Case Study 1
A friend of mine recently asked me about a possible investment in a bond returning 9%. He wanted to know if it was too good to be true.
I asked what other alternative rates he had researched – by and large these seemed to be between 0.75% and 1.25% depending on terms – the normal sort of range one would expect from a bond-based investment return today. That should have been the first warning bell.
I asked him how he understood the concept of a bond. It was, he said, when you hand over a sum of money to a financial institution in return for a guaranteed return in a rate of interest.
I suggested that this particular scheme may have been more an investment which put capital at risk rather than a fixed-rate bond. He may indeed get his 9% but only at the expense of the capital he has invested; essentially the interest includes a repayment of capital. It could even be worse than that. The investment may be ‘asset backed’ by investment in property or other assets or even directly in a business. The ability to obtain the repayment of capital depends entirely on the performance of the assets or business.
So capital repayment was unlikely to be guaranteed. The second warning.
The next question was whether the scheme was guaranteed by the Financial Services Compensation Scheme. This is linked to the previous point – a bond which is not a bond but an investment against assets will not be covered by the FSCS. The third warning.
I asked whether he had ever heard of the company offering the so-called opportunity. The fourth warning. I wondered whether an inexperienced, young retail investor without risk capital to spare should ever invest outside of the major household names.
Case Study 2
In 2017 the British Steel Workers Pension Scheme closed to future accruals. This was partially at least as a consequence of the deal reached with the current owners of the Port Talbot steel works, Tata Steel, to protect around 8,000 jobs in South Wales. All parties accepted that Tata would be unable to continue to fund the existing scheme. This meant that existing workers had to decide what to do with their pensions. The choices were essentially, entering the Pension Protection Fund, a new Tata scheme (both these options involving reduced benefits) or transfer out to other arrangements.
The BBC reported one worker claiming that they had lost £200,000 by transferring out. The BBC also reported that some £1.1bn and some 2,600 transfers had been made. The Work and Pensions Select Committee, chaired by Frank Field MP, reported on the case. The Report noted that ‘dubious advisers exploited BSPS members for personal gain’ supported by ‘unregulated and parasitical introducers’ (para 50). The issues were the level of advice fees, high transfer fees and high on-going investment charges – not to mention the suitability of the advice to transfer out. The full Select Committee report can be read here.
Financial and business education is essential to a moral economy
These two quite different incidences made me think about basic financial and business education for all – i.e. beyond those taking Economics or Business Studies. None of my children report to me any input or teaching at school about budgeting, how pensions work, savings, managing debt, the tax system, basic information about business and the economy. They all were scathing about lessons in Citizenship. I am not competent to comment on the latter, but it seems to me we are missing a trick.
An enterprise economy which rewards innovation and creativity is essential for the well-being of all, for the common good. It is unrealistic to think that we can abandon models of economic growth and wealth creation as the key provider of jobs, goods and services, a tax base and indeed the profits for further investment. However, for that economy to function as a moral economy we need to ensure, yes, appropriate regulation and law, but more particularly that all participants in that economy can take part, not with equal outcome, but with equal opportunity. This requires partnership, skills, and indeed a degree of economic freedom and liberty. Hence, education lies at the heart of this vision, equipping future participants, whether entrepreneurs, workers, consumers or citizens. The first step to a moral economy is educated participants.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.