“Education, education, education!” Tony Blair famously said, but if this week is anything to go by “Regulation, regulation, regulation!” might be more appropriate. Plans for an EU super-regulator which would lord it over our huge and expensive FSA are going ahead – no surprise there. The borderless internal market in financial services is a long way off. While people in the UK prize independent financial advice (especially professional introducers like accountants and solicitors) many continental Europeans are more comfortable dealing with a large insurance company or bank, even though their product charges can be outrageously high by UK standards.

Six months after visiting Brussels http://www.georgeemsden.co.uk/2009/05/et-qui-va-promener-le-chien/  meet up with Managing Partner Julia Harrison of  http://www.fdblueprint.eu/ whose work as a lobbyist often involves work with regulators in setting new rules. Other work involves helping companies set up in Brussels that want to do more business in the EU. According to the book “Local Knowledge Guide to setting up and running your business in Belgium” by Louise Hilditch & Julie Kolokotsa, Belgium rates a 7 on a scale of 10 in bureaucracy, making you wonder where stalwarts like France, Germany and the UK stand. The ministry at heading is taken from the same book under a section appropriately entitled Terminology.

With 75 per cent of UK legislation now originating from Brussels, no surprise again when a High Court verdict which allows employers to force employees to retire at 65  http://news.bbc.co.uk/1/hi/business/8274328.stm is expected to be reversed soon as it clashes with the EC Directive on Age Discrimination. HR people must be quite busy these days. As to when green shoots of recovery might start, no idea but with small employers exempt from little regulation unlike the US, can’t see it starting yet although always interesting to come across businesses that are doing well – usually referred by their accountants or solicitors.

BRX Bond Street www.brxbondstreet.co.uk has an interesting visitor Alex Moscow whose catchingly-named www.9mmpr.com can blow away the competition while master-coach www.georgemetcalfe.com reminds us that “Retirement is not a destination!” Mike Segall’s 10 minute presentation points out that AM is going to be switched off soon and FM in 2015. The future is internet radio apparently and his www.jnetradio.com which started 31st May 2009, now has 7,000 listeners. Topics have been varied including a lively one with Palestinians in the studio reminding me of a Holy Land visit recently by a former neighbour who was treated very kindly by some Palestinian Christians.

Review meeting where pensions are main topic shows some interesting figures comparing ISAs with pensions. The former are invested with NET income (no tax relief) while the latter get tax relief in two ways: on contributions and fund growth, but the price you pay is that most the fund (usually 75%) is used to buy an annuity i.e. you sell the fund to an insurance company who pay you an income for life. The yield on an annuity is barely > the rate we could get in a low-risk income fund where you keep the capital. The number-crunching yields some interesting results:

a) 30 year ISA savings gives projected fund £1,365,000 or say, £397,000 in today’s terms

b) 20 year ISA savings gives projected fund £726,000 or say, £319,000 in today’s terms

c) 20 year savings with pension gives projected fund £1,000,000 with pension £70,000 pension p.a. or say, £439,000 and £30,000 respectively in today’s terms with no tax-free cash taken.

d) 30 year savings with pension gives projected fund £2,180,000 with pension £150,000 pension p.a. or say, £636,000 and £44,000 respectively in today’s terms with no tax-free cash taken.

The main point the above exercise shows is that even with the large contributions the above projections are based on, 20 years of contributions are not enough – client will need to invest for 30 years. One small? advantage of pensions is that in the event of bankruptcy or an IVA, pension funds are normally safe from creditors.

Alternative exit from the world of work might be changing from a well paid consultant to starting his own software company. This could acquire an embedded value which could be sold – listed on AIM, trade sale to a competitor or Management Buy-In perhaps. This means writing a business plan, finding partners including managers to run the business and of course capital, not to mention getting one’s skates on as any gap in the market is not likely to be there for long. Another client who sold his software company three years ago for a seven-figure sum is now working on his next project after a year or so off. While he still has the skills and connections, his next venture will not be a software company – toooo competitive he told me.

Finally, readers just over the age of 50 ought to be aware that the minimum age for taking pension benefits goes up to 55 on 5th April 2010, and there can be a lot of paperwork when you take them, including producing birth and marriage certificates.

The Big C is in the news again http://news.bbc.co.uk/1/hi/health/8246829.stm with the news that depression affects survival rates and one doesn’t have to guess which way. What else did they expect? If you visit someone say in a nursing home or hospital i.e. showing that you care about them, is this going to harm their health or make them feel better? The effect of this was shown a few years ago visiting one of my relatives in a nursing home. Walking in the through the lounge where the TV was on and several inmates stuck in their wheelchairs, some of their faces would light up as you walked in only to drop again as you carried on to spend a little time with your relative.

Friday at the RAF Club with BRX Bond Street and resident jeweller Lewis of www.joseph-sterling.com informs us he is doing the New York marathon again with his nominated charity being  http://www.meirpanimuk.org/about which looks after Holocaust survivors in Israel. In the saddest case of YCMIU, these only get a pension in Israel if they arrived from Germany or UK. Got to Israel from the Ukraine for example, sorry no pension. If you would like to support him, go to http://www.justgiving.com/lewismalka/ Have previously mentioned that in my glorious school holidays in Germany, my German grandparents had noticeably better pensions than their English counterparts, making you wonder even in my pre-teen years, Who won the War? And just to cap this story, this means that Holocaust survivors best pensions are in Germany.

Still on the subject of pensions, a new word for my next Scrabble game perhaps is senescence mentioned by Royal London pensions guru Steve Bee, who you can follow on Twitter http://twitter.com/PensionsGuru

“We all seem to think that modern humans live a lot longer than people used to, but that is not really the case. Mortality improvements from the medical and social advances of the last few hundred years have not really extended our natural lifespan by more than two or three years, but have allowed more people to achieve it. A word was made up to explain this – ‘senescence’. It was defined as ‘the lifespan that can be achieved under optimal conditions’. An 1841 actuarial table showed UK senescent deaths at around 40% of total deaths. So four in ten people dying in 1841 had made it to their seventies. By 1962, UK senescent deaths were recorded at around 75% of total deaths, another massive improvement. And things go on. We will now see further advances in medicine and social policy that may push the percentage of senescent deaths ever higher and at the same time increase the peak age we can expect to reach as well. The society we live in will itself age further as a result.”

Colleague points out that previous good news http://www.georgeemsden.co.uk/2009/09/afghanistan-bananastand/ regarding Friends Provident withdrawal of MVR penalties is a lot more complicated than at first appears, only serving to make me avoid this minefield of investment history.

Haven’t counted shopping days to Christmas yet but one Christmas present for yours truly will be:  300 Beers to Try before you Die by Roger Protz http://beer-pages.com/stories/300-beers.htm and if you really want to know how many days are left, here is a shopping day counter:  http://www.allcapecod.com/shoptillchristmas.cfm Thank heaven for the internet, where you can do your shopping on-line, including gift-wrapping and delivery.

Talking of prizes and presents, the Premium Bond notional interest rate increases to 1.5% from 1st October 2009. Have always mentioned them to clients as they can leaven the rather heavy subject of financial planning, but at that rate not much fun even though the winnings are tax-free.

Living many years in north London and passing what used to be The Settle Inn near Archway, curiosity gets the better of me as Charlotte Despard http://www.spartacus.schoolnet.co.uk/Wdespard.htm now has a pub as well as a road named after her, and was quite a feisty lady it seems.

End of week is at the Berkeley Square offices of Frontier Capital Management whose evidence-based investing approach makes a lot of sense. Reiterating that you can’t beat the market in the long run like previous blog http://www.georgeemsden.co.uk/2009/07/how-long-is-a-piece-of-string/ and pointing out that different asset classes have different embedded rates of return, leads to the sobering thought, Do you really need an investment manager? (See heading) And with 40 per cent of global money invested in Index-tracking funds/products, a lot of other people think so too. A word of warning here, no one approach is head of the pack all the time. Investing has its fashions and if your logical, well-researched approach isn’t flavour of the month, there are going to be times when other people’s approaches appear to defy gravity and streak ahead of you.

Putting it another way, let’s divide investment fund performance into four quartiles. The average is obviously the top of the third quartile or if you prefer, bottom of the second quartile. BUT all funds have costs, and take these off the fund values and the long-term average will be near the top of the third quartile i.e. just below the median/average. Not the sort of thing that would win an Olympic medal, but practically impossible to escape and no reason to stop investing.

But let me finish with some amusement. Keith Floyd’s obituary http://www.telegraph.co.uk/news/obituaries/celebrity-obituaries/6192702/Keith-Floyd.html unsurprisingly reveals a wicked sense of humour where he once fried a breaded beermat for an ungrateful customer who ate it, but complained about something else!

A little good news. Friends Provident announce the removal of Market Value Reductions (MVRs) sometimes known as Market Value Adjusters (MVAs – they are always negative) from most of their pension contracts and all of their life contracts. These MV things are applied when you want out of a with-profits contract at sometime other than when you originally said. The fund manager aided by the actuary (mathematician/number cruncher) will have done his best to match the future liabilities to the life/mix of the investments in the life or pension fund using shares, dated Bonds and Gilts. Choose a bad time for this and getting your money out can cost you a tiny or huge extra amount of your fund depending on: market conditions, the asset mix of the particular fund you are in and crucially: How Many are Stampeding for the Exit??? Don’t usually apply when stock markets are doing well but in the worst recession since WW1 (according to Bank of England) they have been as high as twenty per cent so any removal of the penalties is welcome. For an explantion of types of bonuses, see  http://www.georgeemsden.co.uk/2006/05/with-out-profits/ and if you have money invested in a with-profits fund and are wondering whether to stay there or not, there might be a fee for the advice.

With our soldiers in Afghanistan (and many other places) the recent stats from www.dasa.mod.uk make interesting reading:

• As at 30 June 2009, 155,185 War Disablement Pensioners (DPs) were receiving an ongoing pension. This represents a decrease of 7,935 since 30 June 2008.
• As at 30 June 2009, 32,290 War Widow(er)s (WWs) were receiving an ongoing pension. This represents a decrease of 2,365 since 30 June 2008.
• Over half of DPs (57%) and around five-sixths of WWs (86%) were aged 70 and over, as at 30 June 2009.
• Approximately five out of six (85%) DPs received pensions at the 50% rate or below. The largest group was those at the 20% rate. Less than 4% received the 100% disablement rate.
• The average weekly amount received by DPs, including pension and supplementary allowances was £75.17. The average weekly amount received by a DP at the 100% disablement rate was £319.15.
• The average weekly amount received by WWs was £216.14. The average weekly WWs pension was £114.69, with the remainder comprising supplementary allowances.

What the figures do not show is that women’s annuity rates are < than men’s – for the simple reason that women live longer – about 4 years > men on average. With the average age of brides being about 3 years < their husbands, this suggests an average length of widowhood of around 7 years, easily confirmed when you visit a nursing home. Some politicians bleat that lower annuity rates for females is unfair, and for annuities from SERPS/S2P for example, the rates have been equal for sometime. But equalising rates for both sexes will inevitably mean lower pensions for men, and the same people keep quite about the fact that women’s rates for life assurance are cheaper than for men, for the above reason.

Since this item started with Afghanistan, let me finish with it given the ongoing rumblings about their recent elections. Maybe outside my usual pension/finance ambit, but at least I’ve been there. The elections weren’t perfect, but Karzai did get quite a lot of support and if he is ousted/killed/replaced, do you seriously expect the next guy to be better or different? Regarding Afghanistan’s heroin production, if an otherwise poor farmer can earn 3x amount for producing heroin compared to say barley or rice, which one is he going to plant?

Alternative might be high value produce for supermarkets where people might be willing to pay a premium for high quality stuff, but please don’t mention the carbon footprint. For a country that is quite dangerous to visit, can’t see Tesco & Waitrose rushing to send their brightest people there to talk to the local farmers about planting exotic stuff for their shelves. Does give an interesting alternative to Fair Trade perhaps but with no natural alternative to H, can’t see any end in sight. As Lawrence of Arabia put it (and, yes I know the Afghans are not Arabs, but the principal applies)

“Do not try and do too much with your own hands. Better the Arabs do it tolerably than you do it perfectly. It is their war, and you are there to help them, not win it for them.”

And if you want the whole 27 articles:  http://telawrence.net/telawrencenet/works/articles_essays/1917_twenty-seven_articles.htm

Back in Blighty, employees lucky enough to be in a Defined Benefit pension scheme might wish to make note of the new Pension Protection Fund website  http://www.pensionprotectionfund.org.uk/Pages/homepage.aspx The risk of maintaining these increasingly rare schemes falls on the employer. Retiring next week and Stock Market falls off a cliff? Not your problem. If you are in the more common Defined Contribution pension scheme – it is the amount going in that’s fixed, not the pension coming out, so market falls i.e. the investment risk, are your problem. As those meerkats say, “Simple. Not even the same.”

Picking up from http://www.georgeemsden.co.uk/2009/08/hitch-hikers-guide-to-pensions/ the item on Tim Ferris’s The Four Hour Work Week http://www.amazon.com/4-Hour-Workweek-Escape-Live-Anywhere/dp/0307353133/ref=pd_bbs_1?ie=UTF8&s=books&qid=1203371924&sr=8-1 shows mixed reviews at Amazon but a positive one for Paul Chek who has interesting tasters of his stuff on www.youtube.com Decided to get his book http://www.amazon.co.uk/How-Eat-Move-be-Healthy/dp/1583870067 which it turns out, has helped some of my colleagues stay healthy.

Lastly, for one firm’s weekly view on life, the financial universe and everything that will fit onto two pages, I still  enjoy the Williams do Broe newsletter out of the the many that get sent my way http://www.wdebroe.com/OurLiterature.asp

No, not the W. Somerset Maugham classic but investing.  With the worst economic crisis for nearly 100 years, how do you plan a portfolio which will generate enough income when you want to retire? Continuing last week’s theme, markets tend to revert towards the average over time,  http://www.georgeemsden.co.uk/2009/07/how-long-is-a-piece-of-string/ but no one knows how long this may take and different markets behave…differently. Some markets like Japan, have not reached their long term average 13 years after the last bubble there.

All this from a fascinating talk by Stuart Fowler of www.nomonkeybusiness.co.uk speaking at a www.financialplanning.org.uk meeting. People who swim against the flow tend to be more interesting than the others and heart-warming to hear about the dangers of equities and the relative security of bonds.

His graph showing the relative uncertainty of various investment types, when measured in real terms, whatever the uncertain future inflation, says it all. Most certain or really “least uncertain” is Cash and similarly Index-Linked Gilts (ILG) – not ordinary government securities. Most uncertain is equities – but right up there next to them is the classic idiot’s refuge – Bonds. There may be a place for them in a portfolio, but in terms of certainty of wealth outcomes in real terms, hardly less certain than equities. We all now about the volatility of shares caused by professionals, punters, bored housewives, redundant bankers, lottery winners, other amateurs, Brits and foreigners all trying to be smarter than everyone else.

But with Bonds which include Government Securities (Gilts) too, the uncertainty arises from the inaccuracy of the market’s guess of future inflation, which is what makes up most of the nominal bond yield. Past experience shows markets to be hopeless at guessing long-run inflation. With shares, you also have the high uncertainty of real outcomes but at least you are likely to get paid a risk premium for bearing that risk.

In more detail, the equity risk premium is often described as being relative to cash. It is the expected return on equities (or the past achieved return, depending whether you are observing or projecting)  less the return on cash. If you are interested in real outcomes, such as what your retirement income will actually buy 30 years in the future, it is not logical to compare expected probable equity returns with cash, as the two assets have uncertain in outcomes for different reasons. Hence the relevant risk premium is relative to index-linked gilts.

For a planner, the argument is practical rather than academic. You can get a price for a risk-free approach anytime, by looking at the cost of  an appropriate index-linked gilt (matched to the time horizon you are planning for) or the real income paid by a fully-indexed annuity.

As Stuart put it, this is “taking bets off the table” or “leaving the casino” by replacing equities with ILG’s. Doing this lays off the inflation risk (the value of your income will be reduced by inflation) capital market risk (the value of your portfolio may fall) and longevity risk (you may live longer than your money) but at a known price.  If you prefer a foodie analogy,  think of equities as a curry that is just that bit too hot and ILGs as a yogurt mixed in to reduce the temperature, to make it edible.

In a sample portfolio for a 60 year old taking an agreed amount of income till age 90, the early years are fully matched by cash and index linked gilts, the later years by equities as there is enough time for mean reversion to work, and the middle years a mix of equities and index-linked gilts. Over the course of the plan as horizons shorten, the equity proportion falls but as a function of market conditions and not just the ticking of the clock.

Contrast this with some pension policies for example, where you may choose to invest in a Lifestyle fund. These will gradually switch the fund into deposits as the Retirement Date approaches, but take no account of changing market conditions or individual risk appetite. Both are defensive strategies where you are looking at protecting what you have, rather than waiting for or expecting something better.

Has to be said that the typical portfolio they have is about £2 million, but an interesting approach which ought to be applicable to any portfolio size.

Finally, to add to your knowledge of trivia, Gilts (gilt-edged securities) are so-called as the certificates you received when you bought them really did have gold leaf/paint around the edge, but this was before WW2.