Turning a nation of savers into a nation of investors: surely this is the objective of pensions freedoms. A shift away from the insurance-linked guarantee of annuities; a rejection of cash in the bank.
Instead, an army of pensioners invested in equities, fixed income and alternatives all the way through retirement. Income drawdown in action.
As an objective, it is a tough one. Investment has always been a minority activity in the UK. Of course, millions of UK citizens have had pensions savings invested for many decades but it has been done so on their behalf – the risk lying with the pension scheme sponsor and the beneficiary unaware of the investment dimension to their retirement savings pot.
It is easy for those of us who work in the investment world to forget this. Since the time of Victorian novelist Anthony Trollope, skepticism about the unpredictability of investment has infused popular culture.
To put it another way, the UK has not been like the US: a nation where everyday individual retail stockmarket investment was established a century ago. Keynes famously urged UK policymakers in the 1930s to maintain the “closed shop” institutional bias of the London Stock Exchange. After all, he said, if “markets can remain irrational longer than you can remain solvent” then the dangers to individuals were especially acute.
Since then, an established class of retail investors has emerged in the UK, created in no small part by the “Tell Sid” popular capitalism pioneered by the Thatcher governments. But investing remains a minority pursuit. A plurality of the £700bn in (non-property) retirement income assets held by retirees aged 55 an over is in cash. Likewise, the majority of the £365bn held by 55-75 year olds both retired and still working.
Paul Lewis’ recent research into the returns to be had historically from cash versus shares makes the case provocatively. But more basically his argument is this: cash does not disappear. It makes real returns. The return is guaranteed.
Resistance to investing appears even stronger among future generations of retirees. BlackRock found 62 per cent of millenials agree that “investing is like gambling” and, despite their longer investment horizon, hold high amounts of cash – 70 per cent of portfolios in cash or cash like investments. “This generation harbours certain beliefs that risk preventing them from developing a fully productive relationship to investing,” concluded Merrill Lynch recently.
Professional investors emphasise the importance of a diversified portfolio, as laid down in modern portfolio theory, to offset the impact of inflation but more widely because the equity risk premium over the long-term has been a significant source of returns, especially when combined with allocations to non-correlated asset classes.
For individuals, however, following this advice can be hard. Harry Markowitz’s own retirement planning was somewhat less sophisticated than the theory that won him the Nobel prize for economics. No efficient frontier was drawn by the father of modern portfolio theory. Instead, as he explained: “I visualized my grief if the stockmarket went way up and I wasn’t in it, or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.”
Gregg McClymont is head of retirement savings at Aberdeen Asset Management