Pensions. An Absurd Play. UK Advice Services.

Mothers + Pensions + Sons = Arguments in Alien Languages
Me: Money money money. Money. Yak. Yakity yak yak's milk smoking budget budget budget utilities after tax gym
Mum: Are you saying you don't want me to keep fit at the gym?
Me: No. I'm trying to assess must-have expenses like water bills to possibly variable expenses like gyms so I can match super reliable income money money money smoking
Mum: That's why I go to the gym to be healthy...
Me: In this case the upside to smoking is that there are better annuity rates so death death death
Mum: You saying I'm going to die soon? You know the genes in my family...
Me: Yak's milk.
Mum. Eat your food up
Me. Muuuuuuuuum.

(O. What are Dad and Grandma talking about? A: Pensions. O: Do pensions make people angry? S: Let's go for Trains.)

We make a Pinter play seem positively non-absurd.

This area is complex enough that it has taken me days to reach a place where I can make some sense of it. I'm still having to convince that a proper annual expense budget is going to be needed so I can try and match reliable income to it, under uncertain assumptions of size of pot and also ever changing UK pension rules (pension drawdown) and tax rules (dividend tax allowance, savings tax allowance)

Given the life expectancy forecasts (all in the up) and my new found understanding (especially of the human decision making part) I'm now putting pensions alongside healthcare, climate change, and (forced) migration as serious and systemic problems which partly due to their long term nature and complexity are poorly dealt with by humans overall.

Many would point to using an IFA (independent financial adviser) at this point.  However in my view, in the UK, I would recommend you first contact these two government sponsored services.

The Money Advice Service which has a good (if somewhat too balanced, in my view) website as well as offering phone advice and a webchat advice.

The Pension Wise service which will give you 45 to 60 minutes of advice (if you are over 50 and in a money purchase defined contribution scheme.)  

You should also find out what your State Pension is likely to pay you.

Furthermore, before contacting these two services you should also fill out this money check guide (from Money Advice Service) and to be ruthlessly honest on it (eg don't hide your cigarette expense from it). That should help the majority of people, if after that you still need advice then look up an IFA which both services can direct you towards as well, although it is likely word of mouth on that work might better.

*

A theoretical case study.  Goal to match the approx gross £28,000 UK Median wage. This is approx £22,000 after tax. Purely, back of the envelope, rough calculations (mistakes quite probably made!)  There is an BBC News / Actuary calculation here for various type of ages and income, though it puts money only into an annuity at the end.

The State Pension is worth £8,300 pa. You have a £11,500 personal tax allowance. We will secure another £3,000 in yearly income via an annuity. For simplicity, we will take this straight.

For the typical 65 year old this will take a pot of about £60,000  (gender, smoker, guarantees, inflation links will all vary that).  

We now need to generate another £11,000 after tax.   In the UK, you do not pay tax on the first £5,000 in dividends (this may change, but it seems likely a reasonable idea for governments to keep this).  Several equity income type funds will pay approx 5p in the £1 while attempting to maintain capital, this might slightly draw down over time, but with some skill (or luck) could even appreciate.  This would take approx £100,000 if you had it in savings outside your pension pot, or used some of the lump sum tax free amount (25% of pot) on taking your pension.  We are now at after tax £16,000 (and we've used £60,000 buying the annuity, and have £100,000 in equity income funds).

We need another £6,000 after tax.    Here's where it becomes trickier.  One of the most things efficient things to do here is to earn this either in an ISA which is tax free, or with some interest income (where you also have a £5,000 tax allowance limit).  So if you happened to have another £120,000 sitting in an ISA, you are  approximately done  and reached £22,000 (although there could be some variation as money tied up in a equity income fund, and as we all know the equities can go up and down, but hopefully they can stick to near the right yield for you)    Else, if you have £120,000 sitting in a pension pot you can also get close with a mix of drawdown and income, but your pot would slowly erode over time so it might not feel comfortable.  Or you can buy an annuity, but although £120,000 would buy £6,000 or so, this would be pre-tax and not inflation proof.  A pot of £200,000 would be needed to feel comfortable and if turned into annuity would also get you close to a 3% pa escalation on about £6,000.

So that's quite a lot:  £60,000 spent on an annuity; £100,000 in equity income funds; then between £120,000 to £240,000 more needed in a vehicle either ISA or pension pot in drawdown, the £240,000 for the most comfort, the £120,000 being in the realms of possibility but not comfortable.  Suggesting a min figure of about £300,000 in a mix of savings/pensions at 65 now (2017) to generate around £22,000 in after tax income. These figures will likely only increase with time.

Infant Mortality, SDG - what the data says

Infant mortality.  What does the data say? In a series of thoughts on what human development data is suggesting, I examine the good, the bad and what might be missing.

Infant Mortality rate is measure per 1,000 live births. It measures  the number of deaths of children under one year.  Many factors contribute to infant mortality, such as the mother's level of education, environmental conditions, and political and medical infrastructure. Medically, Premature birth is the big contributor with other leading causes birth asphyxia, pneumonia, and term birth complications.

It would come under #SDG Goal 3 and is often considered a measure of human development.

The good news the world average has been cut in half over the last 25 years from50 to 24. The bad news is that still leaves many poorer nations still a far ways off the richer nations. There is the opportunity to accelerate here. Tunisia goes from 44 to 12 during this time.  Brazil goes from 51 to 15.

The US improves but the pace of its improvement lags many other developed nations. Slovenia improves faster. Slovakia over takes the US. This pattern is reflected in many other indicators suggesting that on many measures the US is slipping.  The UK joins the US in slipping in the HDI (Human Development Index), but not on this measure.

I’ll come to systemic risks such as climate change and forced mass migration in future thoughts, but looking at these patterns and some of the underlying drivers (improved health and education) there are reasons to be optimistic that we should still see improvements over the next decade, although my sense is that the US is likely to continue to slip or stall relative to its peers.

Sources:    see http://hdr.undp.org/en  also I’m a fan of Hans Rosling’s works, his legacy can been seen here   https://www.gapminder.org/   and his TedTalk here  (11.9m views) https://www.ted.com/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen

The HDI is brought to life by google using  google explorer.

Team Work. What Google found.

Effective teams are not a magic algorithm.  Dependability. Clarity. Work Meaning. Work impact and most of all Psychological Safety:  Feeling secure to ask questions and take risks without feeling embarrassed or insecure. Google did find these traits most important.

Who is on a team matters less than how the team members interact, structure their work, and view their contributions. So much for that magical algorithm.

Google learned that there are five key dynamics that set successful teams apart from other teams at Google:

1. Psychological safety: Can we take risks on this team without feeling insecure or embarrassed?
2. Dependability: Can we count on each other to do high quality work on time?
3. Structure & clarity: Are goals, roles, and execution plans on our team clear?
4. Meaning of work: Are we working on something that is personally important for each of us?
5. Impact of work: Do we fundamentally believe that the work we’re doing matters?

The important of the security of risk taking might be surprising but it was the strongest result that Google found.  

Think about it.  If you want to ask "What's really the goal of this project?"  But you don't want to sound stupid... if you don't feel secure, you'll never ask and either (i) you'll be left out the loop and not contribute as much or (ii) the project really didn't have goal and the whole is about to waste the rest of the day in meandering nonsense...  

The questions to think about on a team level:

(Organizational behavioural scientist Amy Edmondson of Harvard first introduced the construct of “team psychological safety” and defined it as “a shared belief held by members of a team that the team is safe for interpersonal risk taking.”  Look up her work for more on this; also links to the Google work below)

1. If you make a mistake on this team, it is often held against you.
2. Members of this team are able to bring up problems and tough issues.
3. People on this team sometimes reject others for being different.
4. It is safe to take a risk on this team.
5. It is difficult to ask other members of this team for help.
6. No one on this team would deliberately act in a way that undermines my efforts.
7. Working with members of this team, my unique skills and talents are valued and utilized.

Google have a tool you can customise to address these questions and issues.  The Manager Work actions are here.  The Team effectiveness guide is here.    All work is originally Google's.   And Amy Edmondson has a Ted talk on it.  My views on it obviously not endorsed by Google etc.

Vaclav Smil, energy expert. Awesome.

Vaclav Smic is a world leading authority on energy systems and usage. I had the fortune to hear him speak at a CLSA event this week.

See his work and academic credentials here.  His books give more data and insights. These two pieces on energy here (2017 Annual Energy paper with JPM) and here, (A skeptics look at alternative energy) also expand on these notes below in more detail. Bill Gates is a fan. 

My brief impressions are:

We are heading for >2 degree world. Too much is already baked into the pipeline. I] It is unlikely we will bend human behaviour enough by 2050. Energy transitions as can be seen throughout history take a long time (decades).

We need to be prepared to deal with negative catastrophes in places like Bangladesh and Florida. Conversely, it is possible that much of Russia will benefit. One could argue Russia might want to ensure at least a +3 degree warm happens if it was only self interested.

We should think about consuming less. The impact of eating 50 percent less beef in the Developed world would be significant. Turning vegetarian for one day a week could also be very significant in terms of carbon impact.

Smil views improving battery technology as incremental. He cites 100 years of progress since Edison made an improvement. He does not view mass efficient energy storage of the type needed to power a city for one day as likely to come on to the market in the next 20 years. He cites near term the biggest to be completed in 2021 in California as being insufficient to power most cities for more than a few hours.

Smic is optimistic on the impact that moving to natural gas could have. Both in terms of pollution, but also in terms of efficiency. Gas is still FF though.

There are no viable alternatives for producing fertiliser, steel, plastics, and much of the basic materials of the modern world; and flying planes other than fossil fuel use. This leaves likely FF to make up at least 50 percent of worlds energy requirements on an ongoing basis.

Fusion. Commercially - The most optimistic assessment would be "Not in our life time" or perhaps "Never". He cites two world fusion experts.

Cities don't really sleep. However solar and wind in most places are not reliable. This is why even though Germany which now has renewable capacity to match its fossil fuel capacity has not impacted meaningfully its FF use, not its carbon emissions from Energy use.

In many places in the world the grid is not connected. One can't send energy from San Francisco to Texas. Or from Texas to Canada. In some places it can work, Denmark can obtain hydroelectric power from Norway when the wind is not blowing. Few people want high energy transmission lines traversing their backyard or landscape, so the situation is unlikely to rapidly improve.

In discussion, as an aside - We will cure more cancers before we solve the mass electricity storage problems  (I happen to agree with this view on the cancer side, I'll have to rely on Smil on the storage problem)

The return on vaccines is at least 44x.  Eradicating polio has been an amazing world benefit. As an advisor to Bill Gates, this is not a surprise to have this view. The Gates foundation has worked on this for a while now.  Many world human development metrics have vastly improved over the last 25 years (As my infant mortality post shows as well, hopefully more data on this).  You can see the Gates work here and a Smil article on it here.

John Kay, 5 Years post Kay Review

John Kay

5 years post Kay review on Long-Term decision making in UK Equity markets.

John Kay at a recent London CFA event speaking about 5 years post the Kay review on Long-Term decision making in the UK Equity markets. My short notes and impressions below.

John spoke clearly and with authority, in a measured but charming fashion. He was a good speaker (which economists are not always, in fact some would say often the opposite), with anecdotes and evidence at his command.

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
― John Kay, Other People's Money: Masters of the Universe or Servants of the People?

One amusing but alarming story:

"[On gathering evidence for the Kay review] Every asset manager I met claimed to be doing stewardship and governance well. In my view, this was not the case. At one fund manager it was obvious this could not be, as the first time the CIO had met the Head of Governance was in their meeting with me."

The strength of his view that regulation was part of the problem and not the solution was a surprise to me. You can read this in the review, but Kay speak about it more forcefully.

“No one will be buried with the epitaph ‘He maximised shareholder value”
― John Kay, Obliquity: Why Our Goals Are Best Achieved Indirectly


Kay describes the problem that regulation and innovation are likely to be in almost constant conflict. Regulation seeks to encompass best practice *at the time* but from the moment it is set and crystalised, the regulations ossify and can not keep up with where best practice moves to (spurred on by the constant forces of innovation).

Brief notes: The wisdom of John Kay as distilled and interpreted by Ben Yeoh, at a CFA event last week in London.

Intangible investment has been run down in the pursuit of (short-term) EPS growth.

Concern that engagement has been dumbed down to a box ticking exercise.

Regulation is part of the problem, not part of the solution.   Regulation and innovation will be in conflict. Regulation attempts to encapsulate best practice at the time of enactment [however it ossifies]

Still need to foster long term trusting relationship between asset owners (Kay dislikes this term) and fund managers.  Fund Managers are central players in the system now.

Believes there is a challenge to the market based paradigm of capital allocation. It is not self evidently the best form of capital allocation. In several markets, net equity issuance has been negative not positive, if one accounts for share buy backs and acquisitions.

Several private equity participants could be views as short term flippers of assets.

Fund managers today and tomorrow will need a different skill set from those of yesteryear. The ability to assess management, culture, stewardship, success planning, corporate strategy…  [items that come under “ESG” or non-financial]

Kay review can be seen here:

Warren Buffet and a test of time

I wrote this quoting Warren Buffet 10 years ago (in the first iteration of my blog, fascinating to note what has stood the test of time or not):

"A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed." 

What he wrote in 2007 in his investor letter, still seems true today. 

Charlie [Munger] and I [Warrren Buffett] look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock-market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

Perhaps 10 years is not a long enough passage of time, but it is notable to me that advice given 10 years ago still seems relevant today (and probably 50 years ago as well).

10 years not even long enough to grow an oak tree.

Daniel Loeb of Third Point did criticise Buffet in 2016 suggesting:  Buffett "has a lot of wisdom, but I think we need to be aware of the disconnect between his wisdom and how he behaves."

However, I am always cautious of such lines of arguments.  If a murderer says “Don’t murder” do we not listen to his advice or wisdom because of who he is? While background can give weight or not to the evidence or wisdom (or lack of) said, the wisdom or message itself needs to be evaluated somewhat separately from the person.

If not then maybe we should never read the works of Ezra Pound.

Buffet investor letters here:   http://www.berkshirehathaway.com/letters/letters.html

Some other great nuggets… on customer service:

"The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year" in the 2015 letter.

This runs through the heart of Amazon as well – relentless focus on customer – serve the customer well and earnings will follow.

On culture…

The 2010 letter quoted Churchill saying, "You shape your houses and then they shape you."

For better or worse, every company has a culture. I’d go so far to say that every family has a culture too.

For better or for worse, you should assess what that culture is.

On valuation…

"As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock)," 

A company is more than just its numbers… and many things can not be counted, numbers simply can’t properly express value in many situations.