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IFAs should embrace Cass Business school view

IFAs should warm to Dr Blake’s theories on optimal investment

Taken at face value, Dr David Blake’s claim that people should not start saving until age 35 may sound facetious but IFAs should warm to the theories of the professor of pension economics at the Cass Business School. This is because the starting point for his rigorous assault on DC pensions is that in an ideal world, we would all get access to top-class independent financial advice every time we needed to make a financial decision.

Blake’s ideas have on occasion been presented as outlandish and breaking with convention because his starting point is a theoretical one. His approach is to show what a rational investor, what he calls “a rational lifestyle financial planner”, would do if they made the right decision at every point in their life. He then sees what outcomes that produces and tries to create structures that can get as close to replicating that as possible.

His papers end up effectively describing what an individual would do if they had the world’s best IFA sitting on their shoulder every second of the day, forcing them to be rational.

In your 20s, therefore, he argues that you should spend and enjoy life because you have not got much money anyway and not doing so will not make much difference. But the flip side is that you have to pay 35 per cent of income into your pension from age 55. Just because nobody is ever going to do this does not mean it is not the optimal strategy, and according to Blake, his numbers suggest it is.

But it is probably his views on asset allocation that are more significant, in particular, how the millions of people relying on DC pensions for their retirement are currently being served by what the industry has to offer them. He argues that the move out of equities should start much earlier than the five to 10 years typical under current lifestyling arrangements. Yes, equities should outperform over a long period but the risk that they will not is a risk most people cannot afford to take, he argues.

People in their 40s, therefore, should have at least a small amount of bonds, which should increase gradually. But, unlike traditional lifestyling, they should not then go too far the other way and be put 100 per cent into bonds at the target retirement date. Instead, 20 to 50 per cent should be left in equities, depending on the individual’s attitude to risk.

So, once in the decumulation phase, the portfolio should be a mix of annuity, increasing with age as mortality drag increases, and equities that reduce with time. To this end, individuals should be signed up to products that phase annuitisation gradually but this should be done years in advance so they are pre-committed to the strategy rather than be forced to make complex decisions at retirement.

IFAs should also be feeling comfortable with Blake’s words on portfolio construction as his approach sounds rather like the blend of fixed interest and equities that many advisers would recommend to their drawdown clients.

But if the basic numbers behind Blake’s theory of how to achieve optimal investment outcomes are correct then members of DC pension schemes are being severely let down.

Of course, not everyone can afford to see an IFA. But with DC set to become the primary channel of retirement saving, it needs to be able to offer something closer to what advised clients are currently getting. Should employees with pots north of £100,000 be starting the wholesale switch into bonds in their 50s? Not without someone at least mentioning the alternatives.

New thinking is required in both the accumulation and the decumulation areas. Nest has already stirred things up in the pre-retirement phase and may do the same in decumulation. But product providers should not be waiting for a state-sponsored body to set the pace.

John Greenwood is editor of Corporate Adviser


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. In the same way that we should have embraced the Keydata Product Review by Debbie Harrison of the Cass Business School?

  2. Is that the same CASS business school whose Debbie Harrison endorsed Keydata Life Settlement Plans?

  3. @Anon – The simple answer is yes, same Dr Harrison and John Greenwood has quoted her again in July 2013 while she remains silent on Key data and her earlier glowing report. Read her reports compare her comments to those on the FOS decisions now in the public domain. Whom was right, her or the FOS? It is easy too decide in hindsight. Come on Dr Harrison, go public or stop commenting on things.

  4. Compare the FOS complaint records for Keydata, there are 3 published now, here is one to the report done by Dr Harrisons which influenced advisers decision as to suitability of Life Settlements as part of a balanced portfolio.
    Product review by Debbie Harrison, SeniorVisiting Fellow of the Pensions Institute at Cass
    Business School and contributor to the FinancialTimes
    The Secure Income Plan offers private investors attractive income and growth prospects via a
    relatively new asset class – the secondary market in US life assurance products – hitherto only
    available to institutional investors.

    Dr Debbie Harrison
    BA (Nottingham), MA (Birkbeck), PhD (Birkbeck)
    Honorary Research Fellow, Birkbeck
    I completed my doctoral thesis in 2008 and am now working onthe monograph, which is under consideration at Cambridge University Press. A Victorian Hangover: Narratives of Addiction
    1820-1900 explores the interface between literature, the history of medicine and social science. Here I examine depictions of
    addiction to alcohol, gambling and narcotics in a Victorian texts and employ the literary model established by Thomas de Quincey in Confessions of an English Opium Eater (1821) to explore the connections and disparities between the Romantic
    and Victorian modes of representation. Separately I am editing new critical editions of George Gissing’s early urban degeneration novels, and working as contributing editor to a medical humanities project, ‘The pathology of the missionary-doctor’s journey: theorising the
    relationship between body, mind, place, and text in Livingstone’s unpublished final field diaries’. I have taught English and Film at Birkbeck and Greenwich and will be working with irkbeck staff to help with the design and delivery of the MA in Medical Humanities in 2010. I have published articles in The Gissing Journal, Gothic Studies, and Nineteenth-Century Gender Studies.
    In my previous incarnation I was a Senior Visiting Fellow of Cass Business School (City University), and an author and journalist working in the interdisciplinary field of demographics, economics and welfare. In this guise I have written extensively for the Financial Times and also for the Guardian, Telegraph and Times.

    City Uni London Reading List Personal Financial Planning: Theory and Practice by Debbie Harrison Publisher: Financial Times/ Prentice Hall
    ISBN-13: 978-0273681014.

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