Communication and National Debt
Put as simply and briefly as possible, the wake of reporting about government debt confirms the central philosophy of the Tomorrow’s Investor vision.
Most are generally agreed on the round sum of £799 bn, or 56.6% of GDP, as the current figure for government debt. The impact of this figure – it’s sheer propensity unnerving- is less assured, more surrounded by conflicting understanding and speculation. Most papers focused on the recent forecasts by The National Institute of Economic and Social Research (NIESR), which predicted that the recession will continue until at least 2014 when annual borrowing will hit over £120 bn, about £23 bn more than the Chancellor’s estimates. The Guardian focused on NIESR’s prediction that there will have to be “aggressive cuts in public spending” whilst the BBC quoted David Kern (chief economist at the British Chambers of Commerce) as saying that public spending will need to be “curtailed across the board”. The Telegraph considered the fear families would be facing amid rumours of such cuts.
In contrast to the tone of these reports, is the tone set by Dora Iakova (IMF European Department) in her report “United Kingdom: From Rescue to Recovery”. In her, albeit tentative, conclusions she envisions the UK’s relatively prompt recovery, should “the authorities continue to handle the crisis successfully”. It is not clear what to make of the various forecasts and their interpretations – indeed, it has been pointed out that NIESR itself estimated only six weeks ago that the recession had bottomed out in March. For a somewhat clearer understanding, the website “Economics Help:Simplifying Economics” provides an concise account of UK national debt and a fairly balanced view of whether or not we should be worried.
Tomorrow’s Investor argues that the key to the future of investment and economic health is held in three core principles: accountability, transparency and trustworthiness – a view apparently also held by the IMF mission chief for the United Kingdom, Ajai Chopra:
“……more frequent and comprehensive disclosure of financial information by banks would help reduce uncertainty and strengthen market discipline.”
Fundamentally, such conflicting accounts and the resulting confusion in what to believe, only serves to undermine the speed of recovery and it’s most fragile stimulant, trust. A failure to improve communication at such a critical time will be a failure to heed the IMF’s warning that recovery “hinges on the trust of the public in the solvency of the government.”
Where is your money being invested?
The concerns surrounding responsible investment have long been at the heart of the Tomorrow’s Investor project. However, once again, a free event at the RSA really highlighted the significance of this issue – alongside recent findings from Tomorrow’s Investor research.
A couple of weeks ago the RSA hosted what was a moving discussion to celebrate the birthday of Aung San Suu Kyi. A question from one of the audience regarding corporate investment was left largely unanswered from the panel but struck a chord with an article I had just been reading about the involvement of Chevron in Burma. Chevron is reputed to be the sole remaining American company operating in Burma. Last December, shareholders of the company filed a resolution expressing concern over the company’s dealings, not only with Burma, but Ecuador and Nigeria also. Chevron has since, unsuccessfully, attempted to block this resolution.
The argument for responsible investment can essentially rely on two lines of argument- that financial revenue injected into business deals with countries such as Burma clearly contributes to the maintaining of their governments. Evidence has also shown that this can lead to the inevitable destruction of share value for these companies. The latter argument however will rely on investors being aware of exactly what is being done with their money and where. This is particularly true for pensions, with a recent survey carried out by the Tomorrow’s Investor project showing that the majority of people (61.4%) with pensions do not know how their investments are being used.
UKSIF has done significant work in promoting responsible investment amongst pension funds. Their most recent report indicated that there has been real improvement in the last two years, with a good increase in the number of funds now having responsible investment policies since 2007.Its results and key recommendations can be seen here.However, despite the positive news, its most revealing find is that:
“Detailed communication to members and other stakeholders about the RI policy and its implementation remains relatively low. A tenth of funds communicate annual voting records. Less than a tenth disclose the fund’s engagement strategy or about participation in collaborative investor initiatives.”
In the Tomorrow’s Investor survey, 75.7% of people said that they wished to be better engaged with the investment of their money. As more people complete the survey this figure is expected to rise further.
However the question remains of what investors can do now, in light of the resolution filed at Chevron. During the talk at the RSA, the level of difficulty faced by governments in dealing with Burma became very apparent. The involvement of business in these types of debates needs to be larger, and their answerability to investors improved. As the Under-Secretary-General of the United Nations Achim Steiner stated in the recent report published by the United Nations Environment Programme Fincance Initiative:
“environmental, social and governance considerations have to be a part of mainstream business and investment.”
In addition to this, however, more investors now need to start asking questions of their pension providers and campaigning for better communication.
Marshmallow?
A few weeks ago now, the economist Robert Shiller gave a fascinating talk at the RSA called “How human psychology drives the economy”. In answer to one particular question, he recounted an experiment done in the Sixties which is hugely pertinent to the Tomorrow’s Investor project. The ‘Marshmallow Experiment’ is in fact one of the foremost of its kind and, given its significance, I thought it was worth quickly outlining here;
In the 1960’s, academics at Stanford University carried out an experiment to test the process of delayed gratification on a group of four year olds. The academics left a child alone in a room having given them a marshmallow but said that if they didn’t eat it and waited twenty minutes, they could have two. The results were naturally mixed, with some children holding out and others succumbing to the temptation of eating their marshmallow before the twenty minutes were up.
The Stanford academics followed the progress of these children as they grew up and the results are what make this simple experiment so compelling. The children who had waited for their marshmallows in the experiment had been more successful in their lives compared to those who hadn’t (academics mainly judged this on the candidates’ academic success, ability to cope with problems and health).
In light of recent events and economic development, many have been highly critical of a modern compulsion for instant gratification – This experiment clearly highlights the value of investing now for the future – However, if we are to invest our money over and for a prolonged period of time, then we also need to be sure it is being handled with due care and respect. In other words we need absolute trust in our pension/savings provider. Tomorrow’s Investor is working to change and develop the trust needed to get more people saving for their retirement.
The Global Impact
One of the most significant factors of the current recession is its global impact. The international element to this economic crisis has clearly created its own unique problems, particularly in producing policy for recovery. Indeed, and despite this, in my experience of reading, watching and hearing about the recession so far (though far from comprehensive) I have heard little about its impact in the developing world. The daily focus of our media is understandable but I was curious to be clearer about the facts and here, briefly, are the most significant I found:
• The first fact has been lifted straight from a report by the organisation WOMANKIND entitled “Who Pays The Price?: The Impact of the Global Economic Recession on Women in Developing Countries”.
“The World Bank predicts that the global economic crisis will trap up to 53 million more people in poverty, in developing countries, in 2009, bringing the total of those living on less than £2 a day to over 1.5 billion.”
• Growth in Developing countries may be reduced to 4.5 percent this year, from 7.9 percent in 2007. World Trade volumes are projected to contract 2.1 percent. Investment growth in developing countries has been predicted will fall, rising by only 3.5 percent in comparison to 13 percent in 2007.
• DFID’s predictions are as follows:
* ‘Private financial flows to emerging and developing countries’ to potentially fall over 80%, from $1 trillion to around $165 billion.
* World trade to shrink for the first time since 1982 ensuring a fall in developing country export growth to potentially -1% in 2009.
* ‘Remittances to developing countries’, currently “at around $280 billion a year”, likely to decline.
* “ For India, which accounts for a third (over 450 million) of the world’s poor, the expected slowdown in economic growth means that 9–12 million people who would otherwise have escaped poverty will remain below the $1.25 a day poverty line.”
• Bob Zoellick, President of the World Bank has declared “this is not only a financial crisis; it’s a human crisis as well.”
Green Shoots and Cautious Optimism
There has been much talk of “green shoots” recently and like many I have been pretty hesitant in my reaction.
It has been cruelly ironic that a period of such crisis for politics has, albeit tentatively, diverted media alarm away from the spectre of recession. It may be that this brief diversion has been somewhat of a blessing for the stock market, if only the most marginal. This is however speculation on my part and hopeful speculation at that…..
It was certainly refreshing to read predictions of recovery and statistics that were making the claim for economic optimism. The Financial Times this week outlined Jean-Claude Tichet’s recent comments, concluding that “the global downturn had bottomed out”. I found such good news hard to digest though despite (at the RSA this week) Kevin Doogan’s observations on the negative, and cumulative, impact of social anxiety during a recession. Interestingly however, my caution appears to have been matched in the OECD’s choice description of a “pause” in the economic downturn.
I am of course encouraged by reports that predict growth.Putting a stopper on my optimism though is the frequent reminder we have of the impact of this recession, not on the stock market or banks, but on ordinary people. The most recent statistics have established unemployment rates at around 2.2 million and a 54% rise in home repossessions last year.
Much has been made of the investment going to banks and cuts in public spenditure. Now there seems to be an even more worrying scene being set for democracy with the deterioration of people’s attitudes towards politics, politicians and their own capacity to be involved in change. Surely, however, it is times like this that pave the way for great opportunity. They make us reflect and appreciate the necessity of skills, investment in people and fresh ideas. A quick tour of the RSA’s blogsite for example, will lead to you to ideas from Aziz Boghani on the shape of essential pension reform and proposals from Matthew Taylor for enterprise in deprived neighborhoods.
The most positive route out of recession could be the investment in these fresh ideas, the development and protection of skills, re-engagement of the dispossessed and the utilization of struggling graduates with all that training and education behind them. In such depressing times, is it this scope for change and initiative that affords me the greater sense of hope.
Pensions and the Social Challenge
Two things in particular really got me thinking this week. The first sprang from the tail end of Alain De Botton’s talk at the RSA. In response to one question, he happened to mention that his ‘favourite’ argument in favour of capitalism was Adam Smith’s – that it should exist to pull and keep the bottom 10-15% of the population out of poverty. Not, as has become so controversially clear, to keep a good proportion of people in a state of comfort or even luxury. The second was the terribly sad story yesterday of the elderly lady found in her home in Norfolk. Unopened letters and newspapers seem to indicate that she had been dead for over a year.
The link between these two things and their reason for appearing on the Tomorrow’s Investor pages is probably fairly obvious. It is the link between business and social responsibility. The RSA is committed to social progress and the Tomorrow’s Investor project promises nothing less, stating in its pledge that “we…believe that business has a vital role and a responsibility in helping us meet the challenges our society faces.” – It is this aspect of social concern in the construction of a new pension fund that has really motivated me during my time here so far -
The case for such a fund has been made repeatedly in response to projections of a looming pension crisis and an ageing population. Certainly the effect of the current climate on older members of society is alarming, as the journalist Julian Knight illustrates. It is clear that, alongside the championing of hot yet increasingly standard topics of regulation and transparency, we put consideration for the real situation of elderly people at the heart of a new pension fund. That we do all we can in the here and now to ensure a better quality of life and security for people when they retire.
I hope it is not too blindly obvious, or pathetically cynical, to say that we can never totally avoid human tragedy, cruelty or suffering. However the loneliness and plight of so many older people is always deeply affecting. The idea that a lady can lie dead, apparently unmissed for a year, is appalling. The frightening truth is however, that as fortunate (or otherwise) as we may be now, none of us know what our situation will be when we are old, or who may or may not be looking out for us. I did mention last week that more needs to be done to promote pensions as what they really are-investments in people’s futures. I guess we need to wake up to what that means in real terms, for others and for ourselves.
Save or Spend?
Last week I was looking forward to researching the attitudes that young people have towards spending and saving. It wasn’t long before I came across this apparent dichotomy:
“Live now: save later? Young people, saving & pensions” is a report that was produced by the Department for Work and Pensions in 2007. Its findings were based on research into those aged between 16 and 29 (it is worth bearing in mind that the proposed age of auto-enrolment is 22). Unsurprisingly this report found that most people in this age range were not yet thinking of pensions. Essentially younger people were attracted to the short term profits of investments such as property or stocks and shares. As far as pensions were concerned, many of the young people surveyed were disinclined to invest because of the restricted access to their fund.
The increasing need of young people to access ready funds has been well fuelled by the banks. However now it seems that this trend has an even wider, and more worrying, relevance.
We are all aware of the current crisis on the high street. Indeed, the only apparent good news is the spending habits of the young. In October 2008 the Times Online posted an article entitled “Young and trendy laugh in the face of high street gloom” discussing the end of year profits for shops such as Topshop and Miss Selfridge. It explained that “spending by younger customers was at a record level while elsewhere spending was in decline.” Many would welcome such news considering the encouragement to spend our way into a healthier economy.
We are already surrounded by adverts targeted specifically at the younger section of society – often leading to significant debt. My worry is that in promoting spending as the solution, current attitudes amongst the young will be encouraged, exploited perhaps. This could potentially be very damaging in the long-term where an ageing population will be relying ever more heavily on the state.
I would argue that for the long term health of such an economy, the kinds of attitudes that lead young people to dispose of their money in such a way must be changed. In response to the Times article, comments posted tended to focus on the general lack of financial responsibility amongst the young. These comments interestingly noted that it was financial responsibility, lost in the pursuit of short term profit making, which helped lead us into this mess. Clearly this issue needs to be addressed and, most significantly, we should be promoting pensions – as an investment in a person’s future – as a vital and attractive use of funds.
To utilise the spending power of the younger members of society would perhaps make a lot of sense to the government at this moment in time. However I think I will leave the question of whether it would be right to someone older, and wiser, than me.
Understanding Tomorrow’s Investor
In the week that saw the world’s leading economic powers unite in London, I started my internship at the RSA and thus embarked on what promises to be a sharp and intense financial learning curve.
There has really never seemed a better time to undergo such an education. Now, more so than ever, an understanding of financial regulation and the implications of how our money is handled could not be more relevant and necessary.
In an economic climate such as this, it is exciting to be involved with a project that is working to help people become more actively engaged with their investments. The most significant aspect to Tomorrow’s Investor for me must therefore be the motivation to provide a trustworthy and sustainable pension fund for ordinary people, particularly those with a low-income and the young.
The vision of young people saving and the proposal for auto-enrolment has particularly caught my imagination. Tomorrow’s Investor proposes auto-enrolment into a pension fund at the age of 22, with an “opt-out” clause. Many young people understand the importance of saving. I think it would be fair to say, however, that few understand when a good time to be saving for retirement is and for many, the reality of having a pension fund will seem a very distant concept.
The recent age of prolific lending has accordingly led to significant access to disposable credit for many young people, particularly students. Across the board, it would appear that this access has been utilised to its full extent and the problem of debt is starting at an increasingly early age. It will be interesting to see if and how this access changes and what we can do to change young people’s attitudes to spending. I hope to find out just what young people’s attitudes to spending and saving are and how they might react to a policy of auto-enrolment.
Over the next few weeks, I will be looking forward to more research into this area. I am looking forward to learning about the problems at the heart of the economic crisis in a practical sense, by exploring exactly how to make a pension fund more trustworthy and sustainable. As I write this, I am thinking of an article I have just read in which Alistair Darling admits that many of his economic predictions were wrong and that he may have underestimated the recession – it seems that we are all still learning.
RSA Vision
News- NYS lowers pension fund's rate of return to 7.5 pct - Reuters September 2, 2010
- Low interest rates squeezing pension funds - msnbc.com September 2, 2010
- French government vows to face down pension strike - Reuters Africa September 2, 2010
- FT.com
- One million over 65s to continue working August 23, 2010
- A third of Britons using savings to supplement income August 23, 2010
- Final salary decision is looming faster August 20, 2010
RSA Bookshop
The RSA Bookshop, in partnership with Blackwell's the UK's leading academic bookseller, offers Fellows and friends an opportunity to purchase books and to explore our speakers’ ideas in greater detail. Visit the RSA Bookshop.- Current RSA Events
- RSA at the Birmingham Book Festival - State of Emergency October 20, 2010
- RSA at the Birmingham Book Festival - Reporting Live From The End of the World October 15, 2010
- RSA at the Birmingham Book Festival - Dispatches from the Dark Side -The Death Of Justice October 8, 2010
- RSA at the Birmingham Book Festival - Whoops! Why Everyone Owes Everyone and No-One Can Pay October 7, 2010
- RSA at the Birmingham Book Festival - The Wavewatcher's Companion October 5, 2010