Ian Neale discusses the importance of looking to the future in a time when short-term thinking presides.
As the famous scientist Niels Bohr said, "prediction is very difficult, especially if it's about the future." Well, the Referendum has just made it a whole lot more difficult.
By all accounts though, the UK government will begin EU exit negotiations with a primary objective of maximizing continued access to the Common Market. The UK financial services industry in particular will be keen to see that happen.
We're told UK-exit will take at least two years from the moment the government presses the button by invoking Article 50. Some observers say ten years, and who's to say they're wrong?
Regardless of how long the process takes, the UK will remain subject to Treaty obligations for the duration – and to some extent quite possibly beyond the exit date, depending on the final outcome. So we cannot suddenly ignore post-23 June EU developments.
Already on the horizon we have the IORP II Directive, due to be formally agreed by the European Parliament this October and transposed within two years into UK legislation. Likewise the formidable General Data Protection Regulation, with a deadline of 25 May 2018.
I've been reading the latest Condoc from the European Commission, on a potential EU personal pension framework. In talking of "purchasing a personal pension product" it seems to continue the unfortunate tendency to liken starting a pension saving plan to buying a bottle of shampoo.
It's worth persevering though, because it recognises that the long-term nature of personal pensions "should help generate funding for long-term illiquid investments (for example infrastructure or unlisted SME equities)". This verges on fresh thinking.
In the current environment, where uncertainty exacerbates the tendency of personal pension savers to freeze in the face of ultra-low interest rates, this is surely welcome. Dissatisfaction with returns from conventional investment routes, including index tracker funds, is already leading some into alternatives such as peer-to-peer lending.
Maybe the time has come to offer a way for individuals to invest in the kind of lucrative opportunities represented by Private Finance Initiative (PFI) projects, where the rate of return expected to be earned by private sector capital in the project is over 12%.
The Condoc distinguishes a 'European personal pension account', which it likens to a US Individual Retirement Account (it might have said a UK personal pension), from a 'European personal pension product' in that the former does not pre-define investment options. The role of tax advantages would be similar.
We live in a time when short-term thinking has become dominant, not least among politicians and policy-makers. Companies report quarterly, share prices determine executive bonuses; and government action to control volatility such as quantitative easing only serves to worsen the outlook for pensions.
We need to find ways of aligning long-term savings with assets which can be relied upon to deliver income decades ahead. So far, pension arrangements have been largely dependent on a wholly-inadequate supply of index-linked gilts: an asset category which is arguably a poor investment at a time when yields do not even match inflation.
Alternatively we could ignore the falling support ratio (the number of people of working age divided by the number over the state pension age) and the growing anxieties of our children and grandchildren, and party like there's no tomorrow.
But I'd rather invest in a future.
Ian Neale, Director, Aries Insight.
