The community space we had before we launched Dozens, with 300 diverse customers from across the UK, was called “What If”. This was a great way of starting interesting discussions. I thought I might challenge your imaginations and ask a few “what if” questions here too, on Financial Wellness related ideas, to see what we imagine our future could be like.
What if we all had to serve on a pension ‘jury service’?
What if, in some not-too-distant future, we had a government that decided that as well as making it an obligation on employers to open and contribute to a person’s private pension, we also tapped the wisdom of the crowd in how this was to be invested? They believed that individuals were too risk averse when thinking about their own future, and that the industry was likely to be biased, so to get around this, it would be up to strangers to make a decision that they would not benefit from.
Like a trial jury, every UK tax payer could be required to have 12 of their peers selected, at random, to determine the fate of their pension for the remainder of their career - and it could happen at any point.
So, one day in this future, you open the post and find out that for the next two weeks you are sitting on a pension jury, and you will have to select an appropriate strategy for a complete stranger. You do not know them and are not allowed to meet, but the jury and ‘candidate’ can exchange a single message. You can ask no more than 5 questions, and they will supply short answers (no longer than a tweet - 280 characters)
How could you approach it? What do you think of the idea - it is crazy, but could there be any benefits?
What might you ask, if anything? Would you play it safe? Would you take a risk to give them a chance for an amazing retirement … but also risk their comfort? Would you focus on the individual, or the benefits to the wider society?
Remember, … one day someone will be doing this for you too.
Company pension schemes might claim they already do these through their panel of Trustees. However, who appoints these Trustees? Yep, the company and, maybe, the recognised trade union. Still not very democratic and hardly “peers” (I have an image of old white grey-haired men in grey suits in my head - oh yes, it’s the team photo I saw in the last newsletter I received from my company pension scheme!). Most of these Trustees are more like life-long technocrats with few of the lived experiences of their customers. Getting them to respond to the needs of their customers is like trying to manoeuvre an oil tanker (only much slower).
I can endorse the idea that people should be helped by “strangers” when making decisions about their pension. A major problem with company pension Trustee’s is that they are too close to the industry and circulate within particular social circles. It’s only because I ignored my employer and diversified my pension investments that I have been able to make the leap in to early retirement. I’m afraid I’ve also largely lost faith in IFA’s. Again, their lived experiences mean they mostly don’t make a connection with their client that will result in the best possible outcome and I fell that AI or so-called “robot advisors” can do the job just as well.
Jobs for life were still very commonplace when I started work as an apprentice, HR was still called “personnel”, and “zero hours contract” would have sounded like a technical term for “gardening leave”. Today, lifestyles and work habits can change rapidly and working people have to face challenges that come out of the blue. Many parents can no longer provide their children with an inheritance that will underwrite key early adulthood milestones. I’m not sure that decisions should be fixed indefinitely. Too much s*** happens! The mantra shouldn’t be “diversify, diversify, diversify” it should be “review, diversify, review, diversify…”.
So, I think two of my questions would have to be: -
(1) “Do you live to work or work to live?” and
(2) “What do you hope to achieve by the ages of 40, 50, 60 and 70?”
Would I be risk adverse? For a young person, “no!” Despite anything anyone says in their 20’s or early 30’s, that approach to your 50th birthday is a real game changer. A bit of risk early on should mean better long term investment growth and provide more opportunities later on if you want to change your priorities. (Hint: Review!) This puts in mind that my third question might be “How old are you now and how old do you feel now?” - not to glean any demographic information but rather to understand a person’s outlook on life.
I’m scratching my head on Q4 and Q5 so I’ll leave it there for now!
I added the character limit for the subject’s answer in order to kill your q2 …
I agree it would be useful information, but I chose to limit this because if you got an essay for each age, you’d still be working on the personal / biased information that the stranger decided to share with you. How honest would it be? How realistic? How valuable?
I’m hoping to find proxies that could give us insights into some of these issues.
As an example, you could ask someone to discuss their attitude to savings in 100 pages or less. Or you could ask: if you were given a one-off tax rebate of £1000 this Friday, what would you do with it? Put it in savings, invest it (how?) or buy something (what?).
I’m guessing we’d learn more about the person from the latter
On the other hand, do their personal preferences even matter? Why not just make reasonable, safe and diversified decisions and leave it at that?
First two questions to work out the life expectancy, the last four questions to work out the savings ratio and investment plan. The risk attitude is irrelevant, as the jury will make the investment decisions, and the person can’t change it.
this assumes we agree that the jury will be making a ‘wise’ decision. However, without knowing more about the individual, it could be possible to argue that they would be worse off that they might be if not enough risk was taken, or that they could end up worse off if too much risk is taken and they lose out.
I was also keen to explore whether such a jury might weigh towards the individuals’ benefit (i.e. ask them about personal preferences), or just do what is right for society at large (e.g. channelling investments that will benefit the widest audience possible)
A plan with 99% success rate will still fail 1% of the time - the plan may fail about once in every 100 years. However if the worst case scenario is still acceptable (say, a few % short), and other alternative plans have even lower success rate and similar or worse magnitude of failure, then it’s still the best plan.
When the best plan has failed to deliver the target, one with hindsight may think that they would have been better off if they had done it differently, but in reality the chance of failure and/or magnitude of failure would be far worse if they had done it differently and the events also unfolded differently.
Of course, usually there’s more than one best plan, often trading the success rate with the worse case shortfall in a reasonable range. For example, a plan with 99.4% success rate and 5% shortfall in the worse case comparing to another plan with 99% success and 3% shortfall, both of them are very good plans, and the jury can feel free to pick any of them for that person.
Individual for sure. It’s an ethical issue, and nobody should ever be allowed to sacrifice 20% of the population to benefit the remaining 80%.
It’s the same as putting people behind the bars. If you have 2 suspected serial killers and know for sure that one of them is the murderer and the other is innocent, but have absolutely no way to tell who is the guilty one based on all the existing evidence, should you just put both of them in the prison and benefit the rest of the society?
I’m not sure I agree that this is relevant. I do understand the issue of false positive/negative issues, but we’re not really talking about judging someone, but rather that you (@Roman ) suggested that the individual’s attitude to risk was irrelevant. In that case, how are the jury to decide?
You suggest that we should invest to meet the individual’s preferences (at least for risk, but what about impact, or other themes?), but you’ve not asked them.
They could choose to use their questions to try to explore this?
Alternatively, why not just give everyone a standard package (maybe slightly differently weighted according to age)?
Although a person’s attitude to risk is irrelevant, the other characteristics aren’t. For example, a person in the early 20s aiming to retire in their late 40s will have a dramatically different savings to income ratio than another person of the same age but aiming to retire in their late 60s. A person who’s close to retire in a few years time will have a very different asset allocation than another person with more than 20 years.
Actually, I didn’t take the individual’s risk preference into account at all. The pension plan should prioritise their financial need, not their preference.
If in an extremely strange world, unethical and unsustainable companies that profits from firearms, oil, and even blood diamonds, were proven and also are predicted to be more profitable and less volatile than green companies, then why would the jury risk screwing a person’s retirement plan by investing in ethical and green companies? That doesn’t make any sense financially. It’s worth mentioning that the predicted future value of a company and the volatility of it have factored in the relevant risks, such as governmental and environmental risks.
In the form of defined benefit pension - the new state pension is the standard package.
If a standard package exists, they wouldn’t need to worry that much about investment choices as long as the population as a whole has a predictable birth rate and life expectancy. The actual amount of money reserved and invested is just a buffer to deal with unexpected events (such as COVID-19, which resulted in many working age people temporarily out of work) and predicted future expenditure growth (such as an ageing population) , majority of the time, the older generation’s pension payout would directly come from the younger generation’s pension contribution of the same month. They don’t even need to factor in the inflation!
Back to the question, why not? It’s simple, putting all eggs in one basket is never a good idea. What if for whatever reason the scheme falls apart in a sudden? Does that mean all the retired people instantly lost all sources of income? I would imaging that in this scenario, the welfare system will collapse too. Having company pensions and personal pensions in addition to the “standard package” will help the pensioners survive such an event (undeniably a lot less comfortable).