9 Jul 2012, 10:43am
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  • Government Guarantee against Stock Market falls – Mis-Selling Scandal ahoy

    Don’tcha just love something for nothing? Here’s a doozy – invest in the stock market, take the gains and insure against the potential losses? What on earth could go wrong.

    It’s like the philosopher’s stone, or the elixir of everlasting life, an idea that is almost numinous because it’s something we all want.

    Guaranteeing against stock market falls did for Lehman Brothers, so why did our very own Steven Webb, Pensions Minister not remember this recent history when he spake thusly

    Steve Webb, the pensions minister, said he wanted to give people “certainty” that they would get a guaranteed income when they retired.

    Steve, me old mucker, it ain’t gonna work. You did PPE at Oxford, so you were a damn sight cleverer that I was, but it obviously didn’t stick. Let’s take a butcher’s hook at the old plan, eh.

    Ministers fear that unless they can guarantee that pensioners’ money is safe, they will be deterred from saving.

    Now this raises a whole bunch of philosophical debates, of the sort that probably occupied fine minds in Oxford. What exactly does safe mean, f’rinstance? Most of your pensioners probably think put in £100 and get at least £100 back, that’s safe. It isn’t. £100 will buy you a colour telly now, it may not buy you a loaf of bread in thirty years, if the economy fails, if energy gets a lot more expensive, if climate change means you can’t grow wheat. It’s called inflation, and it’s how governments lose excess debt. You should know that, Steve, because the Government you are part of has been doing just that. You’ve destroyed 25% of my lifetime net worth over the last five years, by printing money and making it less valuable. However, perhaps the proles aren’t up to spotting such legerdemain, so we’ll conveniently look the other way.

    More fundamentally, however, who is doing the insurance job?

    The policy, provided by private insurance companies, would guarantee savers that their pension pot on retirement is worth at least the combined value of their contributions, their employers’ contributions and the tax relief they have received over their working lives.

    Right. How is that going to work then? Does it come with an implicit Government guarantee, in which case FFS lose the private sector, as all they will be doing is paying bankers bonuses in the good times and letting the taxpayer carry the can when it all goes titsup. That’s the trouble with insurance, it works most of the time, but it is like a flawed sword. It fails you in your time of greatest need, shattering into a thousand empty promises.

    There are many things in life that gain their power from their inherent heart of darkness. It is the possibility of 100% losses that makes investing different from saving, it is the negative counterbalance to the possibility of investment gains. Diversification can mitigate this effectively, both temporal diversification (pound cost averaging) and stock and sector-based diversification. But the risk of investment is inherent – you are capitalizing other people to take risks on your behalf. This risk is the fire that feeds the flame. The price of eliminating the risk is about as much as the potential return. The stock market is a hellaciously noisy signal superimposed on an almost imperceptible drift upwards, though you assume some of the fundamentals of industrial civilization hold or be replaced by equivalent value if you’re going to project that drift into the future.

    The real return on a diversified portfolio is low. Eating an insurance cost of 0.75% could well shave off 20% of your real investment return, year on year. That may be a fair price to pay for  peace of mind for some people, and it may even be good value in the last 25% of your retirement savings career (55-65) but it may come at a high cost in the early days of your retirement savings.

    The worst thing about this is that Steve Webb plans to deliver the future pensioners of Britain into the arms of the rapacious financial services industry, rather than telling them how to achieve the same result themselves, as Monevator describes here.

    There’s a mis-selling scandal brewing in this one…

    I think it sounds a brilliant idea.

    I’ll start a series of SIPPs: each just for a single extremely high risk share, get someone to insure each SIPP at low-low cost, then I can’t lose! Heck – it even sounds like the guarantee of contributions + tax relief covers any charges.

    Hm. Is the practice of converting a portfolio to an annuity common in the UK? I think that would offer peace of mind, albeit at great expense, and involve the private sector.

    @Steve I do hope they restrict the type of asset to a selection of index trackers, but I salute your ingenuity – I had’t got as far and working out the details 😉

    @Richard – indeed, this is the canonical way of turning a pension lump sum into an income. For technical reasons it doesn’t apply to me, but if it did I would spread my annuity purchases over several years and several companies, in order to hedge counterparty and temporal risks. People are still sore about Equitable Life going belly-up, though curiously people still tend to purchase an annuity as a one-shot event with a single firm. That wouldn’t offer me peace of mind.

    @ermine: actually I share your view that the scheme is basically deranged, on every level.

    I was in a whimsical mood.

    9 Jul 2012, 6:16pm
    by Dylantherabbit


    0.75%.. !! The bloke has no idea about the effect those charges will have on returns and losses, compounding any loses and creating even greater risk to the insurer.
    I wouldnt pay 0.75% in fund charges, but at this rate you would be well over 1% per year in charges, possibly over 2%.

    Yep, it’s nuts, unless inflation can be stoked up sufficiently to make nominal index falls impossible. That might actually be difficult to do in an economy stuck in recession.


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