John Tuohy, Acuvest CEO
Life was simpler 30 years ago. Back in the days before the Thatcher/Reagan revolution that changed consumer culture in the western world, there was pretty much one place to get a particular item. In Ireland, for example, we had P&T, the sole provider of telephones (taking months to set up a new line, lest we get too fond in our memories). We had Bord na Móna for peat, the Irish sugar company, CIE and the ESB. What we lost in choice we gained in certainty – there was only one type of phone on offer, one bus to Cork, one electricity package.
Fast forward to today and we live in a completely different world. There’s competition everywhere – whether for buses, sugar, telephones or electricity, we as consumers are now the ones who decide how we partake of these products and services, with an eye-wateringly wide range of choice on offer.
The Pensions Revolution
The financial services industry has been part of this transformation.
Thirty years ago, ubiquitous across most careers, a final salary pension scheme provided a one-size-fits-all set of benefits: a fixed pension at retirement, pension for your spouse, lump sum payable on death. Bar some minor flexibility around the edges, no choice to contend with.
Two key corporate factors have driven a pensions revolution: companies can no longer afford to pay people a salary for a retirement that’s as long as a working life, and they no longer feel as responsible for workers who change jobs many times in a working life.
This has brought the demise of the defined benefit pension. Nowadays, we must contend with the defined contribution pension, and all the burden of choice that this entails. While saving, how much to put aside and where. The ‘where’ continues in retirement alongside the vitally important question of how much income to take.
The pensions revolution has been aided by a concurrent technology-enabled shift in the way people access investments. Enthralled perhaps by the perceived excitement of the trader life, many of us now have instant access to the state of markets on our smart phones. Investors tune into CNBC and Bloomberg to hear the latest commentary on what’s happening in markets.
Funds and Products
This ease of investing has been matched by the products on offer – most notably the advent of exchange-traded funds, ETFs. What started out in 1995 with the SPDR index tracker (Spider) has now grown into an industry with thousands of funds holding as much as $4 trillion of assets. ETFs track every conceivable index and sector of the equities market (large caps, small caps, growth, value). You can choose from country-specific (US, Japan) or regional ETFs (Europe, emerging markets). You can select specific industries (technology, energy, pharmaceuticals) and market niches (gold, property). As choice and competition has increased, so prices have come down, with the annual charge for many of these funds a fraction of what people paid for active funds.
The Consumer and Choice
The internet of course has played a key role in the presentation of choice, and we now see double digit annual growth in online purchases. 59% of Irish people made an online purchase last year, and online purchases are expected to quadruple in value over the next four years. Smartphone purchases have soared, and 30% of Irish people say their mobile phone will be their main shopping tool in the future. Pensions and investment will be chosen, switched, amalgamated and managed online in the same way as books are ordered.
While as a society we value autonomy and control, it is also becoming clear that choice is not always “good” and that too much of it can be a weighty burden. We need only consider the mass of mobile telephone or electricity packages on offer to yearn for the days when life was simpler. When we are overwhelmed by the abundance of choice, many of us simply opt out.
Pensions, Choice and Good Governance
For pensions and savings, this has serious consequences, because choices determine how we will live our lives in later years. At public, corporate and individual level, it’s vital that we get this right.
For the government, it needs to ensure a properly regulated playing field for savers that incentivises those putting money aside for the long-term and discourages rash spending that may leave a shortfall in the later years of retirement.
For companies, the funds released by a switch from defined benefit to contribution should be offset with an increased focus on supporting people with their fund choices and retirement options. That means careful consideration of the choices offered to staff and the way in which they are managed and communicated. It also means paying attention to how the default strategy is managed so that it is working for people and not just left sitting comfortably with the fund manager.
Individuals must take the ultimate responsibility for their futures, but let’s work to enable savers to make good decisions. Not overwhelm them.
John Tuohy is the CEO of Acuvest, independent pensions advisory specialists.
Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients’ employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.