NEST - compulsory pension savings for employees

In the UK, many people face an impoverished retirement. Stakeholder Pensions were introduced in 2001 as a simple and cheap form of retirement saving, but even now, nearly 12 million people have no pension plan, or a very small one. There are reasons for this - including being too poor to invest enough to make a worthwhile difference to one's retirement income.

From 2012, this will change. A compulsory scheme will be introduced in workplaces, for people that haven't already joined a scheme. It's been called by different names and has just been rebranded "NEST" - the National Employment Savings Trust. (The logo (see left) reportedly cost £363,000 to dream up - the equivalent of over 100 years' worth of maximum contributions to a NEST plan.)

There was an earlier, and in my view better, scheme mooted by one-man think tank the Rt Hon Frank Field MP, who set up the Pensions Reform Group in 1999 to address the issue. They came up with the idea of a Universal Protected Pension, which has 5 principles:

1. Together with the Basic State Pension, an extra (funded) pension should eventually lift all pensioners permanently above the poverty line, by providing a total minimum income of 25-30% of average earnings. Those who are able and willing, can pay in more to get more.
2. It should be for everybody.
3. It should operate as a redistributive scheme: everybody pays a proportion of their earnings (so higher earners pay more), but everybody will get the same benefits.
4. The layer on top of the Basic State Pension should be funded - i.e. it would become an enormous investment fund. Without this, the whole scheme would be another expensive unfunded Government undertaking and at risk of being cut or abolished when the national budget gets tight.
5. It should be kept independent of the Government, to keep the politicians' hands off it.

Like other ideas by Mr Field, this one has been well thought-out. And like some of his other ideas, it's been ignored, or badly adapted. Perhaps, in this case, it's because politicians understand the temptation of (4) too well to think that (5) would work.

Let's look at (1 - 3) as well. Without compulsion, many workers not only would not join, but might be foolish to join. This is because of the way the benefit system works. If you reach retirement with an income of less than a certain weekly amount, the State will top it up. So if you know that is going to happen, it's not worth saving up out of your earned income - you'll just get less by way of a free top-up, so it's as though your personal provision was being taxed at 100%.

To answer this objection, the State first discounts each pound of income you provided for yourself, then re-awards you a "Savings Credit" of 60p. But this is still, effectively, a "tax rate" of 40% - Higher Rate Tax for the poor. This explains Steve Bee's comment on NEST:

Now all we need is for the government guys to fix things so that the pension savings of low to moderate earners can’t be devalued by the unfortunate way pension savings currently interact with the means-tested entitlements that are provided for the elderly and we’ll be cooking on gas.

Not surprisingly, financial advisers find themselves in a quandary when advising lower-paid people about funding for retirement!

Under Frank Field's group's proposals, there would be no decision to make, since contributions would be compulsory. But also, however little you contributed, you would still attain the overall target income of 25-30% of average earnings and be above the notional poverty line, so the complicated and self-defeating system of Pension Credit and Savings Credit would be redundant.

Instead, the NEST is universal only for those who aren't already in a scheme, and you only get the results of what you and your employer have put in - no redistribution effect. Presumably the employer will take into account what he/she has to contribute to the pension, when calculating what pay rises to give you, so it's not even "free money" from the employer. In effect, we have a variant on the current unsatisfactory system, plus compulsion.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Simon Johnson on the coming disaster

Simon Johnson comments on renewed speculative activity by the banks. He fears that the next bubble-and-pop may be in emerging markets, especially China.

For those who wish to understand more, Simon's website, The Baseline Scenario, offers a beginner's guide to the global financial crisis (GFC).

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Which books should we burn?

Welsh pensioners are buying books as fuel. Discounting differences in book size, and assuming you could gather all copies of the same title, which books would you burn?

On his deathbed, the poet Virgil requested his friends to burn his "Aeneid". Does an author have the right to do this?

GDP: friend or foe?

I attended the British Association for the Advancement of Science Conference in Birmingham in 1977, and even then economists were asking whether GDP was a useful measure. The example I remember was eating more sweets and consequently visiting the dentist more often.

Should we be quite so concerned about goosing GDP with quantitative easing etc, or is it just a trap to make us continue misallocating resources?

Marmite Easter Egg

According to a team of astronomers, the Milky Way is surrounded by a shell of invisible "dark matter" (Htp: Yves Smith).

But the supermassive black hole at the centre of our galaxy is gpoing to take longer to shloop us up than we thought previously.

We have a bit more time to eat that strawberry.

Food for thought for libertarians

Propaganda time

There's a passage in Evelyn Waugh's comic novel Scoop where gentleman nature columnist William Boot, sent on foreign assignment owing to an administrative mix-up, receives instructions from his newspaper's owner:

LORD COPPER PERSONALLY REQUIRES VICTORIES STOP ON RECEIPT OF THIS CABLE VICTORY STOP CONTINUE CABLING VICTORIES UNTIL FURTHER NOTICE STOP

I was reminded of this today when I heard (via Classic FM) the cheery news that Marks & Spencer has enjoyed an increase in like-for-like sales over the last three-month period. As far as I know, "like-for-like" just means sales turnover in monetary terms, and it's perfectly possible to achieve this if you offer deep discounts, which is what they were doing before Christmas ("3 for 2" on clothes and Christmas gifts, for example). It keeps the show on the road, but it's bound to affect profits - though you may be able to disguise that impact if you mix it up with savings from property sales (27 stores) and redundancies (1,200).

Not that we got that contextualisation on the radio, of course. We are becoming skeptical news consumers, like Russians in the days when they said "v Pravde net izvestiy, v Izvestiyakh net pravdy" (In the Truth there is no news, and in the News there is no truth). It's a shame that we can't rely on mainstream news media, because when forced to the blogosphere to find out what's going on, we discover that not everyone who approaches you in a tatty coat tied together with rope is an Old Testament prophet.

But there's also plenty of stuff from more respectable sources, too. Michael Panzner ( who provides a great scan-and-select service for the economics newsfollower) directs us to this column by Morgan Stanley expert Stephen Roach. Brief highlights:

1. Only about half of an estimated $3.4 trillion in asset losses have been officially written off so far, according to the IMF.
2. The slowdown is worldwide, so other nations are unlikely to take up the slack.
3. The American consumer is not able or willing to resume spending as before.
4. 45% of China's economic activity is in "fixed investment" (building roads, factories etc) and there is a risk that they may be creating a lot of "white elephants".

Money is still changing hands here, but Roach says this is "fueled by a temporary boost from the inventory cycle", i.e. vendors are flogging-off surplus stock at bargain prices - which is why I've cited the feelgood M&S article above. After that, I think, comes cool reality - maybe continued lower prices, but also lower wages, lower profits, higher unemployment and an increase in bankruptcies.

Roach estimates a 40% chance of a "double dip" global recession this year. He also fears that economic stimulus will not be withdrawn quickly enough when a recovery comes, so possibly yet another bubble will be created. Another risk, in his view, is that the US will seek to protect domestic industry against Chinese imports; this could threaten the financial arrangements between the two countries, weaken the dollar and raise inflation.

Is it really not possible for radio and TV news to give a rounder picture of reality?

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Money fund or mattress?

When I first started in financial services, Albany Life (now Canada Life) had a reassuringly-named "Guaranteed Money Fund"; some time ago, this was quietly rebranded "Money Fund" (see page 19 of this brochure).

It's a sign of the times. Money market funds are supposed to be rock-solid - only one ever failed to return 100 cents in the dollar between 1971 and late 2008. But when Lehman Brothers collapsed in September 2008, it caused losses to a large and venerable US money market fund called The Reserve Primary Fund, which owned some Lehman debt. Initially, the loss was not great - Lehman debt represented only 1% of Reserve Primary's total assets - but there was a one-hour window in which investors could get their cash out at 100 cents on the dollar. Naturally, big investment companies, watching their computer screens, were in the best position to know what was going on and act accordingly. So they jumped out of Reserve Primary, in such volume that the Lehman debt was now worth 3% of the remaining (much shrunken) assets.

For the safety-conscious, there is hardly anything more disturbing than discovering that something you trust in completely is not entirely reliable. So a panic started, with investors exiting money funds generally, until the United States government said it would guarantee such funds. At least, it would guarantee those funds that agreed to pay an insurance premium to the government; and only investments made on or before 19th September 2008.

Now the rules on money funds are to be reviewed and understandably, it raises deep suspicions. In this recent post, Tyler Durden looks at a proposal to suspend your right to realize your money market investment, in a time of exceptional turbulence. Of course, that is exactly the time that you would wish to get out, and given the experience of September 2008 it would not be surprising to find that the institutional investors had already moved out before the suspension came into force.

It is important, because according to Durden's article about a third of all mutual funds' (the US equivalent of the UK's unit trusts) assets are in money market funds, and according to this Wikipedia article one-third of all money market funds are held by private investors. So the fear is that Joe Public would be left holding the baby if there should be a run on money market funds.

I think the fear is overdone. The measures discussed by Durden (see the paragraphs re "Recommendation 3") are clearly intended to make mutual fund investment into the money market safer, and less exciting in terms of gains; those funds that try to achieve better returns with higher risk are to be clearly identified and segregated, with tighter regulation plus provisions for emergency backing from central bankers. And removing promises re withdrawal on demand lessens the chances of a panic, by moderating expectations - it's like those commercial property funds that warn the investor that there could be a delay of up to 6 months if he/she wants to cash out.

Besides, even 97 cents in the dollar is a good return, when stocks have, at some points, lost as much as 50% of their value (e.g. between the end of 1999 and the summer of 2003).

A wider issue is the preferential treatment given to one class of investor over another. If The Reserve Primary Fund had cut its realizable value to 99 cents on the dollar immediately and for everybody, it might have prevented the panic, which was at least partly due to not wishing to be the last one left holding the worthless asset.

Nevertheless, there is always the question of what happens if you need money in a hurry. Argentine citizens were caught out in the "corralito" of December 2001, when banks froze accounts for initially a 90-day period (with the right to draw small amounts for day-to-day expenditure). The Argentine peso had previously been pegged to the US dollar, and after de-linking lost almost three-quarters of its exchange value by June the following year.

The real story, then, is the need for (a) emergency cash, in a form you can get at when you do really need it; and (b) for investors, a watchful eye on exchange rates, particularly in the light of economic problems because of out-of-control debt.

On the latter point, it's worth noting that the rot has already set in: the British pound has lost about 25% against the Euro in the last 3 years alone (and about 17% against the dollar, in the same period). A professional investor I read, called Warren Pollock, recently opined that the pound should eventually trade at around US $1.38, which means a further fall of 14%. Both currencies have lost against the Euro; but quite a few members of the European Monetary Union now have severe economic problems and it is not impossible that the dollar may enjoy a (relative) resurgence, not so much because of America's strength as because of others' weaknesses becoming better understood.

Currency speculation is for the high-rollers; but some ready money is a good thing to have, especially if inflation is not burning up its value. Maybe not under the mattress, though; as the Times reported in October 2008, sales of safes in the UK have soared in the crisis - as they did when Japan entered its long recession, years earlier.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

China, Tibet, Arunachal Pradesh: the giant stirs

I don't know how I can have missed it, but Peter Hitchens reminds us today: Britain has given Tibet to China, thanks to Foreign Secretary David Miliband. Hitchens suggests it's something to do with the credit crunch and the price of China's support for the IMF.

China is struggling to provide for its people, and needs (among other things) wood, water and minerals. Tibet is a valuable source of such resources; but after floods caused by deforestation, and ice melts because of industrial activity, China has begun to consider sustainability and is working to undo some of the damage. The Chinese don't need finger-wagging from pseudo-religious green zealots: this is a matter of survival, and the undemocratic nature of their political structure may allow them to make longer-term, and therefore more successful plans.

Nevertheless, one suspects that unlike here in the Mrs-Jellyby-like UK, but like in most other sanely-led countries, China operates on the principle "look after our nation first, and worry about the rest of the world after that". So despite the protests of Free Tibet and others, that, sadly, is that.

But diplomacy to foster better treatment of ethnic Tibetans might have had more success if we hadn't given away such a powerful bargaining point, all in one go. There is a Japanese saying I read in one of James Clavell's novels: "give fish soup, but never the fish". I think we are represented by a boyish amateur.

You may say, if I'm so in favour of our minding our own business, why bother with Tibet? My answer is that we should be trying to encourage our future master to be kinder to his servants.

Besides, giving way on the Tibet question implicitly undermines our position on the 1913/1914 Simla Accord, which also established the border between India and China, which leads us to the next item on the land acquisition list: the province of Arunachal Pradesh, on which I commented in April 2008. The Dalai Lama clearly understands the implications as His Holiness visited the province last November - much to China's annoyance (here, also). Interestingly, it now seems difficult to access the Dalai Lama's own newspage on this story - another Chinese cyber-attack, or a diplomatic self-censorship?

Anyhow, these are more straws in the wind.

Starve the beast

I don't know if there's anything similar in the UK, but if this takes off the system would indeed change. Move Your Money website here.