by Martin White
Material related to the Better Finance International Investors’ conference in Slovenia, 11-14 September 2021
This page, part of the Savers Take Control material in the UKSA website, has been set up specially to carry material that may be of interest to attendees at the above conference, as well as anyone else, following the event.
Helen Gibbons, a board member of Better Finance and also of UKSA, and Martin White, a board member of UKSA, attended this conference in September 2021. The range of topics on the agenda was extremely wide, but the main discussion time at the conference was only one day, so in this page we give links to material that we believe is relevant to those topics, for subsequent perusal. We would very much welcome any dialogue from attendees at the conference and anyone else who might be interested. Please contact firstname.lastname@example.org
Following the issues raised in Slovenia, in both formal and informal discussions, and also in response to any related discussions that continue after the event, we will develop further material and link to it from this page.
Some of the themes that emerged in the conference
Challenges and opportunities in Slovenia, the host country of the event
- Limited engagement with saving for retirement may have something to do with the experiences of the past in Yugoslavia. Slovenia is a relatively newly independent small country with limited financial markets.
- Many economic plus points, however, with good trends in productivity and international trade.
The discussion highlighted differences between countries – both in the investment opportunities available to people and in the levels of financial sophistication and engagement.
We discussed the new Pan-EU personal pension product (PEPP) which is being defined by EIOPA, a regulatory body, and which is expected to appear in 2022 onwards. Some doubt was expressed regarding take-up, in contrast to auto-enrolment, which has been successful in a number of countries.
In a session with a theme of “sustainability”, the highlight was a powerful appeal by Andy Agathangelou, of the Transparency Task Force, related to the urgency of the climate change challenge. He suggested that “survival” would be a much better theme than “sustainability”.
Andy’s short speech can be found in the event’s YouTube video recording which is at “European Capital Markets for Individual Investors” - Joint International Investors’ Conference - YouTube". It is currently (14 Sept) in the form of a massive video over 7 hours long, but Andy can be found at 2hrs 02 minutes into the video.
Slides that Martin presented in Slovenia
My slides for the “State of pension savings in Europe” session on 13 September 2021 can be found here.
In the limited time available, I could not go through the slides as such, and so they are designed to be self-explanatory. Instead, I spoke for a few minutes on the need for a revolution in approach that puts the interests of the ordinary person first, in the face of the huge power of the financial sector. A strategy needs to be found for knowledgeable individuals who are completely independent of the financial sector to work together, across countries. The planned text of my speech can be found below and here. The video of the speech, and of the pensions discussion that followed, can be found at 6hrs 10 minutes into the event’s YouTube video recording.
The “active management partnership” – a challenge to put active managers on the spot
Paying for active management is generally a mug’s game. In aggregate it massively underperforms, as one investigation after another has shown. And Better Finance’s excellent “The Real Return” document shows how poorly pension investment seems to have delivered in many countries, after expenses. Some years ago I wrote a document which was intended to expose the “Emperor’s clothes” around the active management business, with a serious idea for a partnership between investor and fund manager, called the “Active Management Partnership”. It can be found here. Readers are invited to consider why in practice nobody actually offers such an arrangement!
Earlier thinking that informed Savers Take Control
Some years ago, in 2011 the EU prompted me into action. Whilst the ideas for the “Savers Take Control” initiative were still evolving, the EU had a consultation about something called the “EU Corporate Governance Framework”. The headline behind the consultation, which took place in part as a response to the financial crisis of the late 2000s, was “we must do something about short-termism and excessive risk taking”. However, the document was written by regulators with the usual “the solution is more regulation” presumption, which I felt was completely wrong. The start point was surely to correctly diagnose the problem. My response remained in the public domain on the EU web sites for years, but the responses have I believe now been archived. But it can be found here.
One author whose work I have found particularly influential over the years is Sir John Kay. His books “The long and the short of it” and “Other people’s money” as well as his work for the UK Government on the “Kay Review” together constitute, in my opinion, a pretty thorough diagnosis of the problem which STC is intended to tackle. And his book “Obliquity” is relevant to anyone looking to encourage change in a complex world.
Pensions - the work of Colm Fagan, former President of the Society of Actuaries in Ireland
Specifically on pensions, I would like to alert everyone to the really interesting thinking that has been done by Colm Fagan, a past President of the Society of Actuaries in Ireland. He is proposing an approach to auto-enrolment defined contribution pensions that allows investment in equities throughout the life course. It involves a carefully designed approach to smoothing that shares volatility risk amongst the members but does not involve significant inter-member, or inter-generational, transfers. Go to Colm Fagan's website and follow the “pensions” tab. Colm would be delighted to engage in discussion with any interested parties.
It is important to note that both Colm and I do what we do as volunteers, using our actuarial knowledge and experience for the public interest.
An illustration of some of the investment contracts available to UK citizens
Following the discussion in the pensions panel in Slovenia, I thought it might be interesting to demonstrate that in the UK it is possible for individual savers to find arrangements that minimise or avoid altogether annual percentage charges. The article linked here is not about a pension account, but rather about a special tax-efficient account called an ISA. It is by UKSA member Rob McDonald and appeared in a recent edition of our members' magazine.
Speech by Martin White, UKSA director, at Better Finance conference, Slovenia 13 September 2021
Good afternoon everyone, and thank you for inviting me to take part in this event in beautiful Slovenia.
I have prepared a fair bit of material for this event, and all of this, including the slides we have up now, can be found in a special page we have set up in the UK Shareholders’ Association web site. It is easily found by googling “savers take control” and by following the link to the Slovenia page.
I am hopeful that this is part of a journey to change things radically in the interests of the ordinary citizen. Let’s ask where we are today.
I think there is no better place to start than Better Finance’s excellent report “the real return”. Looking at this the other day, I was surprised – it actually made me angry.
At times, to a native English speaker, reading the report, you hesitate for a moment to work out quite what it is being said - and I guess we could help a little here - but the message is actually really clear. The passion, as well as the careful research the authors have carried out, comes through well. The return after expenses that is achieved on pension savings is simply poor. This raises a number of questions:
- What is the contribution of expenses? And I mean all sorts of expenses – explicit costs, levels of intermediation, trading costs, complexity, regulation?
- What sorts of real returns might we expect in the future on equity portfolios in a world which successfully manages to avoid a climate change disaster? I think that means a much lower growth world, and that we can’t possibly look at the last 100 years’ equity returns as a benchmark. And Andy Agathangelou’s passionate speech this morning in the “Sustainability” – or perhaps we should have called it the “survival” session – can only help to make the point even more strongly. This makes minimising expenses even more vital. It also calls, as Andy also alluded to, for some sort of informed citizen participation in determining the principles for corporate behaviour. And I think that the controversial issue of the impact of executive pay on corporate culture has to be faced up to as a vitally important part of this.
The plan for a new Pan-European occupational pension model that is more transparent and has cost caps definitely seems to be a positive step. But it won’t change the balance of power between financial sector and the people.
So what are the fundamental problems? And why did I devise the idea of Savers Take Control?
- I believe that the financial sector, especially the fund management and intermediary sector and the savings part of the insurance sector, is hugely profitable, perhaps even egregiously profitable, at the expense of the rest of society, including at the expense of pension outcomes, and I think it is also the most powerful sector of all in terms of its influence on the political and regulatory process. Simply engaging in politics is not going to change anything, nothing has ever changed anything, so it is going to take something radical to turn this seemingly unstoppable supertaker around.
- More than any other sector, this profitability arises from the relatively weak position of consumers that permits such a powerful wealth extraction process. The fundamental reason for this is the long term nature of the investment process, the extreme non-transparency of costs, and the fact that to appreciate the issues, let alone to be able to calculate the impact, you need a fairly deep understanding of the principles of compound interest. As well as the ability to face up to uncertainty and still make decisions.
- Now what’s the chance of most people suddenly discovering the principles of compound interest, and working things out for themselves? Absolutely nil.
- And what’s the chance that better financial education will make a big difference? Again, I think the answer is nil.
- The key idea has been dawning on me over the last 10 to 15 years – it has taken a long time. It is simply this – for those of us who have the knowledge, and who don’t need help, to voluntarily speak up and help the rest of society.
- So what do people need?
- I believe they need someone they can trust to be well informed.
- And someone who is not in conflict with them, and will tell them the truths and give them the insights that the financial sector would rather they did not hear. Such as that active management destroys value. And that a 2% annual cost or reduction in return across an investing lifetime will reduce your outcome by approximately 50%.
- People need simple solutions that they can trust. Everyone knows that. But everyone also knows that there is a problem with trust if everyone you talk to or deal with wants to take a significant annual percentage of your wealth.
- This “who to trust” group of people must be both knowledgeable about finance and investment and yet – and this is absolutely vital – it must be completely independent from the financial sector. People who have worked in finance, are now retired, and who want to give something back to society, are quite prominent in this.
- They have to be unpaid volunteers, prepared to share ideas freely and to learn from each other.
- We don’t need masses of people, but it would be great if as a result of this session today, a number of suitably non-conflicted people from across Europe were to come and talk to us.