The Herald - Pensions Panic
My mother in law put down her gin and tonic and fixed me with a beady eye. Before I could escape the room, she launched into her inquisition. "That pension plan I bought last year, its value is all over the place! What are you doing?" I decided attack was the best form of defence, partly as I could not recall what she was invested in. "How often are you checking the scheme, every month or every quarter?" The conversation took a sublime turn as she admitted that she was checking several times a day on the smart phone she had bought for herself as a birthday present. "Stop!" I urged. Was she planning to trade the shares and funds in the near future? No, it was her pension scheme. Was she planning to add more money? If only, did I know how much her trip to the supermarket cost each week? Then stand back I said, stay cool (she grimaced) and only look every quarter or even twice a year.
"How does the pension fit into your investment plan?" I asked. She looked bemused. "Plan? There is so much going on in the world I haven’t got time to make a plan". I feared that by ‘so much going on’ she meant all her visits to the golf club, bridge games, gardening, not to mention those short expensive cruises which she was becoming accustomed to. Yes, I agreed, the world is very complex at the moment. "I get 200 emails a day, the majority of those about the situation in Europe" - absolutely, she agreed, on the news every night with those demonstrators somewhere - I stopped her flow and continued myself “and the world is very complicated, correlations are high - I mean everything is very tightly linked. Politics are making forecasting ever more difficult. You need an investment plan. Where do you want to be in five years time?" ‘Here, of course’, was the simple answer, and ‘alive would be nice’, she joked, taking another sip from her G&T.
We settled down with a piece of paper to draw up some simple rules for her. She needed to divide her wealth into several pots. There needed to be enough regular cash for her to live on, and enough cash in an emergency account, then the mainstream safer less volatile funds and a few speculative ones which might pay off. It appeared that a large part of the volatility in her pension related to some emerging market funds she had decided to buy! Yes, she had more assets than liabilities but she did have some large bills to think about in a few year's time - replacing the car, putting a new roof onto the cottage, and then, I timidly mentioned, she needed to think about nursing home fees at some point. Fortunately she did not grumble too much about that one, as several of her relatives had recently had the mis-fortune to be forced to leave their home and be forced into the tender mercies of the care system.
From that point on the discussion went quite well. She agreed that she would look at the make-up of her pension funds, even if in a rough and ready manner - did she have too much invested in more speculative stocks, managers or markets, and not enough in assets that would help her sleep at night, to provide an income, a yield. It was no trouble to state, rather confidently, that the Bank of England was going to ensure interest rates were kept low for some years to come. This meant she should benefit from corporate bond funds, even individual retail bonds held to maturity. As someone who had lived through the pain of high rates of inflation in the 1970s, it was easy to explain to her that she did need to think about some form of inflation protection – even if it was rather an insurance policy in case Quantitative Easing – printing money I hastened as her eyes glazed over - got out of control. Having some bonds linked to inflation, government or corporate, would be “just like carrying an umbrella because it might rain, I said glancing out of the window. Last of all…"do you know what the total expenses of each of your schemes are" I asked, " if you don't they are probably too high. You are going to live for years, and you want to make sure you are getting the benefit of any returns we can make for you". She beamed at that point - "and I cannot spend more time sitting her talking with you. I see snow falling – time for you to go and clear the drive!"
Andrew Milligan, Head of Global Strategy, Standard Life Investments
First published in The Herald on 24th December 2011