Attollo Investment Advisors

Attollo is an Alternative Investments Company

"Life of Pi" or why Average Joe does not like risk

Given the choice between being eaten by a tiger, or drowning at high sea, you would be excused for asking whether there is a third option, given the non-desirable outcome of the original two. Fairing out onto the open sea in a life boat, with only a man-eating feline for company is not exactly a rewarded risk. Not even to the most extreme thrill seekers amongst you.

Risks are only worth taking if they are accompanied by an equivalent compensation. I am not suggesting that sharing an oversized rowing-boat with a 450 pound carnivore, is a risk worth taking should a Dutch reality-TV producer offer you money. Nevertheless some individuals may consider a pile of dollar bills enough reward to risk having bits of their anatomy disappear into a tigers jaws.

Choosing between two evils is never an easy exercise, but becomes increasinglydifficult if only one evil is clearly visible, but the second is concealed, lurking in the dark waters just beneath the surface. ‘Jaws’, a lesser cinematic master piece, but equally entertaining, dealt with the later in a very effective manner. Anyone wants to be eaten by a shark?

In the Netherlands we recently asked a cross-section of 800 individual members from various pension funds, to rate the importance of a list of statements, and one of those statements was the following:

“Pension funds should invest with less risk (and more stable, but possibly lower returns)”

The majority of interviewed members agreed with the statement; why should they share a lifeboat with a tiger? The issue is that many trustees don’t link the lower returns with lower pensions, or have any idea how much lower, lower is.

In Holland, the DB system is different from other countries; Here the onus of funding is often on the pension scheme, where elsewhere in the world, the employer sponsor carries the liability. In the Netherlands, DB pensions have conditional indexation, and if the (regulatory) funding of a scheme is particularly bad, payments can be cut. And a fair number of schemes had to take these drastic actions over the last few years.

So what does it mean that members of Dutch pension schemes think their fund should take less investment risk?

(Future) beneficiaries of pension schemes think pension schemes take to many risks investing their money, however the trustees know that without investment risk, there will not be a meaningful pension available. This is the crux of the matter; We are not communicating what the risks are of not taking risks!

Although I am only highlighting one of the statements we tested in our survey, many of the other high scoring statements dealt with member communication as well.

For pension schemes to regain the trust of their members, I think the trustees need to take the following steps:

  1.  Explain that risky assets are a necessity. Saving for retirement in a savings account is guaranteed poverty in old age. Show the difference in retirement income should you park your money in risk-free assets, and show the retirement income with a 60/40 mix. A lifeboat on the ocean is scary, but the only alternative is drowning.
  2. Explain that the risks are real, but managed, and over time even out. Yes, the markets get stormy and yes in events like 2008 stock markets loose half their value. But show them how markets recover. Explain that their current investments might be affected, but their future investments will benefit.
  3. Explain that some of the investments may look complicated, but they are necessary; Derivatives to hedge, alternatives for diversification, real assets for inflation protection. They are the instruments that protect you from the storms and sharks.
“So how about that tiger?”, I hear you say… For those of you that haven’t read the book or seen the film, it is a bit too late to say “look away now”, but, uh, look away now….

In the story, the tiger is suggested to be a euphemism for the darker side of the lost boy in the life boat, imagining himself strong and powerful, but also capable of unimaginable things. A scheme member himself/herself has to make difficult choices; top-up savings, house, mortgage, changing jobs and all the implications these might have on their income in retirement. Like with ‘Pi’, the individual choices he or she makes, are the biggest risks encountered.

So let us improve member communication, but start with this message first: Don’t leave the life boat. “Whatever you do, don’t go in the water…”