Crisis - Part 1

A bit of a longer article this time, so I've split it in two...

Ever since doing an Open University management course many years ago I have been interested in the culture of organisations. So much of how an organisation works – including the actions of individuals – is down to the culture. It’s rarely explicit or easy to describe, but it’s vital in the success or otherwise of that organisation.

Basically the culture says what is really important to us – never mind what any published mission statement says, or how the organisational structure is put together.
  • If the important thing is to cover your rear-end to avoid the big boss getting angry, then that will certainly take precedence over providing a good service to your customers
  • If it is more important that you can’t be blamed for anything in case you are reprimanded, then you are not going to take any risks in what you do
  • If there is a strong “can do” attitude, then that is likely to be more important than sticking to the rules
One other example of a culture is that you might call someone a “jobsworth” – it’s more important to them to do exactly what is expected of them and no more, than it is to go the extra mile and actually help someone.

What has this to do with personal finances? Well, quite a lot, actually, because it is quite possible for a culture to apply across organisations, too. In fact, I would contend that the whole financial services world has a culture... and I’m not alone in that – “Whoops!” by John Lanchester is one of quite a few books on the global financial crisis of the last two years, and it says the same thing.

Although there have been changes resulting from that crisis which have cost eye-watering sums of money (to the taxpayer mostly), I can’t help avoiding the feeling that nothing has really changed. The culture is still the same. John Lanchester describes people in the City as having “fundamental assumptions based on the primacy of money, and the non-reality of other schemes of value”. The culture is all about letting the free market do its thing.

I can’t help thinking we have gone way past that. It’s time for some real change.

continued soon...

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