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Weekend reading: Why is Nest making active decisions about worker’s pensions?

Weekend reading: Why is Nest making active decisions about worker’s pensions? post image

Good reads from around the Web.

I believe humans are causing climate change. There is overwhelming consensus among scientists. Those who argue otherwise almost invariably come from a certain demographic, who I won’t name because I told reader @mathmo I’d try to be more sparing with labels.

Suffice to say, they might as well argue against gravity.

If Einstein wants to argue with scientists1 about gravity, I’m interested. If a middle-aged Top Gear fan wants to argue with scientists about climate change, they can do so elsewhere.

Liberal Snowflake credentials safely re-affirmed then, let me get to my own indignant outrage.

Why is the government’s workplace pension provider Nest making active investment decisions based on its employees’ opinions about climate change?

Nest knows best

In a short interview last week, Nest’s director of investment development explained to Share Radio that it had identified climate change as a key risk to returns.

According to The Guardian, the pension provider is therefore shifting around 10% of its members’ investments into a new climate change fund that dials back on fossil fuel firms and favours renewable energy:

Nest is now looking after the pension pots of more than four million UK workers, investing £1.5bn on their behalf, and has signed up more than 290,000 employers.

These numbers are expected to increase markedly over the next few years, making Nest a major shareholder and, it hopes, a difficult voice to ignore.

Why is Nest making such decisions for its members? Why does it need a voice? Why is it not just investing in tracker funds?

As we all know around here, most active funds fail to beat the market. Why is the default option for auto-enrolled workers not just a cheap and effective global index fund, paired with a bunch of gilts?

Climate change is hardly a hidden risk. Even Exxon Mobil’s new chief executive recently reiterated the company’s call for a carbon tax to help address it.

The market price of Exxon, Shell, BP, and other fossil fuel firms will normally reflect these known risks – as well as the potential rewards of owning vast reserves of a super-potent fuel.

What do Nest’s decision makers know that the market does not? Nothing, I would suggest. As far as I am aware they are not drawn from the sliver of proven billionaires who’ve made their fortunes reading the market’s runes.

They are no doubt perfectly decent salaried employees, doing what they think is right. But I think they’re getting it very wrong in the process.

I agree environmental degradation is a huge threat. But the market will determine over the next couple of decades whether the reserves of big oil companies and the like will end up ‘stranded’ and left in the ground, and if so which alternative energy will take up the slack.

My own hunch is solar, but I wouldn’t bet four million citizens’ retirements on it.

Whose retirement is it, anyway?

Incidentally, we get a lot of emails from people who want to invest passively but don’t want to invest in, say, big oil companies, or banks, or bomb makers.

We’re overdue an article on this. I understand the thinking, even if I’d suggest your views are perhaps better expressed outside of your portfolio. But the point is it’s your personal decision.

I can’t find recent figures, but as of 2013 the stats showed that 99% of Nest savers were in the default fund. These people are not making an active choice to bet against the market on fossil fuels. I doubt most realise their pension provider is, either.

Pension auto-enrollment is a great initiative, but making these active decisions risks undermining the whole project. Tracker funds exist and they do the job best for the greatest number of people. It’s maths.

I think the government should go to Vanguard, Blackrock, and the other leading tracker providers and play them off against each other to get a special deal for bringing four million new customers to the table. Then get out of the way.

Nest should focus on educating and encouraging savers (a very valuable role) as opposed to playing George Soros – or trying to change the world at the risk to its savers’ retirements.

Update: I should have made clear that Nest does currently (rightly) make use of tracker funds in constructing its portfolios. I believe it should arguably just use a single tracker for global equity exposure, but anyway the main point is it shouldn’t be making active choices.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

  • Weathering a low-growth investment outlook – Vanguard
  • UK market forecast to pay over £100bn in dividends for first time [Factsheet]VT Munro Fund
  • The employment income to net worth ratio – The Finance Buff
  • What is happening to the world? – 3652 Days

Product of the week: It’s time to lock yourself into a 10-year mortgage, says The Telegraph. It recommends First Direct, which charges 2.49% if you’re borrowing 60% of a property’s value and 2.89% for 80% loans. While very low, these rates are still well above the cost of two-year mortgages. But they provide certainty, in an increasingly uncertain world.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.2

Passive investing

  • 5 ways passive investing is actually quite active – Bloomberg
  • Don’t let a bad process derail your investments – Bloomberg

Active investing

  • How money-losing Snap could be worth so much – New York Times
  • John Lee: Independents add value to your portfolio [Search result]FT
  • Some very high income funds have delivered at the cost of capital returns – Telegraph
  • What to make of these twice-in-history S&P valuations? – Bloomberg
  • Buffett: US stock market is not too expensive – CNBC
  • More than six in 10 asset managers are bored at work [Search result]FT
  • By the Bible: New fund “backs arms firms, avoids brands promoting gays”Telegraph

Other stuff worth reading

  • Merryn: My big Budget hope? Scrap the pensions taper [Search result]FT
  • Britain will become a nation of renters, says economist David Miles – ThisIsMoney
  • OECD warns of potential global property crash – Telegraph
  • How will the new Lifetime ISA work? [Search result]FT
  • Radical economics, rethought [Podcast]FT Alphaville
  • Look to the land for the cause of Britain’s housing crisis – Guardian
  • Violent criminals can get off lighter than people late with their water bill – Guardian
  • Mem Fox on being detained by US immigration – Guardian
  • The Walled Off Hotel: Artist Banksy turns hotelier – Guardian

Book of the week: Warren Buffett smuggled a book recommendation into his much-discussed annual letter. He said Shoe Dog author and Nike founder Phil Knight is “a very wise, intelligent and competitive fellow who is also a gifted storyteller”. Knight’s memoir was the best book Buffett read last year. Shoe Dog is just £9.99 on Kindle.

Like these links? Subscribe to get them every week!

  1. i.e. Propose a new working hypothesis. []
  2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 37 comments… add one }
  • 1 Fergus Macdonald March 4, 2017, 12:28 pm

    Humans causing climate change is inevitable. Everything causes climate change so long as it does something. A butterfly flapping its wings causes an impact. What’s important is the degree of change, what impact it has, and people’s opinion (would be in italics if I could) of whether it’s good or bad. There’s a general fear of change so the consensus is it’s a bad thing. I’m not foolhardy enough to think I know what is best for the planet, solar system or universe to say whether a small change in a long life is good or bad. The world will be here after us and our opinions on good or bad. I would assume what most people are scared of is how it will affect them, and we’re certainly lead to believe it will be catastrophic for all of us. (End rant).

    Anyway, I came to post about pensions. Thoroughly agree. Having spent some time this week looking at an auto enrolment scheme for work I’m thoroughly disappointed there is not a low cost tracker on offer. Or at least I didn’t find one…?

  • 2 ermine March 4, 2017, 12:56 pm

    Although I sort of take the point that NEST should perhaps go with VWRL or some mixed bag of suchlike, I think by far most of the win is with auto-enrolment, anything else is second-order effects. With investing, the biggest problem is actually starting along the road to deferred gratification as opposed to jam now 😉

    NEST’s fund choices are here – they seem surprisingly limited and light on information about OCFs and other such stuff. Interestingly they have an ethical option for those who want to avoid polluting industries, which supports your point – people have the choice to go that way, should they be prepared to take the potential investment return hit.

  • 3 The Investor March 4, 2017, 1:12 pm

    @ermine — Yes, I chopped out a discussion about how it was going to express its ethical views via a new fund rather than through the large mix of mostly ETFs/trackers it currently does make use of, at least in its growth fund, because it felt like the article was getting long and into the weeds.

    100% agree that auto-enrollment is a good thing, and broadly support the whole Nest idea.

  • 4 G J March 4, 2017, 1:43 pm

    Regarding Nest, I suspect what they are doing is as much about using other people’s money to back their own beliefs as it is a true belief that it will deliver better long term returns. I agree with you that they technically shouldn’t, but damn I’m glad they are.

    The bespoke government-negotiated fund sounds like it would have been an excellent idea. Our auto-enrolment at work is with Royal London who have a 0.9% basic fee, moving to 0.5% when you have more than £30,000. Then the default fund is then a fee of 1% for a meaty 1.5% uncapped fee per year. Infuriating.

    @Fergus Macdonald: Problem is that the degree of climate change and associated factors have soared in the last 100 years. Regardless of whether we cause it, if we do not take steps to reverse it then huge swathes of humanity are going to suffer. By all means fuck nature, but that gangrene in humanity’s fingertip shouldn’t be ignored, especially when the doctor has said we need to act now.

  • 5 Monk March 4, 2017, 2:33 pm

    Speaking as a small (to smaller) employer currently running two auto-enrollment schemes (one with NOW and one with NEST), it definitely is easier running it through NEST, albeit (and I can hear you screaming now) at a higher cost.

    Now I know as a long term reader of this super smashing website that fees are foes and a major drag on returns, but sometimes you just have to bite the bullet and give people a choice, (even if those I’ve enrolled in NEST have yet to exercise that choice, in that they are still part of the 99 per-centers.)

    Ironically, I deliberately chose their default funds to mitigate any future litigation (apparently it falls to me as an employer to make sure I choose the ‘best’ form of investment for those I auto-enroll) and as far as I can tell. unassisted by a crystal ball, the ‘best’ form are tracker funds.

    So yes I agree with you, NEST should keep their active fund management activities separate from the default funds. They already offer a range of diverse funds, what’s one more added into the mix, plus any extra expense in running it could be attributed to the fund, and more importantly if/when an ‘active’ decision goes wrong.

  • 6 The Rhino March 4, 2017, 2:56 pm

    I auto enrolled then immediately opted out of NEST. If you somehow instantaneously had a large pot and didnt add anymore then the costs were OK. But they gouge you on contributions.

    I believe in climate change, but my belief is that it is 5 billion years old not 30 years old.

  • 7 FI Warrior March 4, 2017, 3:04 pm

    Nothing’s ever guaranteed, I would advise people to start as simply as possible, only advancing as they understand, so you never go into anything you don’t actually understand. Back in my corporate days, the company scheme was voluntary and almost nobody really understood it. That included the director of the Clueless dept. who initiated it as it seems, because 7 years later the money I had put in had more or less stayed the same after various fee rake-offs.

    A new deal was changed to with the advent of a new sponsor and combined with QE our pension totals then increased by ~50% in the next 3 years, so I would say it’s not necessarily a given that any scheme is better than nothing – people have lost everything too. I’m not saying don’t do it, just that people should check they’re not being fleeced and that if you can’t understand the scheme you’re in there’s a message in that too.

  • 8 Lloyd March 4, 2017, 3:06 pm

    @Monk – I set up a NEST scheme last year for the company I work for and from memory the employer is not able to choose which fund each employee goes into ie they automatically go into the default fund. It is only when the employee logs into their account that they can choose to select a different fund if they wish – the employer shouldn’t get involved in any way in the fund selection since I guess that could be deemed financial advice and then you really could be in trouble!

    When I set our scheme up I contacted NEST to ask if they offered an index tracker fund to which I obviously got the answer that they didn’t. Maybe if more people that used NEST pushed for it then they may see there is a demand and offer one.

  • 9 Jim March 4, 2017, 5:01 pm

    Shoe Dog, £9.99 on Kindle and free at my local library (well, it’s on order and I’m now first in the queue on the reservation list!)

  • 10 helfordpirate March 4, 2017, 5:24 pm

    I feel that there is probably more political posturing going on here than actually making “active” bets on alternative energy etc.

    According to the FT the fund is the UBS Climate Aware Fund https://www.ubs.com/uk/en/asset_management/institutional/climate-aware-solution.html

    The blurb suggests it is basically a low cost index fund which will make small +/- tilts to the FTSE Developed Index based on climate change views (the manager’s view presumably) but with the goal of introducing no more than 0.5% tracking error from the index…

    So a sort of political smart beta….

  • 11 helfordpirate March 4, 2017, 5:29 pm

    Sorry. To be fair to UBS… the tilts are not based on their subjective opinion but on a rule based approach based on published carbon usage data. They make up the rules though….

  • 12 Monk March 4, 2017, 6:58 pm

    @Lloyd – I didn’t mean to suggest that I actively got involved in their choice of funds, it was more to comply with the Pension Regulator’s diktat about default funds. They offered a wider choice than NOW and I was forever hopeful that those enrolled would exercise that choice, and in doing so would mitigate my choice of selecting NEST as their pension provider.

  • 13 The Investor March 4, 2017, 7:50 pm

    @Monk @Lloyd — Interesting to hear from your side of the fence. Culpability is probably something everyone has to think about in this age of it being somebody else’s fault. (I have a half written BBC Moneybox rant I need to finish at some point. Paul Lewis’ motto must be caveat venditor.)

    Cheers for insights.

  • 14 UK Value Investor March 4, 2017, 8:48 pm

    Thanks for the link TI but sadly I’ll have to take the counter position. I think NEST has a practical and regulatory obligation to invest its members’ funds in a way that helps us avoid excessive climate change.

    As investors we know that the market discounts the future at a rate of about 10% per year, so if costs associated with generating profits today are sufficiently far off in the future (say 50 – 100 years from now), those costs (no matter how bad) are effectively irrelevant in the eyes of the market. Climate change is one of the more obvious examples of a long-term cost.

    So most active investors simply ignore climate change as it’s outside of their typical 5 – 30yr window, but as a long-term investor with investment goals that stretch out many decades into the future, NEST shouldn’t simply seek to track a short-sighted market (passive investors ignore climate change because they ignore everything).

    NEST should instead seek to nudge the economy away from activities which could hurt its members over the next 100 years or so, and towards activities which could help its members over that sort of timescale. That’s why it’s signed up to the UN Principles for Responsible Investment.

    Of course, this shouldn’t be done if there is an excessive cost over the shorter-term, otherwise that’s excessively sacrificing the returns of members who will retire in the next decade or so for the benefit of pensioners who will retire 50 or 100 years from now. But from a performance point of view there’s quite a bit of evidence which suggests that companies scoring highly on various ESG (Environmental, Social and Governmental) metrics outperform, so responsible investing can be used as a legitimate way to try to outperform over the shorter-term (e.g. 10yrs) as well as a way to try to avoid obvious systemic problems over the much longer term.

    So the idea with responsible investing is that NEST and its members can have their cake (not wreck the climate/economy over the next 100 years) and eat it (outperform over 10 – 20 years).

    Here are a couple of relevant PDFs:

    NEST’s activities as a responsible investor

    NEST’s statement of investment principles

  • 15 The Escape Artist March 4, 2017, 9:17 pm

    @The Investor

    I for one would LOVE to see your article about Radio 4’s Moan-eybox published. I’ve long suspected that everything bad in the world was someone else’s fault.

    I blame the scapegoats.

  • 16 Commentator March 4, 2017, 11:05 pm

    Or a FTSE250 tracker excluding IT’s?

  • 17 Commentator March 4, 2017, 11:08 pm

    As opposed to tracker without oil companies …not for nest

  • 18 Learner March 5, 2017, 2:23 am

    > I believe in climate change, but my belief is that it is 5 billion years old not 30 years old.

    @Rhino, you might find this eye opening (or not, it covers only 20k years, though the *rate* of change is the point): https://xkcd.com/1732/

  • 19 Mathmo March 5, 2017, 3:20 am

    ~*hat tip*~ for one more step towards a world of non-name-calling discussion, and thanks for the links this week. 😉

    I’m amazed that NEST should take this position — effectively politicising the auto-enrolment pension. Although I can also see why it doesn’t just aim to bung the cash in VWRL: the risk of picking a single ETF and exposure to future litigation should that go wrong are clearly much higher than picking a so-called investment professional’s fund as the default. It’s much easier to argue to a judge that you were being prudent when you pick someone who holds themselves out as a professional than just buying a single stock. (and wouldn’t Blackrock complain if HMG picked Vanguard instead of them and vice versa). As ever, in a world of nudgenomics, the default fund is extremely important and dominant, even if there is (and should be) consumer choice to move to different funds.

    As an employer, I’ve set-up auto-enrolment for my staff and — as a fellow human being explained to them the benefits of participating and getting free money from me. As I recall there’s a 75bp limit on charges for auto-enrolment pensions and we’d be wise to recall that the big argument for passive is not just its passivity but its low fees. 75bps isn’t quite the 25bps you pay for VWRL, but at least it’s the same ballpark once you add a bit of counterweight, rebalancing and the right to be sued if it all goes wrong.

    I’m a massive fan of pensions and spent a recent undergraduate careers event berating students for thinking about jobs rather than outcomes and urging them to get pensions. I am also an investor in one of the providers of auto-enrolment pensions (the one that doesn’t charge employers), so have some skin in this particular game. I notice that my particular horse also uses a fund rather than simple ETFs. Will chat with them about it, but suspect it’s the arm’s length issue rather than the costs that are important.

    Proper LOL @ TEA both for comment above and wonderfully delivered above-mentioned article.

  • 20 The Rhino March 5, 2017, 10:51 am

    Haha. Xkcd always good value. The problem I have with climate change is at the heart of it is the concept that the ongoing comfort of humans is the overriding concern. I’m not sure the rest of the universe sees it that way. I think the idea that we are capable of manufacturing planetary homeostasis like the earth is a central heating system and we can turn the thermostat is as mad if not madder than the climate change denyers. My perspective is that over the 10 billion years of sun we’re not important enough to worry about too much. Maybe this makes me a nihilist. But really I think it makes me more of a pragmatist if you were to press me on the matter I think the only solution to climate change is genetically modifying the human brain to remove the older lizard style components. Need to be more Vulcan like to be able to work collaboratively on global issues at the expense of our shorter term more local incentives

  • 21 William III March 5, 2017, 1:37 pm

    @UK Value Investor:
    This.

    Institutional investors have a fiduciary duty to invest on the kind of timescales where climate change matters. UNPRI elaborates, and see also http://www.iigcc.org and the Montreal pledge. Note that this debate is already far beyond ‘oil is bad’. The low carbon transition is a much broader move away from energy intensive assets if policymakers and private investors are serious about limiting warming to 2C. See for example the work by the Energy Transition Commission, which has representatives of Shell, BHP, GE and various other ‘fossil intensive’ conglomerates, on what we need to believe for the transition to happen: http://www.energy-transitions.org . This is about climate but do consider environmental pressures more broadly, as the world speeds towards a 10bn population count.

  • 22 Richard C March 5, 2017, 2:39 pm

    All the funds used by NEST can be found in the ‘Investment Implementation Document’ if you do a search on their site .

    I’m with NEST through my work pension, hate the 1.8% contribuion levy but the scheme does seem to work OK administratively. My employer was either going to go with NEST or NOW pensions and glad they chose NEST as I’ve read that NOW have had some problems. One would have thought that the NEST Ethical fund would have catered for those with environmental concerns, I don’t think the fund managers should be actively making this decision for scheme members.

  • 23 Martyn March 5, 2017, 5:14 pm

    I thought the same thing when I saw that NEST was moving out of fossil fuels and one presumes by this they aren’t investing in the big oil companies. Who’s to say what direction those companies will take? It’s preaching the choir here but they ought be mechanical and cheap. It has a 1.8% contribution charge and a .3% fee. VRWL would cost only .25%. So it’s not even that cheap.

    However the worst part is it simply looks to be substitutional, it will simply replace benefits. In essence they are paying to get a something those that don’t enroll will likely get for free.

    I hope legislation is in place so companies cannot be sued for mis-selling, because it looks exactly like PPI to me. I would suggest if a company is unable to provide evidence that it ensured that NEST meets the needs of it’s employees and has CHOSEN it from a cast of others, then it risks litigation down the line.

    Imagine, NEST underforms (say because for oil companies are stellar performers) then said employee’s find out that that benefits they’d have got anyway are simply being provided by their paid NEST scheme. Bitter, twisted and with the benefit of 20-20, hindsight, sharp lawyers on a no win no basis will plague employers who thought they were doing the right thing, by proving that have in fact not.

    Note auto enrollment and NEST are not the same thing

  • 24 The Rhino March 5, 2017, 7:13 pm

    Yes. That’s my memory of NEST. 0.3% holding charge and 1.8% contribution charge. 0.3% is good as that’s effectively fund and platform rolled together I think. 1.8% seemed a bit heavy to me. Does anyone think that’s acceptable?

  • 25 Rob Taylor March 5, 2017, 8:26 pm

    Would it be too cynical to suggest that the government are controlling Nest and using it as a way to pursue their own objectives using other people’s money without regard for the return those people get on their money? And if so, given that increased inflows into Nest are to all intents and purposes guaranteed by law, is there scope to view the entire concept of auto-enrolment as a super-cynical ploy to make Nest and by extension the government the most powerful shareholder and investor in the country, with all the potential for corruption/lining ones pockets that would entail?

  • 26 Fremantle March 6, 2017, 9:14 am

    As an investor, the future is unpredictable and I have no edge.

    The earth’s climate systems are complex but humans require simple narratives to understand. Climate scientists have complex models of the climate and incomplete data. There results indicate upwards trends in temperature and sea level. Change will present challenges to humans and ecosystems. I do not question this narrative.

    I do question the response to the narrative.

    Wealthy nations have cleaner air, plant more trees, spend more on protecting flora and fauna, have lower casualties from natural disasters, have longer life expectancy. Being rich is good for the environment and good for humans.

    Subsidies and tariffs reduce the ability of economies to produce wealth. They make us poorer.

    Subsidising renewable energy production makes us poorer now. Being poorer now (i.e. spending more on energy production) means we have less capital to get rich through the magic of compound interest, and will leave us less capable of responding to the challenges of climate change in the future.

  • 27 The Rhino March 6, 2017, 10:45 am

    Slightly off topic, but just caught this on the bbc – http://www.bbc.co.uk/news/business-39152282

    HL aren’t supposed to be able to buy articles on the bbc are they? Thought that was just for the broadsheets?

  • 28 ermine March 6, 2017, 2:46 pm

    @ Fremantle Depends who you mean by we when you say

    Being poorer now (i.e. spending more on energy production) means we have less capital to get rich through the magic of compound interest, and will leave us less capable of responding to the challenges of climate change in the future.

    I’d say that magic of compound interest is accreting to a smaller and smaller part of the collective we in rich countries 😉 In that case subsidising renewables to reduce the cost of externalities due to the masses burning fossil fuels may be turn out to be a good thing. Poor people don’t make capital investments if they have any choice, because they don’t have capital.

    @The Rhino that 1.8% looks well steep. I guess it costs in if that’s the price of getting employer match of 4%, but it still seems a waste of too much of that match

  • 29 Jaygti March 6, 2017, 4:14 pm

    As far as I’m aware the 1.8% charge will only apply until the set up charges of the scheme are covered. Then I presume it will stop or be lowered at least.
    Of course it could be like the Dartford Crossing tolls, and just continue for ever, even though it was meant to stop when it was paid for!

  • 30 Haphazard March 6, 2017, 8:19 pm

    It does seem odd for a workplace pension to include this kind of “tilt” as a default strategy.
    Having said that, reading this prompted me to check my workplace pension default option, which I had accepted. It’s rather higher on equity vs bonds than I’d have expected (80/20 except for those approaching retirement). But more striking to me was what I presume is meant to be the defensive assets section: 6% emerging market debt, 5.5% global high yield debt, 7% UK investment grade credit, 8% global ex-UK investment grade credit. Isn’t that a bit of an odd mix? And that’s before you even get to the ethical options….

  • 31 Mr optimistic March 6, 2017, 10:24 pm

    I think if you take someone’s money to invest for their old age then you should invest with a view to obtaining the best financial outcome for them. Each investment decision should be defensible on those lines, and only those. To do otherwise is a breach of trust. I reckon if you have strong ethical views then ok invest your own money how you wish but to let your non-financial philosophical outlook influence how you allocate other people’s money is unethical (worse if you are a trustee) unless you tell them upfront and give them a choice to agree or go elsewhere.

  • 32 Fremantle March 7, 2017, 9:14 am

    @Ermine

    “Poor people don’t make capital investments if they have any choice, because they don’t have capital.”

    Making poor people poorer through high energy costs doesn’t help them either.

    Overall as an economy lower costs of energy result in higher accumulations of capital, more jobs. What you spend on subsidising energy can’t be spent on other things like education and health, spending that will have immediate impact on people alive today.

  • 33 The Investor March 7, 2017, 10:10 am

    @Fremantle @Ermine — I think we’d all agree the mathematics is quite complicated. There is clearly a cost to using a more expensive form of energy, even absent the sunk costs and transition costs of moving from one form of energy to another. A barrel of oil is incredibly potent stuff.

    I don’t think we’re going to unpick the maths here, but for what it’s worth, back in 2006 in what’s still the most comprehensive review I’ve seen, the Stern report put the long-term cost of ‘doing nothing’ at about 5% of GDP each year, versus a 1% cost to GDP from taking early action to ward off the worst predicted impacts.

    To me the precautionary principle would urge taking action, on that measure. But like Central bankers, politicians know they will get very little credit for something not happening. (A great example did the rounds among my friends on Facebook yesterday, with a graph showing how low UK real income growth has been in recent years versus say Italy and Spain. This ignores the fact that our ‘settlement’ was to have lower unemployment; I well remember stories of workers agreeing to wage freezes etc in response to the recession, and government action was tilted in that direction, too. And then we had an economy that could absorb workers via more casual arrangements, albeit at lower wages. Unemployment in places like Spain, where there was little employment flexibility, as we know rocketed).

    Anyway, on the GDP point I think we also have to acknowledge @Fremantle’s concerns; for me 10 basis points of GDP is not created equally. So a huge spending boom to move us onto an alternative energy network that largely replicates at the end of the day the dwindling output of our existing grid is not in itself ‘good’ GDP, versus as mentioned healthcare or education. An extreme example would be something like a Pharaoh building a pyramid — massive economic output that benefits one rich corpse. (Okay, and the stone quarry and the people who sell the food for slaves, etc. But you get the point).

    I think we should be taking action, but delaying has at least allowed the cost of alternatives like solar to come down. (As I said above, I sense solar is about to be a game changer). Switching to renewables also has a long-term benefit of a discounted cash flow into perpetuity versus finite fossil fuel supplies. Not sure how much this was accounted for in the likes of Stern; I expect that sensibly discounted to a terminal value pretty quickly.

    @mathmo — (Hah, I am sure I will slip from that vision of a better world in the future, but I don’t want to carelessly do so… 😉 ) Yes, I think making a deliberate effort to nudge young employees into low cost pensions for life with a focus on equities is the easiest thing to ‘god’s work’ that most employers will get done in a typical day. I’m envious of the impact you’re having. 🙂

  • 34 Fremantle March 7, 2017, 12:09 pm

    @TI

    Bastiat covers the broken window fallacy very well.

    You can’t spend the same money twice. Investment in renewables have an opportunity cost for everyone who has higher energy costs. Even though I used education and health spending as examples, if someone wants to spend their energy savings on booze and fruit machines, it is their money to begin with. As passive investors, we win whatever they spend their income on ;).

    Government picking winners, paying subsidies to landowners to host windfarms, massive subsidy of nuclear power, these things distort the market place and provide concentrated benefits to a limited number of people with dispersed costs for everyone else.

    Place regulations on externalities of energy production, whole of life emissions from power stations for example, apply them equally and energy producers will innovate without any need for government interference. Higher efficiency and value adding of waste product are good for energy producers and don’t need to be legislated for.

  • 35 john March 7, 2017, 12:14 pm

    Unless you are a professional, having an opinion on climate change that differs from the professionals (who DO generally believe in it btw), is exactly as dumb as having an opinion about a company’s share price that differs from the market. I.e. very.

    To the guy who says getting rich is the best way to deal with it: stop reading Chistopher Booker. The above applies to you too.

    I wonder if a class action will one day be taken against NEST for not supplying “the best investment option”? If not for the climate tilt then for the 1.8% confiscation.

  • 36 The Rhino March 7, 2017, 12:59 pm

    So NEST is hammering early adopters to cover its setup costs? I wonder how well incentivised they will be to remove that charge in the future? It seems ropey to me, not particularly fair, even more so as its sort of govt mandated

  • 37 The Investor March 7, 2017, 1:38 pm

    Government picking winners, paying subsidies to landowners to host windfarms, massive subsidy of nuclear power, these things distort the market place and provide concentrated benefits to a limited number of people with dispersed costs for everyone else.

    The market price for anything is of course only an estimation of its intrinsic value. But in a broken market it’s less to be trusted. Stern (and many others) have described the energy market as broken, because the price does not cover the long-term (and admittedly unknown) consequences of choosing one energy form over another.

    For climate change and carbon reduction this is a fiendishly difficult question; a simpler analogy would be the supposed cost of energy from nuclear power stations built in the 1950s that didn’t reflect the ginormous clean-up and storage costs down the line.

    That said, I think we agree more than we disagree, at least looking at your proposed solutions. I’d prefer a universal carbon tax to subsidies, for instance (always keeping in mind that traditional energy companies may have explicit/implicit subsidies of various kinds beyond the scope of our discussion here. 🙂 )

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