Saturday, July 10, 2010

A question for people who work in financial services

My understanding of the details of how a lot of funds work is fairly basic, so I'd like to know if the following makes sense - would it be possible?

A lot of people have pensions, savings and endowment funds that are described as 'with profits' funds.

Am I right in understanding that the provider takes the monthly contribution and invests them across a basket of quoted companies that the provider believes will do well - striking the right balance between profitability and risk-aversion?

If so, would it be possible / easy for such a provider to launch a new fund - or offer an option to existing customers to switch to a modified fund - in which they could take a small degree of control over the fund. For instance, I could accept that Legal & General will make decisions on how 95% of my money is invested, but I could then direct them on the remaining 5% - and, say, ask them to invest it in a Football club of my choice (for example - I'm sure you could come up with an ethical alternative or one where the investor could chose to take a bit of a longshot).

Would it be possible / practical / affordable to do this? And could government do anything that would make it easier for the financial services industry to do this?


Tim Worstall said...

Not sure why you've described stuff as "with profits". That's irrelevant to what you're asking (that's about the mixture of guaranteed returns and market returns that your pension investment gets).

In terms of law I can't see anything that could stop this. You can set up a pension where the investment strategy is entirely controlled by you (a "self invested plension plan" or SIPP), there are many, many finds where you are allowed to switch between investment strategies (ie, say, Vanguard. You invest in them as a whole and can switch your investment between their Asian, recovery stocks, small cap, bond, cash, whatever funds as you like ).

Those sortrs of choices already do include green, ethical, domestic and so on funds.

So, as I say, nothing I can see in law that stops this.

However, as a matter of practicality I see it as an entire non starter. Pension funds don't invest your money in stocks as your money comes in. They don't say, hey, great, new punter, let's go and buy another 2 BP shares, 3 Vodafone and allocate them to Mr. New Punter. They aggregate in incomeing cash flows and invest those. Then allocate the gains losses. So the detail and bumpfh required to hold 5% of each and every income stream and invest it according to individual instructions would be monstrous.

Anyway, there's a way you can do this already. You've your pension plan/s. Let them get on with it. Total pension contributions are quite large: for a civil servant it's about 40% of income. Private sector rather lower, maybe 10%? (don't have that figure handy).

Income of £30k, so pensions contributions are £3k to £12k. %5 of that is £150 to £600. So, set up an ISA and invest that last sum where you like. Tax savings between an ISA and a pension are roughly equivalent.

Parkylondon said...

Good summary above.

I can't add any more to it except to say that the funds often don't just invest in stocks and shares. Currencies, commodities, interest rates et al can all be profit sources.

It comes down to the level of risk you, as the investor, are prepared to take. The important benefit of using a managed fund is that they will be able to get a better spread of investments (and thus, hopefully, reduce the risk of one going bad) than you will be able to with your ISA.

I am not an investment professional and this should not be considered investment advice. You should, before making any investments, take specialist advice or do extensive research before parting with your hard-earned.

Paulie said...

The reason I'm asking (and I probably should have said this at the start) is that - if these companies were prepared to play ball, it could offer a way that football supporters could very quickly use their existing pension schemes to take control of the football teams that they support.

It would hold out the 'lets all jump at once' possibility - no-one would want to get involved on the basis that they're the only one doing it. I suppose I'm asking if there is a way that pension companies could play ball with football supporters and work together on some initiative that would see an almost direct transfer of football teams into the hands of some of their supporters..

Parkylondon said...

Nice idea but it would take a lot of football supporters pensions to do what you're thinking about.

The kind of figures we're talking about here would lead to humungous fees from the PFM's

Jen Archer said...
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Paulie said...


I'm not talking about individuals owning shares directly.

Suppose my pension company owned 20% of the shares in Anytown Utd, and I was one of 20,000 people who was signed up to that pension company.

All that pension company would need to do most of the time is to informally seek the advice of the people who have asked for a minor portion of their pension to be spent on Anytown shares.

I'm sure that there's not a perfect way to have exactly weighted voting, but to say that a pension company owns shares on the direction of it's contributors - directions that may be different from the more short-termist decisions that such funds would otherwise make - and makes an effort to take advice from those members in advance of an AGM or other important milestones - that would be a step forward. I don't see that this *should* incur any fees and the only additional cost would be for the company to facilitate an online network of the contributors so that they could direct a representative at AGMs.