The state of play in the global economy is quite complicated at the moment, and if you focus on every aspect of prevailing uncertainty simultaneously, the outlook very quickly becomes depressing.
The public sector debt that was run up during the financial crisis has gone nowhere; one global superpower, via its president, is making itself ‘great’ again by carelessly trampling all over the jointly nurtured fruits of the global financial system; and one deeply confused member of the European Union is seeking to withdraw from it without knowing why it is doing so, what the consequences will be for itself or others, how to organise it or whether it will even happen. In the midst of all this uncertainty, management of financial assets is a hard art to master.
So says Rasmus Pikkani, the head of the Baltic Asset Management & Pensions Department of Luminor, who has many years of experience in the investment field. “At the same time, if we turn back the clock a little we can see that what happens on the financial markets has never been especially predictable,” he adds. “That’s why you have to disperse your assets. And that’s precisely the sort of challenge that gets me going. The beauty of the thing is that humans are inventive, we cope, even though sometimes it really can be like running the gauntlet.”
Pikkani has seen all too often in his career how firmly people believe in the rationality of their own behaviour without that behaviour corresponding to reality. The idea that at some point your income will be bigger than it is at present and then you will start saving mostly never comes to pass, since people’s outgoings tend to grow in line with their earnings expectations and little or nothing is left over to invest in stress-free saving.
“In reality, the aging population and the world around us leave very little room for blind faith in someone else keeping us in our retirement in the manner we’ve become accustomed to,” says Pikkani. “The figures, as dry as they are, are pointing to a situation where the pensioners of the future, in pinning all their hopes on the state, will be relatively worse off than pensioners today.” He performs a quick calculation in his head before continuing.
“If we take the most optimistic view, which is to assume that your savings will grow at the same rate as the overall standard of living, i.e. the average wage, and your personal income goes up over its life cycle with that same average wage, then with relatively little margin for error you can discount all growth from your calculations,” he explains. “In other words, if a person puts 6% of their earnings into a second pillar pension over 40 years and then spends it over a period of 20 years, those savings give them a pension bonus of 12% of their last salary. Since the first pillar pension will raise a lot less to hand out in future than it currently is, people earning the average wage really ought to take the average pension today, add 10-12% of the average wage to it and then ask themselves whether that will be enough. If it’s not, then expecting someone else to bridge the gap between the bottom line of your calculations and however much you’re hoping for is clearly naive.” However, he says it is even more naive to entertain the thought of distributing a system which is capable of offering so little for wider consumption in this day and age.
We should be thinking about how we can really influence people to contribute more to their own pensions
“Saving is a difficult choice to make, because the flipside of it is being better off right now through immediate, direct consumption. This is an issue where the state could play a more coercive role with the long-term well-being of the population in mind – just like coercion has its place in saving people from doing themselves harm via the excise on alcohol and tobacco.”
In Luminor Pikkani has been working on the development and distribution of investment and insurance product offers since 2009. He has spent the same amount of time building up pan-Baltic organisations in various forms. Over the last 10 years he has amassed a great deal of experience. “I love Luminor’s story,” he says. “Rebuilding something, building something for the future and building something differently. Strategic management of Baltic pension companies gives me the chance to keep building up that story.”
Pikkani’s first job, with the Bank of Estonia, landed in his lap rather unexpectedly. It was, if he recalls correctly, 1996 when a lecture hall full of EBS students started a course on econometrics taught by Hardo Pajula. Only eight of them, if that, completed it, Pikkani among them. When it came out in his ultimately brief interview at the Bank of Estonia that he’d gotten all the way through the course, he was offered a job in the bank’s Economic Studies Department there and then. “My job was analysing the monetary sector, so I had my eye on the finance markets the whole time,” he says. “It wasn’t long before Sampo headhunted me as a financial market analyst, where my first job was cobbling together an overview of the finance markets every morning. After that I became a fund manager in Swedbank, then came portfolio management, then savings more broadly and Head of Investment and Insurance Product Offers.”
To Pikkani, there is no point limiting yourself to how things are done: you need to look at situations anew, from a fresh perspective. “That’s one of the reasons I’m here in the bank right now, because that’s exactly what I get to do,” he explains. “We’re in a good position – we’ve got a chance to build up one bank that covers all three Baltic States. We’ve got experience from all three countries, and taking best practice into account, that’s how we’ve put our new system together. We’re not managing five or six banks that are all functioning differently, but technically building up just one. We can definitely promise our clients the best, the most efficient bank. And by running just the one bank we’re certainly saving on costs. Which might sound off-putting, but we’re already seeing how avoiding pointless costs can boost the quality of what we’re offering. It makes no difference to clients – if the result’s the same, it’s unimportant whether there are 20 people in a department or 100. We can see how our revenue base is being eaten away – fund management fees are getting lower and lower all the time. But of course if your revenue dwindles, one way of responding to it is to reduce your costs.”
Pikkani compares Luminor at present to a kid who’s all grown up and moving out of home – because their parents have told them it’s time they made a start on their own. “We’re having to put a lot of energy into how we separate ourselves from our parent banks and all their different systems, and we have to focus really clearly on where we go from here,” he explains.
It is the sort of situation, Rasmus says, where you need to be able to see the bigger picture and take complex processes and make them simple. “Luckily, if I need to make a dozen decisions that are all interconnected, I can generally break them up and make them manageable pretty quickly,” he reveals. “We’re operating in three countries now and our assets can definitely be managed more effectively by taking the kind of decisions that make our systems more efficient.”
Rasmus is well known among his friends for his ability to see the aforementioned bigger picture: from time to time they come to him directly for financial advice.
“My worst nightmare is one of my friends ringing me and saying, ‘I have 30,000 euros lying around, what should I do with it?’ because there are no simple or even right answers,” he says. “And it’s incredibly complicated to recommend anything. Particularly if they’ve got it into their heads that investing is a quick way of generating extra income. Things are a bit easier if you’re hoping to preserve capital longer term, which is when dispersing your risks can be your friend – although most people see that as the most boring option going.”
Pikkani says that the initial step in creating a financial buffer for yourself is always the same: finding the money to set aside in the first place, only after which can you start thinking about investing. “And that first step is always the hardest,” he concedes. At the same time, he fully understands that no matter what he says about the pension system, there will always be those who think he’s only doing so because he has a vested interest. “It’s like the whole excise duty thing or any political hot potato – if it’s the guy in charge of the brewery talking, no one’s going to believe him because they’ll assume he’s putting his business interests first,” he says. “But it’s always better to hear people out who actually know what’s going on in a particular field, since they’re right in the thick of it the whole time. That’s why I make no bones about saying that ensuring you have adequate savings for your retirement is first and foremost each person’s individual responsibility. The easiest and most effective way of saving is putting money aside regularly, on the same date each month – say the day you get paid, or within a few days after – and investing it in a fixed scheme. And not being swayed by whatever mood’s taken you or what the weather’s like outside. The third pillar pension system provides a nice little tax incentive for saving, too.”
He says that in hectic moments it pays to bear in mind what the biggest investments are that a person makes in their lifetime. “The way I see it, by the time you retire you not only have to have your own savings, but you need to own your own home as well,” he advises. “In the past I was pretty rubbish at putting money aside. It’s something I’ve learned simply by doing it, and by starting a family. And you can’t just have a long-term plan – you need some sort of buffer as well in case something happens at some point and your income drops away to nothing or you’re suddenly faced with some enormous cost. That’s what everyone should be doing, but unfortunately statistics show that they’re not. We’re only human. We all live in the same world, we know how things go – that money you’ve squirrelled away for your buffer can turn into this little devil that climbs up on your shoulder and starts whispering in your ear about that boat you’ve always wanted, or that summer cottage, or that new car, or that amazing holiday. Sadly, if you manage to talk yourself round like that, you’ll soon find your buffer’s gone.”
Pikkani himself fell foul of just such a devil a few years ago, when he dipped into his savings to buy himself a motorboat that would comfortably fit himself and his two sons. Today said boat spends most of the year tied up on the Emajõgi River, which for a man used to fishing at sea with his father and grandfather is an altogether different prospect: fishing is a language he speaks, but doing so on the river and nearby Lake Peipsi is a dialect he struggles to get by in.
“There hasn’t really even been anything that gets my hopes up that things will improve on that front,” he sighs, although the pastime remains a tradition in his family. “The best fishing I’ve had is still in the little bays and inlets on Saaremaa – sea fishing, which is what I’m used to. In fact last year I got the best haul in a decade maybe, and my boys did just as well as me. We tried catching garfish with spinning lures for the first time. We hadn’t tried it before. We’ve traditionally been all about pike in my family, so the whole garfish thing had sort of passed us by. The window for it in spring is really narrow. But I’m glad we tried it – it was a really good experience compared to ordinary fishing.”