25 October 2011

The "Corporate Greed" Protests

I have many sympathies with the protests about corporate greed going on in New York ("Occupy Wall Street") and in London, Rome and elsewhere. The fact is the world is suffering a great deal at the hands of financial mismanagement, and it appears that little has changed to bring any culprits to book, nor to prevent something similar happening again.

Unlike other protests against policy, it is not possible to finger the Government for the most significant stake in causing the problems (though many would say that regulation targeted at what matters was missing). So protesters cannot target the Government and ultimately elect another one that promises to do better, and they are left aiming at big corporates while disrupting normal life.

But what does "big corporates" mean? Apart from the chief executive of a big corporate like a bank - who takes responsibility just by virtue of being the chief executive - who else could be called "responsible"? Any employee, even senior ones, will not feel that they are responsible for corporate greed. They were and still are just doing the job they are paid for. The trouble is, corporate greed is the result of the attitudes of us all.

So I have a confession - I am responsible for corporate greed... just as the protesters are. While I am sure that there are dodgy practices in corporate Britain which are harmful, much of what goes on is only a result of our consumer expectations.

The New York protest was described by the New York Post as "a post-adolescent sleepover complete with face paint and pizza deliveries". While it may not currently be a coherent protest movement which is going to have an immediate impact, I do hope that it represents the beginning of a collective realisation that the direction that society is currently headed in is not a recipe for unmitigated worldwide happiness, even for the rich part of the world in which we live.

17 October 2011

Public Sector Pensions - Some Myths

Public sector pensions are in the news. For the sake of fairness to everyone else, something has to be done about them. There are no good solutions, and the situation is complicated by the fact that there are actually a number of different public sector pension schemes - some funded (i.e. with a pot of money to pay pensioners) and some unfunded (where the taxpayer has to cough up each month for next month's pension payments - that's the principle anyway).

Overall, it's better to have an understanding of the facts rather than hearsay. So here's some myths to put to bed (thanks to Fiona Tait of pension experts Scottish Life).

1. Public sector pensions are better in order to compensate for lower salaries. Untrue.

This is no longer true. Office for National Statistics figures show the average public sector worker is paid 4% more than the average private sector worker in terms of gross pay. In terms of total reward the difference is even greater, at nearly 13% in favour of the public sector, and it is suggested this is understated.

2. The changes are not necessary; public sector pensions are well funded. Mostly untrue.

The majority of the big public sector schemes are not funded. There is no pension fund as such, so the cost to the government, hence the taxpayer, of providing pensions will continue to increase.

3. The government is stealing our [current] pensions. Untrue.

The proposed changes will only apply to future pension benefits. Benefits that have already accrued will not be reduced. Existing benefits will continue to be related to a worker’s final salary even after they have moved to the proposed new career average scheme.

4. Public sector members are being unfairly picked on. Untrue.

The reforms outlined in the Hutton report are aimed at public sector schemes but the ‘saving more and working longer’ scenario applies equally, if not more, to private sector schemes.

5. Public sector workers will have to pay more, work longer and get less. Mostly true.

Not all members will be worse off. Final salary schemes are most advantageous to workers who benefit from regular promotions and salary increases. Those with a more even pattern of earnings may receive more from a career average scheme.

6. Public sector schemes are relatively low. Mostly untrue.

It is likely that those in receipt even of modest pension incomes do not appreciate how much they cost to provide, or how good they are in comparison with the private sector.

The average NHS pension payable from age 60 would require a defined contribution fund of nearly £300,000. Since the average pension fund is worth £24,330, people in the public sector are getting a relatively good deal.

7. It is all the fault of the bankers. Mostly untrue.

It is true that the government has financial problems that affect its ability to keep increasing the funding of pensions for its employees. However, the question is also whether it should, even if it could. The main reason for the increasing cost of public sector pensions is increasing longevity.

8. Public sector workers will leave their schemes if the changes go ahead. Unlikely.

This is difficult to call but it would not be a good choice. Members who opt out will find it difficult to match the level of benefits of their current scheme in a private arrangement (see above).

14 October 2011

Investment Diversity - What Works?

When reviewing an investment portfolio it's always tempting to look short term. You could research how a particular fund (or share) has performed over the last 6 or 12 months, look at how its asset class (equities, fixed interest, ...) is likely to perform in the near future and then make decisions on that basis.
If you take that approach to its logical conclusion you will end up with one investment in your portfolio which you regularly change to chase performance. There's no doubt about it... that approach doesn't work. Doing that you would be missing out on the main benefit of a diversified portfolio.

But the downside of diversification is that you are always likely to have some of your investments performing poorly. At least, it will feel like they are performing poorly - until you remember that you cannot judge performance over the short term (I'm assuming you are a long-term investor here). And since no-one has succeeded in predicting which types of investment are going to perform the best over the next period of time, that means those investments are positioned to take advantage of the next change in investment fortunes.

Of course, you still need to ensure that your choice of investment (unit trust fund, investment trust fund, share, ...) is fundamentally sound - there is no point in picking an investment which has never performed well and expecting it to give you significant growth at some point in the future, just because it never has in the past.

So if you (or your adviser) have made good decisions in the past, don't be hasty to undo that, even if values are going down. Check that nothing fundamental has changed (like investment mandate or fund manager) and then put the lid back on and leave it to cook a bit longer!

10 October 2011

Paying Commission for Advice

I recently saw a post on a local online forum where someone was saying that their financial adviser didn't charge for the advice. Instead they just took the commission from the product provider.

Do people not realise who is actually paying the commission? Them! It is deducted from their investment, regular premium payments, or whatever.

With commission payments it is the product provider who is deciding how much the investor is going to pay. Paying your adviser on a fee-basis is much better for you - you can agree with your adviser what the cost will be rather than being landed for it!

(Did I mention that I am a fee-based financial adviser?!)

6 October 2011

Pensions - Is this you?

  • Only 55% of those with a defined contribution pension scheme know that they are contributing.
  • 28% don't know how much, or even if, they are contributing.
  • 38% don't know how much their employer contributes.
Scottish Widows Workplace Pensions Report 2011

1 October 2011

Which is worse - dentist or photographer?

I'm due to have some pictures taken professionally this week to replace the (slightly dated and slightly amateur) ones I use at the moment.

I'd much rather be anonymous but I guess people like to see who the author of the blog, newsletter, etc. is, so I'm going to bite the bullet and try to look as though I'm enjoying the experience.

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