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Less certain and certainly less

 Salomons Judgement

I spend most of my time thinking and talking about economics and investing with customers, students and other people who are interested in these matters. In the last few weeks, I have again experienced the joy of this. And I have seen how difficult it can be to explain something in a simple manner, and why that’s so important.

The financial industry is good at manufacturing products that are not all equally useful, necessary or understandable. On the other hand, society increasingly requires financial self-sufficiency. Financial literacy is therefore extremely important.

In my work, I meet many institutional investors who manage large amounts of assets and to whom knowledge about estimating and sharing risks and expected returns is crucial. In the conversations I have with customers, it’s my job to advise them with this knowledge in mind.

At university, it’s my job to pass on that same knowledge to students. Even more than in previous years, I have tried to make them aware of the increasing importance of investing. Last week, they completed their exams. I hope they are prepared now to make the right investment choices, for themselves and for others. This is becoming increasingly important, for example for the funding of a decent retirement.

In the pension arena, many things have changed in the last few years due to ageing, low interest rates and a changing labour market. Many defined benefit plans have merged, passed on to insurance companies or replaced by defined contribution plans. The optimal pension model differs per country, but the common denominator is that a pension will be less certain and certainly less. A guaranteed outcome is or will be replaced by the guaranteed deposit.

In other words: in the past, a pension was arranged for you. Now, you largely run the financial risk. And in the future you will increasingly have to take care of it ourselves. This was confirmed in a knowledge session I recently attended with academics, the financial sector and politicians about the future of the pension system: people will have to take control over their own situations even more. Therefore, more financial knowledge about pensions is essential.

Financial institutions can play a social role in making people financially self-sufficient through financial education. A good example Bank voor de Klas, a project of sixteen institutions aiming to make Dutch kids financially aware. Red Start and the work being done by Rob Gardner more generally, is a good example of this from the British industry. Young children don’t like to think about being old, but what’s learnt in the cradle lasts till the tomb.

The author

Roelof Salomons


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