One of the basic laws of investing is apparently that you can’t beat the risk-free rate of return – without taking some risk. However, sales of structured products in the UK in 2009 rose by a staggering 48%, with investors evidently attracted by the allure of low risk, or even no risk (more of that later – as there’s always some risk) and knowing your returns in advance. When the economic backdrop has never been more difficult to predict, i.e. are we seeing ‘green shoots of recovery’ or are we staring into the abyss of ‘a double-dip’, removing unnecessary investment risk is very attractive – but are structured products actually good investments? And, if so, for whom? The answer should be investors.

A structured product is typically a fixed term investment, of say 5-6 years, with a pre-defined level of capital protection and returns that are usually linked to the performance of a stockmarket index, e.g. the FT-SE 100, or maybe an asset class, such as commodities, etc. Understanding them is critical – and this means work for advisers, likely to cause furrowed brows, particularly if genuine ‘due diligence’ is competently performed. That’s what advisers are there for – and good ones should be looking for good investment solutions for clients.

From a provider’s point of view, one of the attractions of structured products can be that having a pretty brochure or advertisement in a newspaper with the word ‘guaranteed’ in the headline makes them sell – for obvious reasons. But when it comes to structured products, a guarantee is only as good as the institution giving it – usually known as the counterparty. Products which had this provided by Lehman Brothers for example, are unlikely to be worth much now. An update if you like on the Shakespeare’s Merchant of Venice “All that glisters is not gold”.

Let’s get back to basics. Generally, people invest because they want to beat the returns available from risk-free assets, i.e. cash deposits. This is always the benchmark, as no-one takes risk for the sake of it – and everyone would stay in cash if returns were always decent. But just now, the problem is that returns are pretty poor, derisory even – and to make matters worse, tax on any interest earned is about to rise. So for many investors, a small amount of extra risk will seem worthwhile, if they feel the return justifies it.

Now the simple truth. There really is no such thing as “no risk”, even in respect of strutured investments, so a closer look at the advantages and disadvantages of various investment categories is worthwhile here. And for simplicity let’s leave out investing in property.

Starting with the least risky, let’s look at depositing funds in a bank. Until the Northern Rock debacle in 2007, the credit risk – will the interest be paid and will the principal be repaid – or idea of a bank going bust was unthinkable. But, the scenes of deposit holders in ‘the Rock’, queuing to get their cash out, known as “a run on the bank” should be etched in our memories for some time to come. There is also market risk with deposits, as interest rates fluctuate. – sometimes dramatically, for instance most recently when the Government/Bank of England slashed rates aggressively to support the economy.

Deposits with Northern Rock are currently 100% guaranteed by the Government  http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7021216.ece but this is set to end soon.

Moving up the risk scale, we come to Fixed Interest investments which include Government gilt-edged securities and those issued by companies, sometimes called Corporate Bonds. Here again there is the credit risk – will the interest be paid and will the principal be repaid?

With fixed interest/bonds, the interest rate ‘coupon’ or rate of return is basically fixed when the bond is issued – or when you buy the bond or government security. The risk of the coupon rate going up and down, as with a deposit account, doesn’t exist – but there is still market risk. With Fixed Interest investments, this works in a different (and opposite) way – i.e. if interest rates go up, the capital value will go down, and vice versa. This effect is much stronger with long-term fixed interest investments. Shorter-term gilts/bonds are much less affected by interest rate movements.

Lastly for now, let’s look at the apparently riskiest investment option of  all, the Stock Market. We all know share prices and dividends can go up and down, i.e. market risk. Beating the Stock Market in the long-term is to put it mildly difficult, but if you can simply match an index in the long-term, you can do well. At this point, advisers often get tied up in arguments about which style of investment is best – active fund management, i.e. picking stocks, or passive fund management, i.e. following an index, see  http://www.georgeemsden.co.uk/2009/07/how-long-is-a-piece-of-string/

Now, think about something many advisers will discuss with investing clients – how to manage, or even control, exposure to risk, particularly Stock Market risk?

Firstly, ‘time’. The longer the term you are going to invest, the more likely that shares are going to rise, and beat deposit or interest-based investments. So ‘time’ – typically of 5 years plus – is often prescribed by advisers as a sensible horizon for investors over which to invest. Trouble is, that the last 10 years or so has seen two 5 year periods when even mainstream markets, such as the UK, US, etc, have delivered negative returns – and risk-free deposits have beaten risky shares. So, does time alone cut the mustard when it comes to controlling risk? Answer, nobody really knows. in advance. But based on past evidence, ‘time’ alone certainly does not remove or genuinely control risk.

Secondly, ‘diversification’. Basically, the portfolio concept is that if you buy enough different investments (different markets, asset classes, managers, styles, etc) the logic is that when some are doing well others may be doing badly, and vice versa. But again, the look back at recent history seems to pour scorn on this as a method of ‘controlling’ risk. For instance, during recent global markets stress something called correlation increased. This meant everything went down at the same time, so no amount of diversification really helped.

But with structured products, investors have the opportunity to avoid all this stuff, by passing on the investment risks to someone else – usually a major bank backing (or structuring) it. Nothing for nothing here, though, so if you want to have protection for the downside, you have to understand that this generally means less on the upside, when things go well. There are always exceptions, and some structured products really have decreased market risk and increased market returns.

Now George has to put his hand up here and admit that structured products have been something of a bête noire - something to be avoided and many other advisers still feel the same way. This is because there are plenty of poor value, complicated products around, offering poor investment returns and features that are not understood by the advisers selling them or the mugs that buy them. Mugs is a deliberate choice here as if you invest in a product/scheme/company or bond that you don’t understand, you really are a mug – albeit not as big a mug as a so-called adviser who sells them. It does also concern me that many structured products are sold by inexperienced advisors in high street banks, where the client relies on the big name of the high street bank concerned and never bothers to read all the conditions. It’s that “G” word again – guaranteed. Because actually these high street branded products are usually the worst value products in the market – and a far cry from the more specialist propositions that independent advisors can access.

But as Chris Taylor, Chief Executive of multi-award winning structured specialist Blue Sky Asset Management http://www.bluesky-am.com pointed out recently, tarring all structured products with the same brush is hardly sensible. As with anything in life, there are good and bad ones out there – even if the good ones are in the minority. A good analogy here is gold mining. If you have a mine with a gold seam where the yield is 1 ounce of gold for 1 ton of rock or dirt, that is pretty good, as gold mines go. And so it is with structured products.

The keys to getting a decent one are: avoid the ‘duff stuff’ your bank tries to sell you when you walk in to pay in a cheque, and use specialist providers through independent advisers. There is also a saying that the smartest people in a gold rush are usually those selling the shovels, but I digress. More detail in a future blog.

* http://montanakids.com/history_and_prehistory/Frontier_Life/early.htm

Things must be looking up with two healthy business lunches in one week. First is with Butterfield Private Bank http://www.uk.butterfieldgroup.com/ in Gresham Street where the fare is low fat Bento. New business for them and other more traditional private banks, is good. Private bank customers where they are owned by very large banking groups, seem to be more and more unhappy with the service they getting and with over 50 private banks in London now, there is plenty of competition. In these larger banking groups, relationship managers seem to rotate regularly and every time they phone up, try to sell their clients a new product. If ever there was a business which depended on long-term personal relationships, it is private banking. Some of these customers have enough money to self insure anyway and for an old fashioned ACIB like me, it seems some banks have lost the plot. Other dislikes are huge bonuses paid to the directors of some of the institutions when their policies and management have caused £billions of losses, and which are now partly nationalised. HNW clients and especially UHNW clients are not always happy in having their affairs handled by a nationalised bank.

Particularly sad to hear that my first proper employer Coutts & Co, has a reputation for poaching clients of for example, IFAs when they introduce clients to them. Several times in my career as an IFA, I have been able to help clients find new advisors or in this case bankers, where they have outgrown their original ones, or the exsiting ones are no longer up to scratch. Three times in my IFA career, I have had to suggest finding a new accountant as the client has been giving tax saving ideas to the accountant rather than the other way round. In all these cases, the accountant’s retirement was approaching. Additionally, Coutts & Co has managed to acquire an Action Group over its investment advice http://www.couttsaigactiongroup.org/

Second guest is an accountant who questions my scepticism on the recent announcement that the UK is now out of recession and that in the quarter concerned, the UK economy grew by 0.1 per cent. My point was that such a small amount is well within the statistical margin of error. Such joy at so small an amount of growth or in this case, the end of six quarters of decline in GDP, is premature. My fellow guest disagrees saying that growth statistics are often updated and usually upwards. For him, the end of the recession was before the fourth quarter of 2009 and is based in the business health of his clients.

To a certain extent we are comparing apples with pears, as one is the national average whereas the other is in the South East of the UK. Away from London and South East, the public sector accounts for the majority of economic activity in the regions, in some cases at levels similar to some old members of the Warsaw Pact. Post election time could be painful there.

End of week lunch introduces me to Brazil’s national dish feijoada a black bean and pork stew http://www.cookbrazil.com/feijoada.htm One guest is a young Brazilian lawyer who takes time off from sorting out the title issues in a huge property deal and brings his cute little dachshund with him. Have never really been a dog person but remember a daughter telling me many years ago that for a guy, a dog really can be a woman magnet. When our food arrives, one pretty lady at the restaurant even offers to take the dog for a walk. This particular dachshund is the more fashionable “sausage dog” shape – quite a long way from the original dachshund (Badger Dog) which was shorter of body and with longer legs  http://hubpages.com/hub/dachshund-info-and-facts From the attention received, a shy guy could have a whale of time here, not to mention being able to dispense with a dating agency. Forgot to mention that a friend told me ages ago never to marry a woman with a pet dog – as you will always be second…..

Chance encounter on the Northern Line leads me to Mark Shaw who used to be the mortgage broker at BRX Bond Street www.brxbondstreet.co.uk who has a new career helping business people with Twitter www.markshaw.biz

But let me finish where I started in Gresham Street named after Sir Thomas Gresham and inventor of Gresham’s Law “Bad Money drives out Good”. In plain language, inflation, printing money in whatever forms means that money loses its purchasing power or value and the poorest suffer the most – as always. Tempting to wonder how he would have helped these days as he worked wonders for the monarchs he served – Edward VI and his half-sister Queen Elizabeth I. http://en.wikipedia.org/wiki/Thomas_Gresham Much of his working life was spent in Antwerp, the financial capital of Northern Europe at the time. One reason he was able to achieve great things was that English monarchs generally paid their debts unlike other monarchs in Europe who thought they were above such boring details. Fine while you get away with it, but a hindrance when you need money say to fight a war to defend your nation.

Like Dick Whittington, he was a member of the Worshipful Company of Mercers http://www.georgeemsden.co.uk/2009/11/curveballs-dick-whittington/ Curiously, he is the only financier I have heard of who was also a jailer – to Lady Mary Grey, sister of the unfortunate Lady Jane Grey who reigned for nine days in July 1553.

Who do you believe? When someone says an investment is low risk should we take what is said at face value? Members of the public can, but advisers are expected to check. Putting money on deposit ought to be as safe as any investment – as long as the bank is still there tomorrow – quite likely, as a huge chunk of the UK banking system is now nationalised. Putting it under the mattress isn’t 100% safe either, as you might get burgled, kidnapped or your home might burn down. And putting it into a fund managed by a large or respected institution ought to be considered safe too – especially if that fund is stated to be low risk. Seems our competitive human nature encourages stupidity regularly among a few fund managers, and here are some examples:

Few years ago, zero-coupon bonds and funds were sold like this and were ideal for investors who did not like risk and did not need income during the term of the investment. They were basically very simple.  If you bought one at say, 75p with a maturity in 5 years time of 100p, then you knew exactly what your total and annual returns would be – in this case, 25% total return or about 5.9% p.a. compound.

Trouble was, the fund managers decided to be clever and gear up, meaning they borrowed (using the investments as security) and then used this money to buy more contracts, rather like betting heavily on your own race horse. If your horse wins, you get the prize money and the profit you have made on your bets. If it doesn’t win or things do not go as planned, you end up out of pocket which is what happened. Clients lost money on an investment which was very simple and if left alone, low-risk.

Last month, Standard Life earned themselves a £2.45 million fine when it misled investors on what was supposed to be a simple cash fund for pension money http://www.whatinvestment.co.uk/making-money/investment-funds/investment-funds-in-depth/1110918/standard-life-says-sorry-to-98000-investors.thtml

And proving the old saying that hubris is followed by nemesis (pride comes before a fall) this video talking about a “low-risk” Arch Cru fund that invested a huge chunk of its money in a shipping venture http://www.citywire.co.uk/adviser/-/news/collective-investments/content.aspx?ID=378824&re=8277&ea=234851 using shell companies in the Channel Islands, really takes the biscuit.  http://www.citywire.co.uk/adviser/-/video/other/content.aspx?ID=379032&re=8278&ea=234851 Financial Advisers have their own grapevine and while there was plenty of warning that this particular fund was not what it said on the tin, some decided to ignore it.

Wednesday finds me at a seminar hosted by www.consultationinstitute.org for local Government officers that deal with elderly people. Since this is relevant to long-term care, seems worth a visit. Main event is an interesting talk given by Michael Foster MP for Hastings & Rye. Without any effort on my part, his answer to someone else’s question includes the three blindingly obvious remedies to someone who has not got a big enough pension – contribute more, manage on a lower income than you planned, or work longer. His comment that Pension Credit will help those still short of pension didn’t mention its complexity which puts a lot of people off applying. Interesting comment too that in 1908 when the first (means-tested) State Pension was introduced, the average length of time people received it for was 2 years. Someone at State Pension Age now can expect to receive it for between 10 and 20 years and longevity has recently been increasing 2 years every decade.

Main subject of his talk is the Equality Bill http://www.equalities.gov.uk/equality_bill.aspx currently going through Parliament and there is still time to put your point of view.  Alas, didn’t get a chance to ask a cheeky question – with an election coming, will this Bill actually reach the Statute Book? as some of the questions were ramblings rather than actually asking anything. At the end of any Parliamentary session, there will inevitably be legislation at varies stages of progress. Negotiation or if you like, horse-trading between the various political parties will mean that some will be allowed to go through while others get chopped. Will have to see if this bill makes it.

Another situation I would have liked to ask about occurred in one of my pension surgeries recently. Lady wants to take her pension benefits from her employer’s scheme and my advice is mainly about the type of annuity she should take – level or escalating? However, being fit and healthy and with no dependents to worry about, she wants to carry on working. As one or two other employees have done this, she asks me if she can do this? Only HR can answer but her situation raises some interesting issues. Working after the Scheme Retirement Age will provide useful extra income but she will not have the same benefits as someone younger than the Scheme Retirement Age, like Death-in-Service Benefit, Private Medical Insurance and so on. She will be at an obvious disadvantage compared to her colleagues – just the sort of issue you would expect the Equalities Bill to address? Looks like another wait & see.

Following speaker is from National Audit Commission showing the huge regional disparities in proportions of elderly people – almost 2/3rds in Dorset while cities & conurbations have a much lower proportion. Some authorities are very well prepared for this while about 30 per cent haven’t got any plans or policy in place. Interesting to see what works with different local authorities. An electric scooter or shopping buggy scheme in one authority where a fleet of 20 is available for people, has very positive feedback – with one user saying, that they feel they have a life again. Something that might have helped people here  http://www.georgeemsden.co.uk/2009/12/james-bond-is-in-a-wheelchair/

Another scheme designed to prevent elderly people falling costs £158,000 a year and is managed by a Falls Prevention Officer (sic). Have heard of Teenage Pregnancy Advisers in some local authorities, but not this latest one. Savings are huge apparently as hip replacements cost £20,000 a pop and if 15 falls are prevented each year (their figure) then the savings to the nation (but not the local authority) are £3 million. Wonder if these will survive the election?

Haiti’s latest tragedy makes many people think that more foreign aid will help in the long term, but Jo Figden’s report on BBC Radio 4’s From our own correspondent http://news.bbc.co.uk/1/hi/programmes/from_our_own_correspondent/default.stm makes me doubt this. Her programme dealing with Non-government Organisations (NGOs) in Zambia (formerly Northern Rhodesia) suggests that too much foreign aid is self-serving and little more than political vanity. Only 500,000 out of 12 million people have jobs in Zambia, the size of UK and France combined and there are few decent roads. My father-in-law told me many years ago that the structural weakness in Zambia is that the fertile food producing regions are a long way from the markets. Previous BBC Radio From our own correspondent programmes have mentioned that Zambia’s agriculture when managed properly, could feed the whole of Africa.

But instead of roads or investing in Zambia’s crumbling railway system that would solve this problem, we have workshops hosted by NGOs in new hotels all over Zambia where delegates are entitled to a generous daily allowance. They are well attended in the morning but only the jackets remain in the afternoon and the fluent jargon is not about implementation. The path to hell really is paved with good intentions. Well-meant advice from America nearly kills a successful business feeding 6,000 families selling high quality food to Europe. Mosquito nets prove to be more profitably employed in fishing which nearly wipes out the previously plentiful fish stocks in lakes nearby. The old saying “If you can’t beat them, join them” is proved when a local nurse decides to concentrate on setting up his own NGO, rather than use his training improving the health of his countrymen. He is not paid his meagre wages very often in a hospital which has only half the staff it needs, and justifies his actions perfectly logically “How else am I going to get a car?”

Farmers get compensation if crops fail, leading some farmers to neglect their crops and has a curious echo from the days of Communism in Europe “They pretend to pay me, so I pretend to work”.

Back in more developed Blighty, someone gives me a brochure for Sure Investment www.sureinvestment.net as they are thinking of investing? Always glad to help or listen, but free financial advice? sets some alarm bells ringing. Have not looked at the website, but the brochure is very well produced with pictures of yachts, diamonds, race horses and other wealth clichés while text is minimal. Based in Bournemouth, Sure are not “Authorised & Regulated by the Financial Services Authority” so are not covered by the Financial Services Compensation Scheme see http://www.georgeemsden.co.uk/2009/11/interesting-times-how-to-spend-14bn-in-a-weekend/

Nothing wrong there as long as the client (and adviser) understand this. Text mentions modestly that it is towards the high risk end of a balanced investment. Part of the return is generated by short selling, a strategy used by hedge funds for example which can be very high risk. Most people understand that if you buy a fund/commodity/share and sell it at higher price, then you can make a profit. This can be done in the same trading day or a longer period if you have the patience and the resources. Have met a few people who do this as a job and set themselves a profit target of say, next month’s living expenses and when they have made enough, switch off their laptop and go down the pub. They don’t make a profit every month, but seem to know what they are doing and are usually honest enough to admit that there is a learning curve here.

But a profit can also be made the other way round – SELL now at a high price and BUY back later at a lower price. This is sometimes called a bear transaction. However, there is a crucial difference here. If you buy shares and the value plummets, the most you can lose is your purchase cost and expenses. If you have sold shares and have to buy them back, the potential losses are infinite as the price could go up to any level. Most traders with more than a couple of brain cells would limit any potential losses by setting a maximum price movement, but it is not for amateurs.

The potential investor in this case has no savings, is unemployed and no knowledge of investments. It would be common with this type of investment for the investor to meet the definition of a Sophisticated Investor http://www.meteorical.co.uk/glossary_sophisticated_investor.php Business Angels for example, who invest in a start ups or other fledgling business, would have to sign such a declaration, see last week’s http://www.georgeemsden.co.uk/2010/01/fat-angels-or-too-much-of-a-good-thing/ This puts everyone on notice that this is not an everyday investment and outside any investor compensation scheme.

But minimum investment here is £10,000 for a minimum of 6 months so would this have to be borrowed? A key issue in recommending any investment is Suitability, so is this investment right for this client?  In this case, hard to imagine a more unsuitable one.

Referrals from professional introducers are always interesting and latest one is basically “Can you raise some money for my client?” We meet at Institute of Directors in Pall Mall which is busy as usual and the client tells me his story. A modern languages degree from Oxford and continued study, now allow him to work in 26 languages in his translation and international business consulting work. Know people with translating agencies who handle this number of tongues, but never met one person who can handle so many. Story unfolds and alas, credit history scuppers the chance of raising additional funds but there is plenty to be positive about. He knows how to write feasibility studies etc for the next stage of his business growth, but needs other professional advice too which my contacts can provide. Not least is the requirement for his own website to get him a profile in cyberspace.  Just to remind me of my own limitations, he already receives his State Pension and runs marathons.

Study time needed to be able to use a new language is 100 – 200 hours so anyone intending to do that evening class to acquire a language for their Summer holiday needs to get started.

Trawling through a library catalogue leads me to a classic guys’ read – the memoirs of test pilot Eric “Winkle” Brown – Wings on my Sleeve http://www.amazon.co.uk/Wings-My-Sleeve-Worlds-Greatest/dp/0297845659 Part of my continuing fascination with some military/war matters is the sheer insanity that occurs. End of WW2 and he test flies various captured German aircraft including the exotic Messerschmidt 163 and weird Dornier Do-335 http://www.squadron13.com/do335/DO335.htm Former is deadly (to the pilot) with its volatile fuel mixture while the latter has an engine at the front and the back.

Bail-out instructions for the Dornier are the most complicated ever: i) press this button – BANG goes the rear propellor (don’t want to end up as mincemeat, do we?)  ii) press next button – BANG gets rid of the tailfin (don’t want to get sliced in half either)  iii) PULL hard on these two red handles to jettison the canopy, but the exit of the canopy is so swift that a crashed example found the (dead) pilot in the cockpit with both his arms missing! Another theme that comes out from reading any books about the history of the UK aircraft industry is that Government interference and mismanagement, is not new. If you want to read a real rant on this subject, see Plane Speaking by Bill Gunston ISBN 10: 1852601663 who makes me look quite tame really.

Record gold prices prompt a rash of TV adverts but it still pays to shop around http://www.bitterwallet.com/have-you-said-bye-bye-lovely-gold-hello-tiny-little-cheque/19640?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bitterwallet+(BitterWallet) If you still have some and want to talk to the buyer face to face, contact Lewis Malka of Hatton Garden http://www.joseph-sterling.com/about_us.html

Recent long-term care enquiries include one where the client is in good health but over the age of 75 so unable to purchase a pre-funded plan. As they are not receiving any care currently, they are not able to purchase an Immediate Needs Annuity either, which would cap the cost of future care. So if care in their home is needed or if they need to move into a care home, they will have to self-fund.

One of the exceptions where the NHS will pay for care is if continuing care is needed. Care in hospital is paid for by the NHS. Care outside is subject to a means test. But if treatment still needs to be provided by the hospital, then the NHS can pay for this although they are not an in-patient. This avoids the means test etc and surprise, surprise, expenditure on continuing care has shown a sharp increase which the Government is now looking at closely.

Final meeting of the week is with www.carehomeselection.co.uk Started 10 years ago by a GP, it helps families find a care home by telling them what questions to ask, for example. Coordination between the care home and the hospital can mean more efficient use of hospital beds, while knowing what to ask and look for when a relative or client is going into a home, can make the process less stressful.

Seem to have had a record number of appearances on BBC Radio London 94.9 FM this month where an Estate Agent and I spoke on Jonathan Lampon’s programme last Saturday evening. Subject was “Are mortgages or is the house market getting any easier?” to which the answer is a definite  No!

Main point that I was picked up on, was that your credit file can pick up how quickly you pay your bills. This is used in Credit Scoring and decides IF you get a mortgage and how much. Thinking of applying for credit in the next 12 months? Pay your bills on time. Doesn’t matter so much if you pay the minimum on your credit card, but pay it in good time.

Signs that a business is in trouble often show themselves in corporate vanity – expensive new offices, rising executive expense claims, new departments and rebranding. Personal Accounts, the Government’s complusory pension scheme http://www.georgeemsden.co.uk/2009/11/do-you-know-what-day-it-is/ has had a £360,000 rebrand to NEST http://www.padeliveryauthority.org.uk/documents/press-release-nest-07-01-2010.pdf as people find the P-word or Pensions, boring. There is even a video for people whose reading attention span is a bit short and a rare piece of honesty http://www.padeliveryauthority.org.uk/nest-video.asp as it starts off “Workplace pensions are changing”. Trouble is, there has been non-stop pension change since 1997 which has compounded the confusion the new measures claim to solve. It’s about as honest as someone who mugged you offering you a cheap loan.

Not mentioned of course, who will provide the back-up system to run the scheme for it’s 3 – 6 million members? There is only one bidder left now  http://www.ifaonline.co.uk/ifaonline/news/1566067/gwrs-withdrawal-leaves-bidder-personal-accounts One also wonders what sort of pension the staff at NEST will have? Defined contribution/money purchase - where the employee carries the investment risk? Or will it be final salary like most of the the public sector (and of course MPs) where the employer takes the investment risk – supported by the taxpayer? Don’t be surprised if the admin is all done overseas to save money – call centres could be busy.

To be fair, there is some good news here. The idea of the members’ pensions being run as a not-for-profit corporation is a good one so you will have your Personal Account after all. But unless people save enough for retirement it will be pointless, and the average amount you need to save to get a decent fund for your pension is about 15 per cent of earnings. If you don’t believe me, come and see me for a pensions chat.

But there is more dishonesty and contradiction here.

a) Taxes are rising so how are people supposed to save more when real incomes are falling? OK you get the tax back with pension contributions, but a huge turn off for many would-be pension investors is having to buy an annuity. Haven’t had a request from a hard up 30 or 40 year old to “cash in my pension” lately, but all IFAs get them.

b) We are all living longer thanks to the NHS but the maximum annuity purchase age of 75 has been unchanged for decades. Government has really dug its heels in here. The Association of British Insurers is now suggesting  http://www.trustnet.com/News/DisplayStory.aspx?id=53251 that it should be raised to 80. Logic behind refusing to raise the maximum annuity purchase age is that pension or annuity income is taxed as earned income and the Government starts getting its tax relief back.

c) At the same time, the State Pension Age  is being raised to 67 in 2024 and then 68 in 2046 - again because we are living and working longer. And some think it should be raised to 70 http://www.pensionsadvisoryservice.org.uk/news/2009/july/lord-turner-pension-age-should-be-70

d) Saving 15 per cent of earnings may solve someone’s own pension problem but would have dire consequnces for the rest of the economy. The current recesssion is caused by a lack of spending and people are saving more now. Anglo-Saxon countries do not generally save much – the savings ratio in the USA was negative not so long ago – in contrast to Europe and Asia where the propensity to save is much stronger. In fact, these people have often expressed puzzlement when they have moved here and been amazed how little people save in the UK – and this was when times were better. A huge jump in savings would cripple the leisure industry for example, not to mention the restaurant business.

Some leadership from MPs might help? How about if they had money-purchase pensions and took the same risk as the millions of NEST members? Would the next Government be so daring? Waiting for hell to freeze over is not usually a worthwhile exercise, so don’t expect much here – except maybe another rebranding.

Exciting end to the year when I am in the studio on Eddie Nestor’s Drivetime show on BBC Radio London 94.9 FM to talk about pensions. Most talk is about drug smuggler Akmal Shaikh’s execution in China so my contribution is reduced, but for an enlightening counter to the “how awful!” chorus, see   http://www.dailymail.co.uk/debate/article-1239051/LEO-McKINSTRY-Sorry-join-liberal-wailing-heroin-traffickers-deserve-die.html

If you’re surprised by the Chinese reaction, go to Google and search with “opium wars”. My favourite book here is the classic Foreign Mud by Maurice Collis  http://books.google.com/books?id=DK78eANlr-AC&dq=foreign+mud+collis&printsec=frontcover&source=bl&ots=vBNcl-5RI_&sig=GecSuwuzNtGh7KhlT3JWFQhkZxw&hl=en&ei=TsZBS-GZBI6i0gTJ-tGSBQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CAgQ6AEwAA#v=onepage&q=&f=false

Another highlight is a relaxing day spent with friends in the beautiful village of Ickwell, home of clockmaker Thomas Tompion. Two surprises there. Firstly, after-dinner whisky is Welsh http://www.welsh-whisky.co.uk/ and very drinkable too while the village is one of few in England with a permanent May pole http://www.bedfordshire.gov.uk/CommunityAndLiving/ArchivesAndRecordOffice/CommunityArchives/Ickwell/ThomasTompion.aspx 

Christmas Day itself finds me at church after some years. A daughter’s parents-in-law are over from Italy and Dad wants to go to church. Choice is between the Italian Church in Clerkenwell Road   http://www.italianchurch.org.uk/  and St George’s, Hanover Square  http://www.stgeorgeshanoversquare.org/  As friend www.georgemetcalfe.com is reading the epistle at the latter, it is St George’s where apart from being a beautiful church, the choir is stunning and worthy of another visit. Three daughters and their two grandsons make the family gathering everything such an event should be. Eldest grandson is now a toddler who finds the sofa, grandad’s paunch and other seated members a useful climbing frame. In true child tradition and for part of the time, the clear packaging that fits nicely over his and grandad’s head, is more appealing than the contents. Youngest grandson now three months old, smiles when you talk to him and has a look of bewilderment when strange sounds come out of his mouth. Hunger is indicated when he slobbers over and sucks hard on the end of my nose – time to hand him back to mum.

But let’s get serious. Final business meeting of 2009 is with Partnership Assurance attending a workshop on how to develop long-term care business – something which is now more topical after the monumental indifference I found in the 1990s. Being twelve years older and the credit crunch have sharpened people’s minds, it seems.

Most readers will be able-bodied and capable of washing, dressing, feeding themselves etc. When you start to need help with these, start to forget what day it is or dare I say it? can’t recognise members of your own family, you need what is commonly called long-term care. We all like our independence and no likes to be a burden, but this can change overnight perhaps with a fall, hence the title. A lively debate always follows when this subject comes up with “Someone else should pay!” at one end and people who can afford to take a better off view at the other. If care has to be paid for and you haven’t got insurance, you have six choices:

i)    Cash – use your own money. Nice if you have it, but even if you do, do you wish to burn it all up living in a home?

ii)   Get the Local Authority to pay for it (What everyone wants) There are also Deferred arrangements with a few councils (live now, pay later). Here they pay for care now but take a charge on an elderly person’s home and only get repaid when the person concerned has died or their home has been sold. Councils cannot charge interest in this situation so few allow this option, and you can’t blame them.

iii)  Rearrange your portfolio to produce income. Needs to be a big portfolio if the yield is say, 5 per cent p.a.

iv)   Equity Release to get a lump-sum or income. Realistic BUT being based on annuity rates (which in turn are based on life expectancy and interest rates) these are low currently. Even five years ago when interest rates were much higher, the rates were not great, even at age 70. Falling house prices has led to an exodus of providers here.

v)     Buy an Annuity. Often the only option but many people leave it for too long and there is not enough cash or equity left when they finally do get round to looking at it. The cost of care can be capped. The insurance company that provides the annuity income takes on the risk of the person concerned living a long time. The risk of someone dying say 2 months after buying one can be insured separately.

vi)    Renting out your own property. Fine in theory but do you really want this? Beneficiaries might not be happy either. Rent you get from renting out your own home is unlikely to be enough to pay for care in a residential home.

Seventh option might be to give one’s career to care for a parent for example, but this can be the most expensive.

People with no money will probably get their care paid for by the local council while few have enough to pay for everything. Most common situation is a shortfall in the cost of care which planning for now will make it easier to cope with, and perhaps safeguarding someone’s inheritance.

There are other issues too and equity release for example, will involve a solicitor. The following might be worth a visit as well  http://www.georgeemsden.co.uk/2009/10/your-worst-nightmare/ 

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.

First meeting with a new introduction from an accountant brings up the subject of Stakeholder Pensions. These were this Government’s answer “the pensions problem” where people were (and still are) not saving enough for their old age, all the fault of the wicked insurance companies that provided them who were considered too greedy in terms of charges. If charges could be reduced, low earners would rush to save for their retirement.

While a pension is just a savings scheme with some tax-breaks, a Stakeholder Pension is the “fleet model” of pensions with limited fund choices and for the first few years, a cap of 1 per cent on charges. This led to the ludricrous situation where pension providers lost money providing these contracts for several years and the low-income earners they were aimed at, did not want them. In a classic example of the law of opposite unintended effect, they did generate some jolly wheezes for saving IHT for example, for grandparents with loadsamoney.

Minimum contribution was £20 per month but that is not going to provide a pension you can live on even if you start in your 20s. As an answer to the pension question, they were little better than the equivalent of the answer to “Life, the Universe & Everything” which Hitch Hiker’s Guide to the Galaxy devotees http://www.bbc.co.uk/cult/hitchhikers/ will know is……..42! After years of pressure from the insurers, Government finally relented and allowed a maximum charge of 1.5 per cent for the first 10 years – perhaps remembering that insurance companies that lose money might go out of business and aren’t going to pay much in Corporation Tax.

8th October 2001, new rule for for employers with > 4 employees who must have a Designated Stakeholder Pension Scheme. They do not have to give any advice nor do they have to contribute, just have a Designated Scheme i.e. a particular scheme with a particular insurance/pension company which will then issue a certificate to let the employer off the hook. Given the huge interest that pensions generate, this was one of those laws “more honoured in the breach, than in the observance” as Hamlet’s Polonius diplomatically put it. But then regulator OPRA now part of The Pensions Regulator http://www.thepensionsregulator.gov.uk/aboutUs/index.aspx had the sanction to fine errant employers up to £20,000, and in March 2004 they dished out their first fine of £10,000 against a 300 employee company Foodflow Ltd. One of their employees felt he was prevented from joining a designated scheme and complained to the regulator. To their credit, they did not wade in and issue the fine immediately but the employer apparently ignored their requests and was fined, losing their appeal http://www.accessmylibrary.com/coms2/summary_0286-20799889_ITM

The maximum fine for this transgression was recently increased to £50,000 so any concerned employers reading this might wish to look at  http://www.thepensionsregulator.gov.uk/pdf/faq2007.pdf

Long-term readers of my blog will remember my previous swimming teaching experiences, and previous blogs on this subject can be found in the Swimming category on RH side of the browser. My forté was nervous people in general and usually nervous children in particular. The nervousness was often more with the parents than their offspring, but it was very rewarding emotionally to help them overcome their demons. Children generally learn more quickly while adults have much stronger motivation – decades of “I’ll do it sometime” finally get swept away with the grit to face it and book those lessons. In one memorable case and after two terms, we had reached the stage where it was time to jump in at the deep end from the side of the pool. Had forewarned the adult pupil the previous week, but he looked really nervous so I asked if I should hold his hand? Yes, he said quietly and in we jumped. Did it all himself next time and at the end of the lesson told me “I never thought I would be able to do that”.

So what’s prompted all this? Fellow blogger and tango dancer Tim Ferris whom I have mentioned before has found a new way to swim and apparently very efficiently http://www.fourhourworkweek.com/blog/2008/08/13/total-immersion-how-i-learned-to-swim-effortlessly-in-10-days-and-you-can-too/ Have yet to read his book 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 but suspect it’s basically, stick to what you are good at and delegate everything else.

Another person whose thinking seems against the flow is novellist and apparently ex-Feminist, Fay Weldon. In the week when the UK’s population reaches 61 million she suggests women have chidren first and career later ergo more teenage pregnacies http://www.telegraph.co.uk/culture/books/authorinterviews/6089253/Fay-Weldon-Its-easier-to-pick-up-your-husbands-socks-and-clean-the-loo.html Having done my own procreation relatively early in life – getting married at 23 and now with 3 lovely grown up daughters to show for it, she has a point but the thing about having children is you sometimes have to let them find their own way – and not just in swimming.

For a change, let George finish on a serious note. Had interesting meeting with the Chairman of children’s cancer charity www.campquality.org.uk who want me to help them in the UK. Their parent is a very large Australian cancer charity and while details not worked out yet, watch this space.

August – the Silly Season. Time for a break in Suffolk and two weeks of chill. Sister’s cottage is available in Saxmundham where pace of life is definitely slower plus plenty of family to catch up with. Very slow Internet connection and an overheating laptop become a virtue, resulting in little time on the net and lots of reading done. Halfway through the break, BBC are on the line wanting me on TV on Monday. Not the sort of thing one wants to turn down lightly, but my holiday togs do not include a pinstripe suit. They want to talk to a pension expert about a story of a council that has £7m of its £540 million pension portfolio invested in two tobacco company shares. The same council spent > £3 million last year on an anti-smoking campaign, Council’s Health Credentials Up in Smoke?? says the headline. http://www.wandsworthguardian.co.uk/news/4543507.Council_s_health_credentials_up_in_smoke_/ My limited wardrobe for the TV appearance does not worry them – I have one decent shirt, and they can film me at a local studio and splice that in to the news item for Monday. The weekend gives me time for thought but the issue is quite simple.

Wandsworth Council’s apparent lack of logic here is just the same as that of the national Government – running the NHS while raising £billions from taxes on tobacco products without which, Basic Rate Income Tax would have to be nearer 25% instead of the current 20%.

If you are running a pension fund and you have an investment that is producing good dividends and looks good value, chances are you would want to hang onto it or maybe even buy some more. Didn’t check, but suspect that the two shares involved are are doing their job and if not, would be due for a review or the chop anyway, regardless of ethical issues. You can’t have it both ways. Tobacco stocks, like supermarkets are a classic defensive investment when markets look sticky. We all have to do our shopping and smokers will always need their nicotine fix. Entertainments similarly, as friend Louise, Corporate Entertainments Director for London theatre group http://www.delfontmackintosh.co.uk/Hospitality/ has never been busier.

Changing the investment mandate so armaments, gambling, alcohol and tobacco etc are excluded can be done, but that means a smaller pool of investments to choose from and therefore a slightly higher investment risk. The whole point of investing in a pool of shares or assets rather than the few flavours of the month is to spread the risk.

In the actual programme on Monday which was with Eddie Nestor on BBC Radio London 94.9 FM Eddie asked me if many of my clients cared about this? Have always asked but “Very few” is my answer. There are plenty of IFAs who major in this if it means a lot, as any Google search with “ethical IFA” will reveal or visit www.unbiased.co.uk

First ethical fund in the UK (1984) was the Friends Provident Stewardship Fund shortly followed by NM Schroder Financial Management’s Conscience Fund – NM have long since been subsumed into FP. They were my first company in my financial services career and unit-holder meetings were always lively with an unforgettable one in the Natural History Museum surrounded by skeletons of many huge and frightening dinosaurs. After a review of the year in question, the investment managers invited questions from the floor but in those apartheid days, one issue which always raised temperatures and got things really lively was that of Sainsbury’s selling South African oranges. Sainsbury’s  are a common ethical fund investment are as they have a reputation of being a good employer and give large amounts to charity – positive ethical criteria as opposed to the above-mentioned negative ones. Sainsbury’s view was that the oranges in question were a good quality, reasonably-priced item and their purchases provided employment to people who were (and probably still are) very disadvantaged. If people felt they did not want to buy a South African product, there was a clearly priced alternative next to it.

Other people would get upset when a company with a new gizmo which would save the planet, was not deemed worthy of investment, usual reason being that these were typically start-ups which tend to be weak financially making them a very high risk investment – see http://www.georgeemsden.co.uk/2009/07/im-an-investor-get-me-out-of-here/ where 56 per cent of people lose all their money.

Interestingly, there is a US Government-run Conscience Fund but whereas the UK ones are for people trying to be good, this is for people who have been bad i.e. defrauded or stolen from Uncle Sam and want to make amends http://en.wikipedia.org/wiki/Conscience_Fund – wonder if it would catch on here – for MPs who haven’t come clean about their expenses, perhaps? Contributions to the US Conscience Fund tend to be annonymous and vary hugely, but don’t attract tax relief.

But as yours truly is not quite back in work mode yet, let me share some grisly trivia from one of my holiday reads: Salt A World History by Mark Kurlansky ISBN – 978-0-099-28199-3. In the chapter, Liberté, Egalité, Tax Breaks, is an intriguing item about a use of salt arising from a 1670 revison of the French Criminal Code. Suicide was an offence in France (and until 1961 an offence in the UK as well). But whereas the UK law was designed to prosecute those who did not succeed, the French law was used against those who did and their salted cadavers were brought before a judge and sentenced to be put on public display – YCMIU.