Dr Hari Mann: RSA Tomorrow's Investor programme

Dr Mann was the first speaker at last weeks meeting of the Association of Member Nominated Trustees (AMNT).

He spoke about the 4 year research programme into investments by the Royal Society Arts/Tomorrow's Investor Programme. He and co-author David Pitt-Watson published this report in July on Collective Pensions. 

His key theme was the high cost of many defined contribution pension schemes and the lack of transparency over charges. He prefers the Danish model where you find clear cost transparency which allows market forces to work effectively and drive down charges. In the UK the pension annual management charge does not include all costs. Some schemes charge up to 5% of contributions.

 

While it is clear that due to cost well designed Collective DC schemes are far better than individual DC. They are still clearly inferior than Defined Benefit schemes and always will, be since the risk in all forms of DC, remains with the employees. Also the return from pension annuities is so miserable that you need to save huge amounts in order to receive a decent income from DC.

 

Surely there is no getting away from it that it is better to retain (and reform when necessary) DB schemes? The real problem with DB is not that it is unaffordable but that of outdated accounting standards and the resulting volatility in valuations?

AMNT meeting September 20

"Dear member,

Do you know how much your scheme is being charged, and whether that is too much? Do you know what to look for?

Come along to the open meeting of the Association of Member Nominated Trustees and find out.
 

The meeting will be held next Thursday at Barings Asset Management, 155 Bishopsgate, London, EC2M 3XY.

If you have not done so already, you can register by choosing one of the following options:
 

- Click here if you would like to attend the meeting and will arrive for lunch (please let us know if you have any dietary requirements);
- Click here if you would like to attend the meeting, but are unavailable for lunch;
- Click here if you are unable to make the meeting.

A buffet lunch will be served from 12:30, and the meeting will begin at 13:30.

The theme is ‘Costs of Pension Schemes’ and we are putting together a programme of speakers and discussions which will be of interest to all.

We have Hari Mann presenting some of his research recently published by the RSA as a paper on “Charges to Pension Funds”, followed by a speaker from Barings, our hosts for the day.
 

Then John Simmonds from CEM Benchmarking will speak on “Comparing the cost of running pension schemes: If you pay more, do you get more?”
 

We will then break into smaller groups to discuss what we have heard, and what we can apply to our own schemes. Each group will present a brief summary of their findings, after which there will be an opportunity to network over drinks.
 

We also welcome new trustees with no experience just as warmly as we welcome those who¹ve experienced the joys of trusteeship for years.

Regards,

AMNT Committee"

 

My PS if you are a member nominated trustee (or LGPS representative) and have not yet joined the AMNT click here.

RSA Debates "The Spirit Level" 22 July 2010

I am a little early at Congress House waiting for tonight’s seminar by one of the authors of “The Spirit Level: Why More Equal Societies Almost Always Do Better”. Checking my netbook I see that I still have my note from the Royal Society of the Arts (RSA) debate last year which I haven’t got around to posting. So at the risk of confusing things I might as well post it now – it will remind me of the issues. I’ll post on tonight soon (and not leave it 6 months this time)

RSA CEO Matthew Taylor chaired the lunchtime meeting. He remarked that he had never seen the lecture theatre so packed. The debate was between Peter Saunders and Christopher Snowden (Spirit Level Deniers) and the authors of “The Spirit Level” - Kate Pickett and Richard Wilkinson.

Christopher Snowden spoke first and claimed “The Spirit Level” was a delusion. The charts used actually do not show any link between “happiness” and inequality. People “happy” from greater income. But "happy" is only one indicator. No significantly significant coloration. No significant evidence that inequality in itself causes ill-health and not income or other factors. One exception is over life expectancy and inequality. But the evidence is that there is no direct link between inequality and life expectancy.

The authors are selective about which countries used to compare so not to spoil their argument. Portugal, not mentioned. Japan may have little obesity but this is due to Asian culture rather than greater equality.

For Peter Saunders the problem is the use of statistical “outliers”. For example “income inequality and homicide”. Need in statistics to take out the USA which is an “outlier”. There is a reliance on such exceptions. USA on high child obesity and Japan with its high life expectancy. Take Japan out (greater life expectancy due to eating more oily fish rather than equality) and the arguments fail. As a Professor of Statistics he would have failed his student’s papers if they used these arguments.

Teenage births rates are the same. There are differences due to historic and sociological reasons - nothing to do with inequality. Look at third variable? Look not only at inequality but look at the link between homicide and African Americans. Ethnicity predicts homicide twice as much as inequality. This is the same for infant mortality. 18 times more likely to predict infant mortality as income inequality. He is upset at being accused of a racist slur.

Richard Wilkinson then spoke and defended their use of statistics. They didn’t use the most dramatic statistics. They did not self select and used respected and independent World Bank statistics on the 50 richest countries. Their results are based on the data. Poor health increases with stress. It is implausible that chronic stress does not cause worse health. The suggestion to remove black Afro-Americans from data is like removing manual workers in the UK.

Final speaker was Kate Pickett. All the research had been peer reviewed and responses published online. She claimed that her opponents had misquoted her and that she would fail any of her students who misquoted facts. White homicide rates in America, in the south and the north, are still associated with inequality.

Next was Q&A panel. I asked Kate and Richard whether there is a link with greater inequality in USA when compared to Scandinavian and levels of trade union density. Which Matthew Taylor asked me did I mean that if you joined the GMB you would live 5 years longer? I pointed out that I was a UNISON member. The answer was that they had not researched this point yet.

You can read more and download an audio file of the event here. I’ll post a picture from the July event when I get home. UPDATE: done.  The good guys obviously are on the left :)  Buy the book here

"Going Dutch – how to double the value of British pensions"

Hat tip Touchstone by TUC Nigel Stanley "Earlier today I spoke at the launch of  Going Dutch – how to double the value of British pensions.  This is a new report by David Pitt-Watson for the RSA that argues that the UK’s DC pensions could deliver much better pensions for the same contributions.
It’s an exemplary report - succint, well-written and carefully argued. I would urge anyone with a passing interest in pensions policy to read it.
The report argues that the DC schemes in which most people with pensions now save are extremely inefficient. There are two main areas of potential gain.

• Making schemes much bigger and ensuring that they are run by trustees in the interests of their members can deliver one lot of savings. Charges dramatically eat up investment gains – up to 40 per cent of potential pension – and if you can reduce charges through efficient management and economies of scale then you can deliver seriously better pensions for the same contributions.
• Making DC schemes collective so that members pool their resources and share risk can deliver a further increase in benefits. This would mean schemes provising their own pensions rather than compelling people to buy annuities....."

Nassim Taleb and the Black Swan Cameron

On Tuesday I went to a breakfast seminar at the Royal Society Arts to hear Nassim Taleb (left) speak for the first time recently in London about the current worldwide economic crisis. He was here 30 months ago when he ridiculed by some for his predictions of a pending financial meltdown. Now of course he is the “hero of the hour” (as was Shiller).

Nassim is “Mr Interesting” personified. Check out his website “fooledbyrandomness”. He has a very high opinion of himself and a somewhat lesser opinion of those who don’t totally agree with this former opinion.

The panel comprised of Nassim, chair Danny Finkelstein from the FT and David Cameron - Conservative Party leader (check out Tuesdays post).

Nassim was very good value – provoking, entertaining and very personable - who spoke without any notes. His most famous work is “The Black Swan” which he explains is about “high-impact but low probability events”. Wikipedia explains further:-

The term Black Swan comes from the 17th century European assumption that 'All swans are white'. In that context, a black swan was a symbol for something that was impossible or could not exist... The main idea in Taleb's book is not to attempt to predict Black Swan events, but to build robustness to the negative ones, while being able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to losses beyond that predicted by their defective models.

Nassim described himself as being in the “preventive business not emergency care” so he was uncharacteristically uncertain about what do next in the UK. He did convincingly argue that the big banks and financial institutions that are “too big to fail” must be broken up or they will just eventually repeat the same mistakes since they know that the authorities will not allow them to go bust. Check out similar argument here.

He also suggested that there is too much specialisation in financial services and too much debt. We need more generalist institutions which should have greater levels of deposits and lend less. (Not rocket science then?)

His solution to the current mortgage debt crisis is that Banks should stop sending “hate mail” to those in arrears and instead offer to reduce repayments in exchange for equity in these properties (good idea which is starting to happen in the UK). If there is cancer in the housing sector you don’t just offer pain killers.

Nassim actually likes economic crashes – he thinks they are good thing but they should not be big enough to be able to threaten the entire economic system as has recently happened.

He is very skeptical of “regulation” - he pointed out that he was a derivatives trader for several years and when he was a trader, give him a regulation, he would just find a way around it.

Regulations only benefit regulators and lawyers (workers capital argument?).

The bonus system in Banks definitely needs reforming. If Bankers are fooled by the randomness and give loans to black swans then they should not get any bonuses. (But who and how will they enforce this?)

I thought that Nassim ideas were really interesting. I was not able (despite trying) to ask my usual question to Nassim and Cameron about the role in the economic crisis that poor governance of workers capital played. Which is a pity - but there you go.

On the night before I read about Nassim’s proud boast that he always replies to short emails from people so I emailed him the question “Did Gordon Brown save the World”. He didn’t respond to this but to be fair he did actually email back and ask “Are you john Gray the author, my friend, or another one? “ I responded that “we are all Spartacus” but I was in fact “another one” to which he did not reply.

I suppose I hope he meant the highly regarded philosopher John Gray as a mate rather than the “Mars and Venus” John Gray. But somehow I have my doubts.

David Cameron and the Labour Trade Union blogger

Picture is from this morning’s breakfast seminar at the RSA. The main speaker was Nassim Nicholas Taleb author of “Black Swans” who famously was one of the few to “see it coming” and predict the current economic crisis. David Cameron was also part of the panel. I will post separately on this seminar which appears to have picked up quite a lot of negative (and inaccurate) comment.

I thought it was really interesting even if the dastardly chair Danny Finkelstein from the FT didn’t choose me to ask a question (not from my lack of trying).

Now this is the first time I have ever seen “Just call me Dave” up front and I will admit I am just a teeny, tiny bit biased against him, but I honestly didn’t think he came over that well. He seemed to me to be a little tense and even very, very slightly annoyed all the time. Not that he was at all rude or abrupt, just a little testy. It is ironic that to me he comes over well on the national TV but in such a relatively small gathering (75 of us?) he is a bit, well, plastic. While “our Gordon” comes over as a person much better in similar gatherings.

There seems to be some discussion why he was there and was it some attempt at the rebranding of his image as an intellectual heavyweight?

To be fair as I came out of the RSA he was chatting to people (aka being lobbied) as he was getting in his car. I went up to him and said “David I am not a supporter but could someone take a picture with the two of us”. He immediately agreed and for the first time that day gave a lovely relaxed tanned smile for the camera... Such is the prospect of appearing on John’s Labour blog!

I know I am setting myself for some stick by publishing this photo - but why not, it is after all the silly season.

Myners to sort out City Fat Cats?

I found the appointment of Paul Myners to become Minister for the City and to serve as an advisor on the New Economic Council particularly interesting. Tom P says “great news I reckon – he knows what he’s talking about and isn’t afraid to be radical”

The Times calls the Chair of the Guardian Media Group, Land Securities, Chair of the Low Pay commission and ex-Chair of Marks and Spencer’s a “respected figure in the City”. While The Telegraph has called him “controversial” which I think is nearer to the mark.

Many on the left will be most upset that he was a director of a hedge fund that made money out of the collapse of Bradford & Bingley. He also gave £12,700 to Gordon Brown’s leadership campaign.

However, there is more to him for those who want meaningful change in our financial systems that may at first appear. He is not at all easy to pigeon hole.

I first came across Paul many years ago when he was a senior fund manager with Gartmore investments. I was a relatively new trade union rep on my pension fund investment committee. The fund had decided to sack Gartmore for poor short term performance. Paul came to a meeting and gave a typically impassioned presentation to our committee about why we should not dismiss Gartmore due to its recent performance and that things will improve in the long term. The Chair of our investment committee however, had already decided Gartmore had to go...... and I went along with things. I don’t think that the replacement fund manager did that much better and has since been replaced anyway, but such is life. It did seem strange to me at the time (and since) that long term investors (pension funds) paid so much attention to short term performance.

I’ve heard Paul speak at a number of events since and he has always shown an edge as a City outsider with an appetite for controversy. Of course he is probably best well known for the Myners report on investment principals.

While I loved his appearance on BBC Question time last year where he said “The arrogant, superior young toffs who lead the Conservative Party, neither of whom have done a serious day's work in their life... David Cameron was executive at Carlton Television which lost over a billion pounds while he was there. I take no lectures from that young man about business competence. ...Nor can we blame Gordon Brown for the sub-prime disaster in the United States of America or the recklessness of bankers.”

At the RSA early this year I heard Paul declare that he spoke “ as a trade unionist” and “someone who wouldn’t join the Labour Party because it is not sufficiently left wing for my taste” but who urged that stamp duty on shares ought to be increased to 5% in order to encourage long term ownership (not short term trading). I assume he is now a member of the Party.

He also advised the unions to concentrate their campaigning on the disparity in Executive pay “the self appointed managerial elite are raping the resources of companies”. So called “independent” external advisers on executive pay are called “Ratchet, Ratchet and Ratchet”. His distaste was clear.

Today we learnt that the former head of failed Bank Lehman Brothers, Richard Fuld, (see picture above right) “earned” $300 million in the last 8 years.

So once the present crisis is over (which eventually it will be) shall the new City Minister take steps to tackle the abuse of executive pay and short termism – and help prevent the next “Great crisis”? We’re wait and see, but I feel that if anyone can have a go .....

Tomorrow Investor – Royal Society Arts

On Saturday I was really pleased to have been invited as an “expert” witness by the RSA to address a “citizen Jury” on pension activism.

I’ll post on this separately but I had an enjoyable day and very appropriately for such a venue, my faith in the basic decency and common sense rationalism of the “great British public” has been fully restored.

I was there because the RSA are launching a new project called “Tomorrow’s Investors”. Last week they held a keynote lecture to mark the event.

“Much of the money invested in company equities is held on behalf of ordinary citizens, often saving for retirement and other major life events. Yet it appears that many of those citizens have little consciousness of their role as owners.

Should investors be more involved with their investments, with a greater awareness and understanding of the broader implications?

Would a greater degree of involvement yield better results – both financially and ethically?Speakers to include: David Pitt-Watson, founder and chair of Hermes Equity Ownership Service; Jasmine Birtles, journalist, broadcaster and finance expert; Paul Myners, Chairman of the Personal Accounts Delivery Authority; and Penny Shepherd, Chair of the UK Social Investment Forum.

Top "Labour & Capital” blogger, Tom P was also there, and has as usual captured the debate wonderfully in this post (see selection below) so I won’t need to add anything apart from a few observations.

I think it's fair to say the real action was the split between the views of Pitt Watson and Myners. David sketched a more optimistic picture, arguing that the democratisation of ownership through funded pensions and other savings had already started to have an influence on the nature of ownership. He gave the example of the success of UNPRI.

Myners was far more critical, arguing that there had been very little real progress. Most institutional shareholders didn't take ownership seriously, SRI barely figured on the radar of company boards (as an influence on them), trustees were still spoon-fed by advisers and still focus on short-term performance despite its irrelevance.

I think the broad consensus from our little group was that although the Pitt Watson view was the one we would like to believe, the Myners perspective seemed to fit more with our own experiences.

I thought that Paul Myners was being deliberately provocative - shock horror. There are still huge problems to overcome, but as David pointed out there has been an enormous change in living memory. I actually think that Myners is actually on on board with New Capitalism although unsurprisingly off message.

Even if he is a "trade unionist" and “someone who wouldn’t join the Labour Party because it is not sufficiently left wing for my taste”. Which is a somewhat unusual statement for the Chair of a Hedge Fund to say? As was his suggestion that stamp duty ought to be increased to 5% in order to encourage long term ownership (not traders).

He advised the unions to concentrate on the disparity in Executive pay “the self appointed managerial elite are raping the resources of companies”. So called “independent” external advisers on executive pay are called “Ratchet, Ratchet and Ratchet”.

We need someone like Myners to remind us how far we have to go. Hopefully, at some stage he may have some slightly more constructive remarks. But I agree (and I am sure that David would as well, but is too polite to say so) that the majority of pension trustees need to be more independent minded and stand up to professional advisers. There again to do this they need support and training. Who can do this other than the unions?

Jasmine Birtles was very entertaining and brought us back to planet earth, she remarked that on her money web site she has worthy features on ethical investment, but no-one reads them. The most poplar stories tend to be “how to get rich without really doing anything”. While Penny Shepherd combated Paul’s negativity and took him to task.

I was fascinated when David pointed out that the BT Final Benefit pension scheme (run of course by Hermes and owned by the scheme) only cost 0.2% in annual charges (I repeat 0.2% pa). While modern DC (defined contribution, money purchase, stakeholder, personal pension - what ever) Pension charge at least 1.5% which could swallow over the years up to 40% of the fund in charges.

Come back DB schemes – all is forgiven.