The quiet expropriation: financial ‘advice’

These days – and quite understandably – retirement funds and savings are not a major preoccupation. Yet – unless the system we live under radically changes – any young person contemplating their future needs to think vaguely about how they will build up some capital or savings to care for themselves when they no longer work.

Many years ago it was taken for granted that such very long-term financial decisions were mutualised. You joined a pension fund – usually run by an employer, group of employers or industry. These funds managed large amounts of retirement contributions, and could meaningfully negotiate with banks, financiers and others to get the best deal for their clients (i.e. the workers who contributed). Mutualised pension funds employed savvy specialists, wily and knowledgeable, whose sole purpose was to maximise retirement income for contributors. Thus, workers and the middle classes had specialists on their side whose only motivation was to use financial markets in the best way possible for ensuring retirement income.

In the late 1980s – as Thatchersim and Reaganism took hold – governments listened to the advice of financial specialists (not to the mutualised pension funds, of course, but to financial markets, investment banks and neoliberal economists).

“Get rid of mutualised pension funds”, governments were told (they were being told what they wanted to hear, naturally) “Workers will get a far better deal if there is competition between different retirement savings schemes. Each worker can manage their funds, and obtain the best deal”.

Fast forward 40 years. Workers manage their own retirement funds. They have neither the time, energy or knowledge to learn the ins and outs of financial markets. Therefore they are getting screwed.

It now can cost 2% or more per year to get these savings ‘managed‘ (i.e. 2% of all that has been saved goes to the ‘manager’) – whereas mutualised management of retirement funds cost 0.5% per year or less. Financial markets are not, now, faced with wily and knowledgeable specialists, but with ignoramuses like you and I : even if we are very good at our jobs and extremely clever, we have neither the knowledge, inside information or contacts to understand the world of finance. Technically this is called information asymmetry – getting royally screwed by people in the know is more precise and clear.

We are lambs sent to retirement slaughter by our governments and employers. Note that de-mutualising pension funds was also accompanied by shifting financial risk onto the shoulders of workers (defined contribution plans) – before this, employers, current workforce and to some extent the government underwrote retirement savings (defined benefit plans). Now our government underwrites Goldman Sachs, and moral hazard is created : the advisers who manage our savings now have no incentive to ensure we obtain a decent retirement income since risk is shouldered by the workers (who know little or nothing about finance, which is why they need advisers).

Whilst it is undeniable that changes to pension schemes were necessary as population aged, as life expectancy (and length of healthy retirement) increased, and as work arrangements evolved (repeated contractual work is not the same as long-term employment under one employer), these changes were seized by financial markets and neoliberal governments as an opportunity to divert money into the pockets of financial advisers, under the guise of ‘management’ fees. The principle of mutuality was abandoned: new private pension schemes were designed to interact with individual workers – ignorant of finance – to the massive benefit of financial advisers who monopolise the knowledge.

This is a slow-burning crisis. These reforms were introduced in the early 1990s and onwards. It is people entering the workforce after the 1990s (and who will begin retiring in the next 15 years or so) who are seeing their retirement savings eaten away by management fees and by shoddy ‘management’. Most often their savings are shunted into off-the-shelf index-weighted investments that simply track a selection of stocks. As Piketty and others have noted, it is only once one has serious money – in the multi-million range or more – that returns on investment increase, fees come down, and taxes can be avoided.

This is not an immediate issue, but young people should take note for two reasons.

First, their retirement savings – if they are able to generate any (and I realise this can be difficult to envisage, given student debt, gig work, the pandemic…) – will also be treated as fodder for financial intermediaries.

Second, the generation of older workers (and by worker I mean anyone who has worked for a living earning less than the 99th percentile, and who has not dedicated their free time to the study of finance) will be faced with a choice: retire into poverty (their mis-managed funds will be in the pockets of their advisers, who earn 2% come rain or shine, whether they make money for the workers or lose it all!), or carry on working. And if too many workers decide to carry on working an extra 5 or 10 years (because they can’t afford to do otherwise), what will this mean for job openings and promotions for younger people?

Maybe the solution to all of this has nothing to do with finance. Maybe the only way out is through communal living arrangements in which the future of members – not only financial but environmental and social – is ensured through mutual long-term engagement and interdependence… An ideal to think about, but one that people in search of individuality and freedom will chafe against.