Retirement Investment funds and social issues

I recently read an article that complained about how public pension investment funds were underfunded and were also investing in underperforming stocks that were being used to fund social issues. Members wanted their funds to perform. According to the story, I read, “Ultimately, members reiterated that they want the performance of their funds to be financially driven, strongly preferring to maintain personal control over any charitable donations or socially motivated investments. That focus on financial performance is the biggest and most important takeaway from the Spectrum research – pension members simply don’t see their funds as a political tool to advance social issues and causes.

Sadly, large funds are increasingly being used for activism, with members' retirement treated as a subordinate concern. For example, CalPERS and NYCERS have both embarked on strategies investing heavily in alternative energies at the expense of more traditional energy resources, despite the fact that many renewable energy stocks continue to underperform”

How are public pension plans performing and what percentage of their asset allocation is being used to fund social issues and causes around the world. First, let’s address the performance of the funds. According to the Organization of Economic Cooperation and Development (OECD), the following countries funds did well between 2010 and 2015

Is the risk of investing in renewable energy a problem for pension funds worldwide? According to the OECD, nine funds (worldwide) reported exposure to renewable energy, with Denmark’s Pension reporting the largest allocation (through unlisted equity), followed by two Netherlands Funds. Denmark Pension has increased the share of renewable energy companies in their energy portfolio from 11% to 41% from 2010 to 2014, and expect this trend to continue. As part of its new investment policy adopted at the end of 2015, Denmark plans to invest an additional EUR 4 billion in renewable energy generation. While the changing regulatory landscape in the energy sector brings challenges, it can also give rise to investment opportunities, specifically in renewable assets. Québec Pension Plan, Argentina’s Sustainability Guarantee Fund, all had significant allocations to social infrastructure. 

Looking at the funds above you can see the investment in social causes is not affecting the rate of return of these funds, with the Netherlands leading the world at 7.4% and Denmark in the top ten at 4.1%.

Source: Pension Markets in Focus (pdf file)

Women and Pension Planning.

Women are not saving enough for pensions. This is an issue that I have raised before and talked about the reasons for this. Women receive on average about 79% of what a man makes for doing the same job, which means that women may not have money to put into retirement savings. Company pensions and government pensions are based on income—the more you earn the more you can put away for retirement, which puts women at a disadvantage. Women have a different outlook on financial matters, which means they need a different approach from Financial Advisors—and financial advisors who cater to women are few and far between.

A new survey out of Ireland found that just over one in three women own a pension (36%) compared with 55% of men. It also found that the vast majority of women (71%) don’t know how to start a pension, while the average woman with a pension saves just €140 a month. Depending on her age, she should be saving at least double that.

According to the Journal, the average woman in Ireland wants to retire on about €600 per week but, even when the state pension of €239 is factored in, women are saving at best half of this.

Further questions put to the 1,000 adults over the age of 18 from a variety of socio-economic groups showed that three in four women (76%) who don’t have a pension are worried about not owning one. A vast majority of women (89%) also said they’d like help with their retirement planning.

The issue and a solution that works is being considered by the Irish government. The government hopes to introduce an auto-enrolment pension system by 2021, too late for thousands of women but good news for young women in Ireland.

The problem is that this issue is a world-wide issue and will cause major problems for economics and governments very soon. Senior women will be finishing work and will not have adequate pensions, and this will cause a huge strain on our welfare systems. Women not only are receiving inadequate pay when they work, they will receive inadequate pensions when they retire. Women also live longer than men by an average of about 8 years worldwide, which means that older women will be living in poverty for longer.

The problem can be fixed if there is government will. Providing education about financial issues and pensions that are easily understood; provide automatic enrollment in company and government pension plans, provide information that addresses the issue and keep it simple. Finally, start to pay women equal pay for equal work.

Reasons to not save for retirement

K.I.S.S. Keep it simple smart, is something we don’t do when thinking about retirement. I just received an email from an investment firm that had the topic line “The top ten retirement planning excuses”. I thought I wonder if there were the any of the excuses I used when I was younger.

When I was young I did not think about retirement, I had a company pension so all other thoughts of retirement went out of my head. I may have at one point decided I should supplement my pension by taking advantage of the Registered Retirement Saving Program we have in Canada, so I did. But I was not a steady contributor, nor did I maximize my contributions. If I thought about why I did not contribute or maximize my contributions, I came up with many of the following excuses.

· "I'm too busy "

· "It's too soon "

· "It's too late "

· "I don't need to "

· "I don't have enough money to get started "

· "The Government will take care of me "

· "I don't want to think about it "

· “No access to an employer retirement plan”

· “I don’t have enough knowledge, or I don’t know how”

The above excuses are from the following source, The Retire Wire and if you look online you can find many other lists of why people won’t /cannot/will not save for retirement. The people I know who did not/could not/ plan or save for their retirement are in big trouble. I have several friends and in my workshops, I run across people who had all the right excuses and who are now facing the consequences of indecision.

The frustration I feel is because we know through Behavioral Economics why people do not save and we can help.

There are many reasons why individuals do not always act in their best interests when it comes to saving for retirement. In his book “Misbehaving – The Making of Behavioral Economics,” economist Richard Thaler outlines three reasons why people often fail to save for retirement:

1) inertia or failure to act, which explains why people do not begin to start saving even when they have the opportunity

2) loss aversion, which explains why people avoid taking actions perceived as reducing their paycheck

3) the lack of self-control that contributes to choosing actions that provide immediate gratification rather than planning for the future.

There is much short-term thinking about retirement, many who claim that planning for retirement is an individual responsibility forget that in the long-term society will pay a tremendous price when millions cannot support themselves in retirement. The problem isn’t that people don’t want to save for retirement the problem is that many do not have access to any programs that allow them to do so easily. Today many low- and moderate-income workers, contributing anything toward retirement is difficult because they may have debt and struggle to cover day-to-day living expenses. Not having easy access to a retirement savings program makes it even more difficult to save.

No access to an employer retirement plan excuse

According to the U.S. Government Accountability Office (GAO), 84 percent of the workers who do not participate in workplace retirement savings programs reported that the main reason was not having access to a workplace retirement program, rather than a failure to participate.

It's too soon or its too late excuse

Behavioral Economics talks about time horizons, which is economics speak for how do we see time. Some of us think only of what is going on in our present. For plenty of people, future thinking or planning for the future is thinking about the upcoming weekend or maybe one or two months ahead. According to a study done in 2015, workers of all ages and income levels are present-minded when making financial decisions. This leads them to weigh the present more (“present bias”) than the future and make investment decisions today that reduce their welfare in the future. For example, individuals tend to be more concerned about day-to-day financial needs than their future financial plans. In addition, if the decision is a complex one requiring the evaluation of many alternatives, such as having to choose from a large number of different investment funds offered by their employer as part of a retirement program, inertia takes over and they may simply never take action.

I don’t have enough knowledge, or I don’t know how excuse

A study in 2011 found that many workers were not able to understand the ABCs of finance. Individuals who lack the knowledge of basic financial terms, such as compound interest are much less likely to save for retirement. In the United States, according to the study, many workers do not have a basic financial literacy. The importance of financial literacy has been addressed by the President’s Advisory Council on Financial Literacy: “While the crisis has many causes, it is undeniable that financial illiteracy is one of the root causes … Sadly, far too many Americans do not have the basic financial skills necessary to develop and maintain a budget, to understand credit, to understand investment vehicles, or to take advantage of our banking system. It is essential to provide basic financial education that allows people to better navigate an economic crisis. Without proper knowledge to figure out the numbers, a lack of information, overwhelming information, or information that is difficult to understand could all result in workers over- or under-estimating how much they need to save, to give up on saving, or unknowingly save too little."

How does society overcome our weakness and our inability to plan for our future? While there are solutions, which can be implemented easily, but it does require some political will.

Offer Plans where people work

Research has shown when employees are offered a plan, about 70 percent voluntarily participate which is a solid number, but when workers are automatically enrolled in a plan, with an option to opt-out, participation jumps to about 90 percent.

Keep it Simple, Easy, and Make the Default Automatic. 

Behavioral studies tell us when faced with complex choices people adopt simplifying strategies, which is to take whatever is the simplest path or the easiest option that could be used. This strategy of making the plan compulsory,  with an option to opt out and with increasing contributions, has been tested in a program, named Save More Tomorrow (SMT). An empirical study with 25 companies that administer retirement plans shows the SMT program has a noticeable effect in boosting annual savings.

Keep the message simple

When providing financial and enrollment information, using behavior insights to design the message could make a great difference. In a program to promote retirement security for government agencies, emails redesigned by the Social and Behavioral Science Team (SBST) led 22 percent more people to re-enroll in Thrift Savings Plan (TSP) within a week.

Provide Financial Education Opportunities.

For individuals with limited financial knowledge and primary responsibility for saving and investing, improving financial literacy can make a difference. Many studies and reports have suggested that workplace-based plans and financial education are the most effective to improve financial literacy and thus increase retirement savings. A case study found that “the most financially savvy are also the most likely to participate in and contribute the most to their plan …” and “… employees who completed a financial education module were more likely to start contributing and less likely to have stopped contributing to the DC plan.”

Hide and Seek

Children love to play hide and seek. When you were raising those kids of yours, it was great fun to join them in that game. Another variation on it that lots of us play with the grandkids is “where’s Grandpa?” This is the one where you hide your face and then suddenly show it to a baby just to see that look of surprise and delight when they see Grandpa or Grandma over and over again.

We grow so used to knowing every little thing that goes on with our children. If they have grandchildren, they don’t really appreciate how much you want to see them every day and enjoy every aspect of their lives. But when the kids live in another city or another state, that becomes almost impossible to pull off.

Sure, you knew as far back as when the kids went off to college that you would go through some separation anxiety. But the desire to be more in touch with your family goes a lot deeper than just a dose of empty-nester syndrome. It goes to the very foundation of who you are.

We are by nature family oriented creatures. For many of us, there never was a time when they were not in the middle of a family situation. If you moved directly from the home of your parents into your married family and had children right away, family life was a continuous flow in your life. So, when the time comes for the children to leave, especially if that means they will be in another state, or country the depth that you miss them is tremendous and the deep desire to be more in touch doesn’t diminish with time.

Is the answer to move to the same town or country where the kids are living? Sometimes that is possible. But we know that it’s the nature of young professionals that they may be moving again and again because careers that are being built often call for that kind of commitment. This is less difficult for the kids if their families are young and they are enjoying the adventure of living in different places. But for you as a senior citizen, living in one place, making friends, finding a church or social group and becoming part of a long-lasting community is important to feeling secure as you enjoy your golden years. 

The good news is that we live in at a time when information technology can help you stay more in touch than ever before. There are new ways coming along every day that you can use to reach across spans of hundreds of miles and feel you are part of what is going on with your children and those precious grandkids. Some technologies that can help include…

While these forms of hiding and seek with the kids were fun when they were little, now that they are grown and you are Grandpa or Grandma, there is a form of hiding and seek that isn’t so fun. That is when the children move far away and it gets harder and harder to stay in touch with them.

• The internet. Through email and other modern technologies, you can exchange messages with your children many times in a day.
• Digital cameras. The ability to take pictures has gotten so much more accessible with cameras becoming part of mobile devices, phones and other machines you and your kids may have on you all the time. So, you never have to miss out on a cute photo of what the grandkids did this week.
• Facebook, Skype, FaceTime and Instant messaging. This is the ultimate in staying touch. You can go so far as to put cameras in different parts of the house so the kids can see mom and dad every day and you can watch the children and grandchildren play and talk to them almost like you are there.

Everybody will have to get used to these new tools of communication. But as much as you will be thrilled to see and talk with your kids every day and see them so much more often with these new tools, they will love being able to have some “mom and dad time” with you as well.