Was Carillion like a ponzi scheme? (Part 2)

I’ve decided to create a 3-part series on Carillion and the hidden goings-on in the accounting world. This is part 2, where I look at some of the questionable accounting. You can read Part 1, on the insolvency process here. You can read Part 3, on the ongoing investigations and aftermath here.

I loathe hyperbole. As I explained in the first part of this series on insolvency, a lot of the time that hyperbole is nonsense. So when I started hearing people describe Carillion as like a Ponzi scheme, I was thinking: “here we go again“.

A big difference this time is that one of those saying it is former Auditor General Sir John Bourn. That made me stop and think. When somebody of that calibre says it, you should probably take it seriously.

Having reflected on those comments for a week or so, I think they are right. Carillion had many characteristics of a Ponzi scheme.

What is a Ponzi scheme?

Ponzi schemes are named after Charles Ponzi, who used the technique in the 1920s. A Ponzi scheme is a fraud where a business seeks funds from new investors and pays those funds as profits to earlier investors. The fraudster tricks the old investors into believing that the profits are from sales or trading returns, not disclosing their true origin. Investors are misled as to the true nature of the alleged ‘profits’.

Ponzi schemes can keep running as long as: investors do not demand repayment of their funds, continue to believe that their non-existent assets will continue to generate ‘profits’ and there are new investors willing to contribute new funds.

Revenue accounting

Carillion was primarily a construction and services contractor. As a forensic accountant, a big red flashing light appears. This is because the most notorious financial frauds and scandals are perpetrated by recognising non-existent revenues. Construction and services contracts are the most tricky when it comes to determining when and how to recognise revenue. (So much so, the international accounting standards body is once again updating the standards on revenue recognition).


The big problem is this: the contractor pays lots of cash out upfront and gets most of the cash backloaded. It’s easiest to see this graphically:

When the orange line is above the blue line, the contract is making a cash loss. You can see that for most of the project, it is making a cash loss. It’s only at the end that a cash profit is made. This is quite common, where the contractor is paid in increments when it reaches a milestone. [update: for those after a bit more detail have a look at the end of the post]

Recognising revenue

The accounting standard relating to construction contracts is IAS 11 (for general revenues it is IAS 18). Both will be replaced by a new standard, IFRS 15 this year. Basically, it says, if the outcome of the contract can be estimated reliably, revenue and costs should be recognised in proportion to the stage of completion.

If the outcome cannot be estimated reliably, no profit should be recognised. Instead, contract revenue should be recognised only to the extent that contract costs incurred are expected to be recoverable and contract costs should be expensed as incurred.

However, the stage of completion of a contract can be determined in a variety of ways. Such as, including the proportion by costs incurred compared to estimated total contract costs or completion of a physical proportion of the contract work.

Importantly, an expected loss on a construction contract should be recognised as an expense as soon as such loss is probable.

As you can see from the standard, quite a bit of judgement is involved. In the judgement lies the grey areas. In the grey areas lies dodgy accounting.

Carillion’s story

Carillion was a relatively young company. It started in 1999, a spin-off of the old Tarmac Group. From the outset, Carillion’s approach was to take on debt and buy up competitors. Over time, it made increasingly big bets buying out a number of competitors including Mowlem, McAlpine, part of John Liang and even tried and failed to merge with Balfour Beatty.

Despite the rapid acquisitions, following the financial crisis the company struggled to grow profits. Struggling to grow revenues from acquisitions alone, it resorted to taking on more projects to grow profits.

But as we saw above, those projects start off with cash outflows. Generally speaking, the bigger the project (think the big PPP stuff with the government) the bigger the outflow. So Carillion turned it’s hand to getting short projects in to get the cash to fund the big projects. The trouble was, those short projects had wafer-thin margins – making very little profit. So Carillion needed more and more of them.

In other words, Carillion was bringing in projects so it could service the old ones. It became a cycle and somewhat reminiscent of a Ponzi scheme.

How things turned bad

These projects are complicated and often go wrong. Especially when you have little profit margin to play with. So many firms have big cash-buffers to help if this happens. They also retain deep pools of knowledge and expertise that it can use to ride out rough patches and know when to cut their losses.

Unfortunately for Carillion, it had huge debts from its acquisition spree. More concerning, Carillion just wasn’t very good at building things.

At this point, with very little cash in the bank and projects going wrong, a company should cut its losses to stop the bleeding before its too late. Carillion, however, doubled down.

The “Early Repayment Facility”

Its first step was to find cash in more creative ways. Despite being a signatory to the Prompt Payment Code, it used ethically questionable practices to delay payment to suppliers (querying invoices, delaying issuing purchase orders or just flat out not paying for supplies).

It went one further and arguably abused a government scheme called the Supply Chain Finance Scheme.

The scheme, created in 2012, was designed to help SMEs that got burnt during the financial crisis by banks refusing to offer credit. SMEs could use their invoices to get the money from their bank rather than wait for the company to pay them. In turn, the bank would collect the money from the company when it was eventually paid.

Carillion flipped this on its head. It said to its suppliers, if you want your money early then you can use the scheme. They renamed it the “Early Payment Facility”.

However, a few months later it cynically pushed out its credit terms (sometimes up to 120 days). In other words, it wasn’t an early repayment at all. Worse still, many suppliers would have to pay a fee to access that early payment, leaving them with a difficult choice of losing money but getting cash or waiting for longer and longer to get hands on the money it was due.

In effect, Carillion was borrowing from its suppliers to plug its cash and funding gap. Carillion was quite open about this, boasting that the scheme: “Gives Carillion greater flexibility in terms of managing its own working capital.” But in the accounts, there was no mention of the Early Repayment Facility.

A gap in the accounting standards

That’s because, in my opinion, it falls in between a gap in the accounting standards.

Carillion was in effect borrowing cash from its banks secured on supplier invoices. This is, by most people’s reckoning, a debt. But the accounting standards are vague on these transactions (sometimes called Reverse-Factoring). It essentially boils down to a judgement call about whether the link to the original payable has been broken. If it has, it’s a debt liability. If not, then it stays as a payable. It’s a judgement call that depends on the exact wording of the legal agreements.

This is important because if you keep it as a payable your debt levels look much lower. Carillion decided the link to the payables was still there – this wasn’t a debt. This should have been a high-risk area for the auditors because of the large amount of subjectivity.

One of my major projects was where there were bad debts on a factoring facility and the argument was that the accounting by the company was wrong. The answer was, according to the accounting standards: “it depends on the legal documents”.

As far as I can tell from the accounts, KPMG (the auditors) didn’t consider this a high-risk despite the very large sums of money at play (roughly £500m). If Carillion had recognised these amounts as debts, then it may have broken it’s borrowing covenants and the banks could have recalled their loans putting Carillion out of business.

Aggressive Accounting

But the major problem was that Carillion resorted to aggressively recognising revenue on contracts.

If you recall from above, you could either recognise revenue on a percentage basis (only if you could reliably estimate it) or you couldn’t recognise any profit, only the recoverable costs.

As I mentioned before, Carillion was doing a poor job at delivering projects, usually over budget and behind schedule. Where there is doubt that you can deliver the project to contract, you should stop booking profit and only book the money you’ve actually brought in. If it’s probable you might incur some losses, those should be recognised immediately as well.

But Carillion continued to book revenue as if everything was fine and dandy. Trouble is, once you go down this route there is no going back. It’s like Cortez scuttling his ships. The more you book aggressive revenues the bigger the gap becomes between your actual revenue and the forecasts. This is exactly what happened at Carillion when a new finance director came in and said: “hold on this isn’t right!”. In 2017, Carillion wrote off around £800m of revenue (the difference between the stage of completion accounting and the actual money it could bring in).


From my review of the 2015 and 2016 accounts, I would consider that Carillion was potentially insolvent in 2016 (and possibly 2015 as well). This view is shared by, among others, Frances Coppola, a finance and economics journalist. During 2015 and 2016, hedge fund managers smelt something was up and it became the most shorted stock on the London Stock Exchange.

This is because Carillion had a wafer-thin amount of cash, had mountains of debt (excluding even, the payables possibly that were mis-classified), and because its net assets were almost entirely propped up by Goodwill (an intangible asset that is not immediately realisable, unlike cash or hard assets like property, though usually at a discount).

Goodwill hunting

Goodwill is the extra money paid by the acquirer above the asset value of the company being taken over. It can be thought of as representing things such as brands, patents and reputation. In Carillion’s case, it represented the forecast profits from its the subsidiaries, joint ventures and “special purpose companies” that it used to run projects. As those profits evaporated so should have the goodwill.

Put bluntly, the goodwill accounting in Carillion’s accounts made no sense. Carillion was due to pay ‘contingent consideration’, extra money, to the sellers of some of the businesses it acquired. However, because they were missing profit targets it was slashing these amounts. At the same time, it was saying that goodwill would only reduce in value if the discount rate (the time value of money) went up to 20% – i.e. money in 5 years time is worth only 40% of money today. But this would mean almost all of the extra profits from the acquisition had to come within 5 years. This was a big sign that these profits (like Carillion’s own) were overestimated.


In 2017, Carillion tried to undo the damage with enormous write-offs. Including nearly £800m in overstated revenues. But it was too late, the company was already short on cash and had nothing left in the bank. Likewise, because almost all its assets were goodwill, it had nothing to sell either. Carillion quickly went from people thinking it was insolvent to being insolvent (more on that in part 3).

A lesson for all businesses

There is a lesson here for all businesses. It was one of the first I was ever taught as an accountant:

Most businesses go bust, not because they fail, but because they do too much business.

It’s called overtrading (that link made me laugh, Carillion followed the bullet points in that link point-by-point). What happens is that you sell too much stuff, and you run out of cash to complete those sales.

Carillion was the quintessential overtrader following bad projects with more bad projects. Rather than stopping before the damage was permanent, it followed a Ponzi-like business practice that made salvage impossible.

It’s quite inexplicable that experienced directors could act with such incompetence. However, there are questions about whether there was something more insidious going on. I’ll be looking into that in the next and final part.


All the best,

Young FI Guy

(p.s. a personal thank you to Frances Coppola, who was an inspiration for me writing this post).


This is part 2 of a Carillion three-parter. You can read Part 1, on the insolvency process here.  You can read Part 3, on the ongoing investigations and aftermath here.

[update: some industry bods kindly shared this post on twitter and there were some interesting comments.

This post was designed to be accessible to those with no knowledge of accounting or contracting. So I’ve kept it as simple as possible. That said, for those after a little more detail it’s worth talking a bit more about the contracting subcontracting relationship (something helpfully mentioned by commenters on twitter). Here it goes.

Generally speaking the contracting industry can be broken down into a hierarchy of three (or more) ‘Tiers’. At the top is Tier 1, the contractor engaged by the ultimate customer. For major projects, this will be a national contracting firm like Carillion. Tier 2 is a subcontractor engaged by the contractor to deliver major parts of the work. These are often local contracting firms, specialists and consultants. Tier 3 are the subcontractors engaged by Tier 2 subbys. These will do specific jobs or services in the project ranging from electrical installations through to cleaning toilets.

Even though each tier will have contracts with one another, a lot of the industry still works on trust. That said, there are also specialist ‘supply chain management’ firms that can also act as the ‘grease between the wheels’.

Generally speaking, as you flow down the chain, the subcontractor will rely more on cash to fund works. The Tier 3 contractors will pay for material and labour in cash or short (monthly) credit terms. In turn, the Tier 2 contractors will pay Tier 3 contractors on longer credit terms. And so on, up the chain.

In effect, this means that subcontractors are net lenders of finance to build projects and contractors net borrowers. The contractors ‘borrow’ by having services rendered for them before getting paid, only paying out when work reaches the relevant milestone. In other words, they borrow from their suppliers.

So what happened with Carillion? Well as I noted in the main piece, Carillion aggressively tendered for projects. Taking on projects with very late payment or thin margins. Unfortunately, some major projects became severely delayed or not built up to standard.

You might think that’s the subcontractors’ fault. After all, they are the ones doing the job, right? To some extent, there are bad subbys out there. But it’s important to understand that it’s not just about doing the right job. You have to do the right job at the right time. It is the responsibility of the contractor, like Carillion, to ensure everything is working in order.

As we saw in the main piece, as things started to go pair-shaped, and the cash stopped flowing in, Carillion would delay and delay paying subcontractors. In effect, they had to borrow more and more from suppliers to keep the lights on.

There’s only so far you can push things though. From speaking to people and reading around, Carillion became notorious in the industry (though by no means the only one) for sharp business practices. Over time, a great deal of goodwill was lost between Carillion and its subcontractors.

Eventually, Carillion has tapped out their suppliers as far as they could and only cold hard cash could keep the business afloat. As we saw in the main article, that’s when the business came crashing down.





Interesting links:

Frances Coppola on the Early Repayment Facility: https://www.forbes.com/sites/francescoppola/2018/01/30/how-carillion-used-a-u-k-government-scheme-to-rip-off-its-suppliers/#7ab7a7c252dc

FRC letter to the Work and Pensions committee on Reverse Factoring: https://www.parliament.uk/documents/commons-committees/work-and-pensions/Carillion%20report/Letter-from-FRC-to-Chairs-21-March-2018.pdf

Carillion 2016 Accounts: http://www.annualreports.co.uk/Click/12208

  • The references relating to my point on Goodwill are Note 11 (Intangible Assets), p110 and Note 29 (Acquisitions and disposals), p129.

Insolvency and Carillion (Part 1)

I’ve decided to create a 3-part series on Carillion and the hidden goings-on in the accounting world. This is part 1, where I look at the insolvency process. You can read Part 2, on Carillion’s accounting here. You can read Part 3, on the ongoing investigations and aftermath here.

Sex sells. And at the moment, so does laying into accountants. I can’t open the FT or The Times without seeing an article criticising the accountancy profession. Just like banker bashing around 10 years ago, it’s the ‘in’ thing. It’s what the cool kids are doing.

There’s a lot of truth in what’s written. There’s also a lot of hyperbole. There’s also a lot of stuff that is downright wrong.

In particular about insolvency.

In the aftermath of Carillion, I’ve seen people claim there is no insolvency regulation – not true. That secured creditors get paid before the costs of winding up – wrong. Imagined conflicts of interest. And most bizarrely of all, complete ignorance of the involvement of the High Court in insolvency proceedings.

There are problems with insolvency, but these are lost among some of the ‘fake news’ put out there.

How do I know this?

I’m a Chartered Accountant. Not one of those ‘useless’ auditors or ‘thieving’ insolvency practitioners (who don’t have to be accountants by the way). I’m a forensic accountant, the guy you call when the shit has really hit the fan.

I’ve no love for auditors. My heart would sink when my colleague would say: “the X plc audit team needs a hand”. Likewise, when a restructuring came up I’d try to hide lest I get dropped in an alphabet spaghetti of accountancy chaos.

That’s why I’m writing this post. Because I’ve seen first hand what happens in insolvency, and it isn’t like what’s reported in the MSM.

Insolvency and Carillion

Over the past few weeks, I’ve been particularly irked by some of the stuff written on the Carillion insolvency. Whilst lots of writing lays into Insolvency Practitioners, the true ‘bad dudes’, Carillion’s management slide away into obscurity.

So I’m going to run through the Carillion insolvency process.

First off, this is a liquidation (wind-up by the Court). There are four types of insolvency process: CVA, administration, liquidation and receivership. Each is different, each has several different sub-types. But I’m not going to talk about them (at least not today).

What is happening with Carillion

Carillion went bust. It couldn’t pay its debts. At that point, it stopped trading and went to the High Court asking to be liquidated. The High Court heard the petition and said, yes, you should be wound up.

The Court then went off to the Government’s Insolvency Service (IS), asking them to nominate someone to take charge of the liquidation. That person is the Official Receiver (OR). They are a civil servant, salaried by the Government.

The Official Receiver

The OR asks the Court if they are fine with them being in charge. Hopefully, they say yes.

The ORs job is to oversee the liquidation process. They are ultimately responsible. They must ensure an orderly wind up, try to get as much money for the creditors as possible and investigate what went wrong.

The ORs first job is to work out if they need help. That is, whether they need to get an Insolvency Practitioner(s) (IP) to aid them with the liquidation.

The Special Manager

In the case of Carillion, the largest ever UK liquidation, the OR clearly needed a lot of help. So he opened a process to find and select a suitable helper called a ‘Special Manager’ (SM). There are rules about when the OR can do this and he had to ask the Secretary of State for approval.

The OR negotiates with the possible IPs to find the best one for the job. With Carillion, the OR selected PWC (a firm with a very good restructuring team and having managed on the previous largest-ever insolvency). [p.s. I worked for two of PWC’s competitors so I’m by no means a fan.]

Together, the OR and PWC would have sat down to agree to fees and a plan. They would have gone through this plan with the largest creditors, the Pension Protection Fund (PPF) and the Government. When everyone was happy, the OR then asked the Court to approve the appointment of PWC (including their fees and the general action plan).

Work begins

Now the real work begins. PWC’s principal role in the first week is to stabilise the company. Carillion would have been in carnage. They would have taken over operations with three major aims: protect the companies’ assets, save people’s jobs and get the company working again.

Once things have stabilised the OR and PWC will start working through their plan. Generally, this is:

  • Work out what assets can be sold and for how much;
  • Work out what onerous contracts can be escaped from; and
  • Gather evidence to investigate any wrongdoing.

Let’s look at each of these for Carillion.


PWC will find Carillion’s most valuable assets and try to realise them. It’s a tricky process where good IPs come into their own. On the one hand, the liquidator wants to get as much money as possible. On the other, every day that passes means the costs rack up. It’s about finding the right balance, some of the top IPs are the quintessential wheeler dealers – making money that nobody thought was there.

To make sure the creditors aren’t being screwed, Real Estate experts, asset valuers and business valuers (like me) carry out independent valuations of major assets. The OR will oversee this and check they are happy with what the IP is doing.

Onerous contracts

Carillion was losing money for a reason. It had entered bad deals. PWC and the OR will be looking to get out of the very worst ones. They will negotiate fee reductions, scope reductions or simply get out (sometimes through litigation). In many cases, Carillion worked in partnerships. PWC would look for the partners to take on work as quickly as possible to save costs.


The OR will be looking for wrongdoing at Carillion including Fraud, Fraudulent Trading and Wrongful Trading. If they find evidence, they will ask the Insolvency Service to bring action. This is the most difficult part of the job and requires lots of specialist skills (I’m biased as a forensic accountant, little-known fact: forensic accountants are the smartest and best-looking accountants).

The OR will ask forensic accountants to pore over Carillion’s books and IT systems to see if bad things were going on.

Unfortunately, this is a bit like finding a needle in a haystack. There will be trillions of bytes of data. Billions of accounting transactions. You’ll find something that looks odd, start tracing, only to find it was innocuous or a simple error later corrected.

Proving fraud is incredibly difficult. The bar on proof is very high for criminal convictions – mainly because we don’t want to send innocent people to jail. The reality is, most of the time there isn’t enough evidence. That said, the Insolvency Service strikes-off 1,000s of directors each year.

The work

The work is front-loaded, the most costs are borne in the first few months. This was the case with Carillion. PWC and the OR expected most work to be complete after 4 or so months. Most liquidations last around 6 to 12 months. The final months dominated by wrapping up the investigation and tying up loose ends.

The SMs are required by industry standards to update the OR of work progress at least monthly. Most of the time, updates are far more frequent. Given the complexity and size of Carillion, these updates were on a daily basis.

In these appraisals, the OR will be reviewing and agreeing to PWCs work. He’ll be saying if it’s good enough or not. He’ll monitor the direction of work and decide if there are particular areas he wants PWC to focus on. If he ain’t happy he’ll tell PWC. Remember it’s the ORs neck on the line.

If necessary, the OR will petition the Court. Seeking permission to change the process, increase or vary fees or update the plan. If the Court isn’t happy, is says no.

The OR also must produce a report for the creditors. Often, the OR and liquidators will keep creditors up to date on a more regular basis (unless the creditor opts out of such communication).


As Carillion is wound down, the OR will get a better idea of the assets left for creditors.

Assets are paid out in a specific order BY LAW:

  1. Expenses of winding up: Liquidator fees and expenses are paid first
  2. Secured creditors with a fixed charge.
  3. Preferential creditors and ‘prescribed part creditors’.
  4. Secured creditors with a floating charge.
  5. Unsecured creditors.
  6. Interest on debts.
  7. Shareholders.

To reiterate it’s by law. You might not like it, I might not like it. Tough.

Order of fees

The OR is paid first. Their fees are paid to the Insolvency Service and are set by law: 11,000 per liquidated company plus 15% of recovered assets. As at the end of March 2018, the OR’s Carillion fees were £297k (£11k x 27 liquidations).

Next in line are the costs of the wind-up. The IP and SM’s fees, the running costs of the company during wind up.

This order is for a specific reason: if you aren’t gonna get paid you won’t do the work. This applies from accountants, to the building staff to the cleaners. If these people aren’t paid, they won’t work. If we didn’t have liquidators and staff doing work the wind up would be disorderly, more jobs are loss and less money recovered.

Next up are secured creditors (aka banks). They lend money but in return get collateral. Just like your mortgage. The deal is, you get a lower interest rate, in return, we get your house. That’s one of the reasons why loan interest rates are higher than mortgage interest rates.

Unfortunately, there’s rarely any money left after paying the secured creditors. That’s not because they gorge themselves on money, it’s because companies go bust because they were rubbish at business (or due to fraud).

Sadly in the case of Carillion, there isn’t even enough money to pay the expenses of wind up. Instead, the Insolvency Service will be picking up the tab. And therefore, ultimately, the taxpayer.

Petitioning the Court

The OR will set out the assets recovered and ask the Court for permission to distribute the money.

If the Court doesn’t like it, they tell the OR to go back to the drawing board. This sometimes happens, especially in administrations if the Court thinks the deal is a ‘bit dodge’ (very technical term there).

Once approved, the OR consults the lists of creditors drawn up during the liquidation process. This is generated as information is found and from creditors petitioning the OR.

In the case of Carillion, the list looks like this:

  • Insolvency Service
  • Nobody else

The report

As mentioned above, the OR has to investigate what went wrong. They will produce a report for the Insolvency Service explaining this and recommending actions against the directors of the company if necessary.

Most of the time, this will be a recommendation to strike off the directors. Where fraud is thought to have occurred the Secretary of State will consider whether to bring any civil action. In the most egregious of cases, the file is passed to the Crown Prosecution Service to consider criminal fraud charges.

A quick work on this. Criminal fraud is very very hard to prove. We only send people to jail if we are sure they committed a crime (beyond reasonable doubt). Unfortunately, proving fraud to certainty is hard. It means very few ‘bad dudes’ get nailed for fraud. I could write mountains on this. If there’s interest I can write a piece on that (this one is long enough already).

An unhappy story

Companies going bust sucks. It is terrible. People lose jobs, businesses go under. Nobody can turn back time to stop it from happening. All we can do is to put a system in place to make the best of it.

I share huge sympathy for the victims of Carillion. It’s upsetting what happened. I can’t bring their money or companies’ back. But I can try to shed some light on what’s going on. That’s why I wanted to write this piece. Free of the bullshit, to explain exactly how the process works.

So let’s turn to our final question.

Is the process up to scratch?

In many respects, yes. In some important respects, no. The process above sounds great, and it works well. But there are some problems.

A long-winded process

Firstly, as you’ve probably realised the process is quite long-winded with lots of back and forth. The idea is to prevent mistakes from happening, but often the process takes too long. A litigation culture has emerged making IPs very reluctant to speed through the process. This means extra costs and a longer wait for money. I don’t have an easy solution for this. But many much smarter people than me have repeatedly asked the government to look into it.

Austerity has hurt services

Secondly, the Insolvency Service and Courts have been savaged by cuts. Things aren’t as dire as in other areas, but they are expected to do more with less. Talent has ebbed away into the private sector and there is a lack of resources available. They are doing the best they can and put on a brave face, but it’s hard. I wasn’t around in the ‘good old days’ when the Insolvency Service was a Goliath, but today only the simplest cases can be managed by the OR alone. That’s all a political choice. I don’t think we should be outsourcing justice and the law to the private sector, but successive governments don’t agree.

Small Creditors aren’t engaged with

Recovery rates and efficiency in the UK is relatively high compared to other countries, but with a concerning downward trend recently. But this hides an uncomfortable truth. Insolvency is dominated by big creditors – typically banks. Engagement with, and by, small creditors is very low. That’s understandable due to basic economics, but we can do better. Other countries have created professionals that represent the collective interests of small creditors in insolvency. I’d like the same here, with an automatically appointed professional to represent SMEs alongside the OR. The job might be like herding cats, but it’s better than nothing.

Lots of regulation doesn’t mean good regulation

Next up is regulation. Insolvency is probably the most highly regulated industry in the UK. The Insolvency Act 86, Insolvency Rules 2016, Insolvency Amendment 2017 are (erm…) ‘comprehensive’. IPs answer to the Insolvency Service, the Courts, the law and their professional bodies (accounting and law bodies).

Trouble is, nobody knows who should be policing what. The Court steps in if things go badly wrong, but most of the time it falls to the professional bodies. They treat discipline seriously (or at least my body, the ICAEW does). But whenever they ask for more powers they get rebuffed. This has been going on for years. I’ve found articles where the accounting bodies asked for more powers a decade ago. If I had to guess why, it’s because the government wants to keep power for themselves. Politicians want it under their control. Unfortunately, they just mainly grandstand rather than actually doing anything. In my opinion, it would be better to have a single regulator given stronger powers to ensure higher standards. [edit: just read now that ministers are considering giving the Insolvency Service some tougher powers! Good news if true.]

Fees are misunderstood

Fees are another issue. Recent changes mean that fee estimates have are published upfront. Trouble is, it’s impossible to accurately gauge fees. Sometimes the liquidation is straight forward, sometimes there’s been wholesale fraud. As such, for fear of not recovering costs, IPs quote the top end of fees, lest they have to go begging to the Court. Likewise, they publish the highest fee rates, just incase they have to seek the specialist expertise of the only world expert on Mongolian Salt mines. These get quoted in the press, everyone gets upset. But the fee rates I’ve seen are the standard City rates for professional services firms. They are dictated by the market. Being upfront with fees has increased transparency but caused confusion and disquiet. The Insolvency Service needs to improve the way it communicates the insolvency process to the public.

Too much in one go?

Finally, there is the investigations. This is an increasingly complex part of the process. Public expectations are for no stone left unturned. Unfortunately, this distracts from recovering assets. It would be much quicker to get the asset recovery done first and get people paid as quickly as possible and leave the bulk of the investigation work for later when it can be given more time and done properly.

To some extent, this is already the case. But the public demands (unrealistically) to know what went wrong almost immediately. It takes time to do a thorough investigation and I really urge more patience. I think its imperative of forensic accountants, like myself, to communicate better what work is required to properly perform the investigations.


With Carillion:

  • The Official Receiver, a civil servant, was appointed by the Court
  • He answers to the Court
  • He chose PWC to help him
  • They set out their fees and liquidation plan at outset and got court approval
  • Carillion is such a mess that the Official Receiver won’t get full fees, the taxpayer will have to foot some of the bill.

Specific problems with UK liquidation process:

  • The process is long-winded.
  • Cuts in services means Court and Insolvency Service deprived of money and resources needed to provide good service.
  • Low engagement with SMEs, we need professional appointed by Court to represent SMEs.
  • Consolidate regulations and bodies that regulate Insolvency Practitioners. Grant them stronger powers to punish bad Insolvency Practitioners.
  • Publishing fees has brought transparency but also confusion. More education required.
  • Splitting asset and recovery will speed up the return of money and improve investigations.

You can find out more about insolvency from the .gov website:



This is Part 1 of a 3-part series on Carillion and the hidden goings-on in the accounting world. You can read Part 2, on Carillion’s accounting here. You can read Part 3, on the ongoing investigations and aftermath here.

All the best,

Young FI Guy

P.S. Don’t worry, I’ll be back to ‘regular programming’ soon, I just had to vent.

P. P. S. As always, I moderate comments. If you post abusive comments like ‘accountants are scum’ I won’t approve them. Constructive comments are always welcome. I’ve tried to get all my facts right, I’m sorry if I got anything wrong. Be nice!

Mrs YFG: it’s not all sunshine and rainbows

Reading our blog back to myself now and again, I think sometimes it can come across like we’re some kind of Home & Country magazine yuppies with a perfect life. Oh, we don’t fight, oh we’re equal, isn’t Mr YFG a wonderful house husband (aren’t they bucking trends by having a female breadwinner). Sometimes I feel the urge to slap myself through the screen.

I just don’t want everyone to think our life is perfect and that we’re happy all the time. Life simply isn’t that way – it’s not all sunshine and rainbows.

Controlling my jealousy is difficult for me

I am not going to lie, there are days where I get pissed off with Mr YFG. I wake early and leave while he is still blissfully asleep. Mr YFG gets to wake up half-way through my morning meetings and then go about his self-determined day. He gets to wear pyjamas or lounge clothes all day. He can eat what he wants when he wants and he can have a nap if he needs to. There are times where I get home after he’s in bed, and then have to do it all again the next morning.

I am often insanely jealous of him being able to do this, and this borders on resentful. I have to remind myself to rein the resent in otherwise it sits there festering.

The one thing that keeps me from tipping over into resentment is the fact that I couldn’t trade places with him – I wouldn’t last a week. I would get bored really quickly.

The last time I was left with a week of free time I rearranged our book collection in colour order and took apart the kitchen to deep clean it. I was cleaning out the spout of our taps with a toothbrush (annoyingly, everything else was already spotless as Mr YFG keeps the house very clean). After two days I got really grumpy as there was little else ‘to do’.

Wanting to arrive at the finish line is hard

Sometimes I find it really hard sometimes to know that I have to work (for now) and I haven’t saved enough. I feel angry at my past self for spending and not saving. I see Mr YFG and others who are FI looking back on their journeys and can’t help but get frustrated that I have four or five years to go – it feels like such a long time.

Gratitude has been very helpful in getting me back on a healthy mental path. I am grateful that I have the opportunity and good fortune to save as much as I have. One day I may not need to work. Many people will never be able to save or retire early. I have to put that in perspective.

Despite having a job with long hours and high expectations, I am well-paid and treated fairly. The Firm is very good at looking after its employees, even if it’s a bit of a trap. I have a certain degree of autonomy which is really important to me. I don’t have to work strict hours (if I come in early I can get back those hours in the evening and if I come in late I just stay a bit later). My salary is very good with great health and other benefits. I am very grateful that my hard work has paid off in my career.

It’s not all sunshine and rainbows

There’s probably a reason there are so many ways to say this. There are ups and downs. Taking the rough with the smooth. And so on. I think we all tend to overstate the negatives and underappreciate the positives. In some ways, this isn’t a bad thing. Those down days help to reinforce my drive on the FI journey.

Likewise, jealousy isn’t always a bad thing. There’s a great quote from Susan Cain on jealousy:

Pay attention to what you envy. Jealousy is an ugly emotion, but it tells the truth. You mostly envy those who have what you desire.

I get envious of Mr YFG sauntering about. Perhaps that’s a good thing.

How about you?

I often wonder about what drives other people in their lives. Looking at some people I know, I’m bewildered by how little they think about money and my lifestyle is just completely confusing to them. In the same vein, I do not understand their motivations for not living as frugally as I do. It’s two different worlds.

I’d like to know: what things cause you to feel jealous of other people? Are there negative things in your life you want to remove?

(p.s. thankfully, even though he might seem like it over the internet, Mr YFG isn’t too much of a smug tw*t)

When cash was king

I promised my twitter followers something special:

So here it goes. It’s 1 January 1989, the Soviet Union still exists, Kylie Minogue has just conquered the charts with her debut album and Young FI Guy isn’t even born yet. Here’s the question: what would you take: 20 years of cash returns or 20 years of global equity returns. A no-brainer right?

Cash vs ACWI - 1989 to 2009

Quite remarkably the return on both was almost exactly the same (although with significantly different journeys!). Two months later, in February 2009, the cash return would overtake the equity return. That’s right, over a twenty year period, cash beat equities.1

What the hell?!

Financial economics says this shouldn’t happen. Over such a long period, higher risk assets should deliver higher returns. But it can happen. As Monevator recently pointed out: Taking more risk does not guarantee more reward. That’s because:

Risk means that more things can happen than will happen.

When cash was king

It’s easy to forget, but cash used to give a pretty great return:

Throughout the 90s and early 00s, cash paid out significant real returns. And we’re talking risk-free returns here. The return shown above is from the Building Society Association. This is the average interest rate you’d get from popping to your local building society and opening a savings account. No TIPS ladders, no money market shenanigans. Simple deposit savings. Completely risk and stress-free.2

Mr YFG’s journey – growing a princely sum

This result, though surprising, was instinctive for me. I grew up saving a lot. By the time I was 16 I had saved up 1,000s of pounds through birthday and Christmas gifts and working. I fondly remember double-digit interest rates up until the late-00s. Children’s accounts could have incredibly high rates. I very much rode that cash returns chart. But then the financial crisis hit.

Knocked off the throne

I suspect some of you will be screaming at your screens right now: “you’re not telling the whole story!”

Alas, you are right. Because since the financial crisis, interest rates have plummeted:

[Note: the BSA average Building Society rate data stopped in 2007, to create a longer dataset, I’ve combined this with the Bank of England average 1 year Fixed Bond interest rate from 2008.]3

I’m not a banking expert, but from what I gather there are three reasons why this happened:

  1. Quantitative Easing and Funding for Lending – these policies made it very cheap for financial institutions to borrow money. It dramatically reduced the need for customer deposits to fund lending.
  2. In addition, the Bank of England drastically cut the base rate, further reducing the cost of borrowing.
  3. The financial crisis caused a wave of consolidation in the market, reducing the competition for customer deposits.

This had a huge impact on returns:

Generally speaking, real cash returns have been negative since the financial crisis. Only popping up into positive territory for brief periods.

The full story

So let’s fast forward 10 years, how does our choice between cash and global equities stand after 30 years?

To put it mildly, the equities have usurped the throne. At the 20 year stage, you’d have roughly doubled your money (in real terms) with both cash and global equities. At the 30 year stage, you’d have a 550% real return with equities. Over the last ten years, you’d have actually lost money on your cash (in real terms).

In other words, if you had held on to tried and tested cash, you’d have massively lost out. This is one of the reasons I bang on at young people about how important it is to start investing as soon as possible. Those sitting out there with all their money in 1% Cash ISAs are getting poorer. If that’s you, I strongly recommend to close this window and open a broker account right now (look at this link on how to do it).

Some lessons

Let’s have a think about what we can take away from all this:

  • Even over very long periods, risky assets might now give you a better return than risk-free assets
  • Cash has historically been a great investment asset
  • But right now, it isn’t
  • That might change, but if you are currently sitting on piles of cash you are losing money
  • But even globally diversified equities are highly volatile, there’s no guarantee of high returns

I have fond memories of my old cash accounts. And I feel it is a shame that cash isn’t the investment it once was. Building societies were a great way to get individuals to start saving for their future. But times have changed. Am I the only one who is nostalgic? I’d like to know if you are too, or if you think I’m being a sentimental fool.

All the best,

Young FI Guy

1 Cash returns data sourced from BSA and BOE. 1989-2007, from BSA 2016/17 yearbook, “Building Society Average Gross Share Rate“. From 2008, BOE “Monthly interest rate of UK monetary financial institutions (excl. Central Bank) sterling fixed rate bond deposits from households (in percent) not seasonally adjusted” – ID:IUMWTFA. These returns are gross, as in before tax. Equities data from MSCI: MSCI ACWI, GBP, Index Gross. Unlike the cash return, you would not have been really able to get this return as I don’t think an index tracker has tracked this index back to the 80s – besides you’d have fees and tax to pay. In that respect, the equities return is overstated by more than the cash return! Inflation data is monthly CPI from ONS: Series ID: D7G7.

2 Datasets for interest rates periodically changed. Prior to 1989, Building Societies were somewhat enforced in the interest rate they had to offer. In the late 80s banking was substantially deregulated giving building societies greater flexibility to set rates (and demutualise). I tried to find the best fit with the BSA data from the various BOE data series. I went for 1 year fixed bonds as that seemed to be ‘the closest fit’.

3 This post is another example of why I don’t like the term “risk”. Risk, as defined by volatility, isn’t particularly helpful to individual investors. I prefer to think of three different types of risk: inflation risk, capital risk and shortfall risk (link).

How we track our expenses

Tracking expenses is one of the most important ways to take control of your finances. You can’t actively manage your money unless you know what you spend your money on. That said, tracking your spending can be tedious – manually entering hundreds of transactions a month is nobody’s idea of fun.

Things are getting better, there are now many automated apps that can do a lot of the grind for you. That said, I still think it’s better for everyone to track their own expenses in their own way. That’s because it means you are actively engaging with your spending. Automating expenses tracking can mean you end up on auto-pilot, not really challenging what you spend each month.

Each month, we track our expenses in a homemade spreadsheet. It means we don’t hand over our bank details to any third-parties and we can monitor our spending habits.

The process

At the end of each month, we sit down together and download our bank statements. We then input those into our spreadsheet, do a bit of labelling and out the other end comes our summarised expenses and savings rate. It only takes us about 30 minutes to an hour each month. Which is much less than any other non-automated process we’ve tried.

Over time, with lots of similar items (mortgage, utilities, groceries) the process becomes quite straightforward. It also helps to spot spending patterns, identify odd or expensive spending and has a side benefit of picking up on fraud (which has thankfully never happened to us).

The Spreadsheet

Enough abstract. Let’s talk about the spreadsheet. (Excel: link Google docs: link)

We’ve used it for over two years. After many requests, I’ve finally tidied it up and changed a few things so that I can share it with you.

It’s a deliberately very simple spreadsheet. There are no complicated formulas (for excel geeks: the most complicated formula is ‘SUMIFS’, the ugliest formula a not very nice ‘IF’ function). There are no macros or VBA. Sure, it could be cleaner, faster, better (if you have suggestions, or find errors do let me know). But, I believe this is a spreadsheet that anybody can use.

This is also a spreadsheet where you don’t have to fill everything (or in fact anything) for it to work. Likewise, this spreadsheet is pretty easy to customise and add/change things if you want. I’ve designed it with redundancy built-in for that reason.

How it tracks expenses

Let’s give a run through for how it works. Where you see a yellow or blue tab, that’s where you manually enter data. Everything else is automated.

There are three elements to the spreadsheet:

  • The ‘labels’ – where you input a few things on first use
  • The ‘bank account tabs’ – numbered 1 through 10, each represents a bank account – here you input your bank account transactions
  • The ‘summaries’ – these summarise the data from the bank account tabs in various ways, with the option to add some more data if desired.

The labels

First up, there’s the ‘Labels’ tab.

There are a few things to do in this tab:

  1. Enter the starting date.
  2. Customise the expense ‘tags’ in column 2, these can be whatever you want, use as many as you need.
  3. If you want, you can then label whether these tags are bills, one-off items or if you want to exclude them from the summaries:
    1. We label some items as ‘bills’ these are the things that Mrs YFG and I split between us
    2. Some items are ‘excluded’ these are where we transfer money between accounts (‘transfers’); money we invest (‘investments’) and capital expenditure (such as, our house extension. These won’t show up in the summaries.
    3. Some items we label as one-offs, these are big expenditure items that will only occur once. There are then separate summary lines which show expenses and income minus these lines, to show the more ‘regular’ in and outgoings
  4. Next up is to do the same for the income tags (blue cells)
  5. Next, enter your names, this is used to split expenses and income by person (you can use ‘joint’ or similar if you have a joint account).
  6. Finally, you can designate how the bills are split between yourselves.

The bank account tabs

On first use, there are two things to do. One, select the person from the drop-down menu and two, put in your bank account name (or identifier) for reference (so you know which tab is for which account.

The process for using this tab is quite straightforward. What we do is to login to our online banking; navigate to the page where you can download your bank statements; and export them as an excel or csv file.

We then copy this data into the relevant yellow boxes. Be careful to make sure all items are entered as positive (not negative figures). Money going into the account should go in the “money in” column, money going out into the “money out” column.

Finally, for each item, select the relevant ‘tag’ (i.e. mortgage, groceries, etc.).

Here’s an example of how to enter the data:

Expenses tracking example
Screenshot of expenses tracking spreadsheet – transactions

Two minor things.

You’ll notice I’ve left a cell with “-1.00”. If you’ve got negative values, select this cell, and hit copy. Select the negative values, then do CTRL+ALT+V (aka ‘paste special’) then under ‘operation’ select ‘multiply’ this will multiply all the negative values by minus 1 to turn them positive.

Another thing to note is refunds. There are three ways to deal with these:

  1. Set up an income label as ‘refunds’ or something similar
  2. Move these items into the money out column as negative values and label them the same as the earlier expenditure (so they cancel out the earlier expense).
  3. Delete the entries manually, and the corresponding expense.

(I’ve tried to think of a better solution, but couldn’t come up with one!)

You do that for each of your bank accounts and all the automation is done for you by the snazzy formulas.

The summary tabs

First up, there is ‘Expenses by individual‘. This tab brings together the expenses for an individual across all the bank accounts. No need to enter any data here. (To the excel geeks: this is the tab with the horrible IF formulas – sorry!)

Next is the ‘Income by individual‘. It works in the same way as the expenses tab above, just for income. One difference is that you can manually add in income which you might want to include, but doesn’t flow into your bank accounts (such as, interest in investment accounts etc.) This can be done in the yellow boxes as usual.

The third summary is ‘Savings rate by individual’, here you can calculate each person’s savings rate. There are some tabs where you can add in extra savings that don’t go through your bank accounts (i.e. pension contributions, SAYE, etc.)

The main summary is surprisingly named ‘Summary’. This aggregates everything together. With a table for expenses, income and finally savings rate.

Finally, there are some charts in the ‘Charts’ tab which are linked to the ‘Summary’ tab. These are the ones we use, but feel free to create your own.

Wrap up

And that’s it. If you’ve been looking for an expenses spreadsheet, please download it and give it a whirl:

Updated Excel v1.2: https://youngfiguy.com/wp-content/uploads/Income-and-expenses-spreadsheet-1.2.xlsx

Updated Google docs link: https://docs.google.com/spreadsheets/d/1TuyLlAIPMx9SDJrQZUFOHkTKQLO7773DEHrdWNzsdE0/edit?usp=sharing


If you have any questions or suggestions, do leave a comment or drop me an email. I certainly think of this as a living document, so I expect to make updates and changes over time.

Do feel free to make changes, and edit it the spreadsheet if you want. I think it’s good to make the spreadsheets and documents feel like your own!


All the best,

Young FI Guy

Deciding between drawdown and annuities – 23 years before retirement…

I had planned a completely different post today. But, like a moth to a naked flame, I’m drawn to another post on pensions. This time, on deciding between drawdown and annuities. The catch is, you’ve still got 23 years till retirement.

The question posed comes from a This Is Money post:

I’m only 34 but my pension firm wants me to decide NOW between drawdown and an annuity – can it do this?


The post is a regular series where readers can send in questions to former Pensions Minister Sir Steve Webb. I found this one particularly interesting because it’s a question I’ve had to answer, and I suspect a large proportion of readers have also had to answer (perhaps without their knowledge!) On the face of it, it seems absurd that a 34-year-old should have to ‘choose’ between drawdown and annuities. Let’s have a little dig in.

The question

I’m 34, make regular contributions into a defined contribution company pension, and until recently have pretty much ignored it.

I logged on to have a look at the provider’s new portal and noticed I had a new range of options which boil down to me choosing now if I think I’ll be wanting to take an annuity or a drawdown pension.

What it doesn’t tell me is how this choice affects what I might get when I hit the magic age. Which is the least ‘risky’? If I say drawdown, but later decide annuity, does that put me in a worse position than if I flipped it around?

Should I be trying to split the pots – I’ve got a couple transferred in from other places? What if drawdown doesn’t exist in the future? What if some magical new pension option appears?!

I’m not looking for the differences between the options at retirement, more about the investments which will be made now. Help?

What brought about this madness?

Steve’s response is, of course, bang on the money – I’ll do my best to paraphrase. This mad situation comes about for two reasons.

First, the ‘choice’ arises because of pension freedoms. Before 2015, almost everyone would have to use their pension pot to buy an annuity. Since the freedoms, savers can opt instead for drawdown.

Second, when you contribute to a pension and haven’t explicitly chosen an investment for it to go into, it will go into a default fund. When everyone had to buy an annuity the fund would use something called lifestyling (or glide pathing). This is where, in the years before retirement, the fund moves out of equities and into bonds. This is to cut the volatility of your pension pot in the run-up to taking an annuity.

Here’s an example from one of my pension schemes:

This is for an ‘annuity’ type retirement:


This is all very sensible, lifestyling before an annuity is one of the few things most pension experts seem to agree on. But given that you no longer need to buy an annuity, and can opt for drawdown instead, the game changes.

If you’re opting for drawdown, there is strong evidence that you don’t really want lifestyling (or at least, not as much of it). That’s because you will continue to keep investing your pot after retirement, and will want to keep benefiting from growth in your investments.

What happened

Companies will make a decision for all pension scheme members. This is reflected in their choice of default fund.

Most companies now assume that savers will take drawdown. So they changed their default fund from one that used lifestyling into one that did not. Not all companies did this, and the default fund may continue to use lifestyling.

What you do about it

You have the choice as to whether you intend to buy an annuity or opt for drawdown. If you select to go into drawdown, your investments will likely not be lifestyled. You can change this ‘notional’ choice at any time pre-retirement (although you should check your scheme rules).

You can also usually actively dictate what happens to your investments in two ways.

In the first way, you stay in the default fund but you select whether you want lifestyling or not, and the percentage of your pension contributions that go into a lifestyle investment option.

In the second you instead pick which funds you invest into (and not the default fund). Your pension scheme will offer a list of different investment options and you can ‘pick and mix’ between them.

Does it matter?

If you’ve elected to stay in the default fund (the first option above), you won’t see any practical difference in your investments until about 10-15 years before retirement. As shown in the chart above, when I would get within 10 years, the investment proportions changes. It’s around that time when you should really start thinking about whether you want to drawdown or take an annuity with your pension pot (or a mix of the two). Have a look at two previous posts of mine on drawdown and annuities on each option.

A word on default funds

If you haven’t actively selected what funds you want your pension contributions to be invested in then you are likely invested in the default fund.

Unfortunately, this is not always a good thing. The default fund doesn’t mean ‘standard’. In fact, it is a lottery whether your default fund is any good or not (link – FT google result).

It is absolutely worth taking the time to find out more about your default fund and the other fund options available to you. Generally speaking, low-cost, passively managed equity funds are what you are looking for. With these funds, you are invested in higher return assets but with higher risk. However, very few investments are absolutely certain and even government bonds can go up and down in value.

A final question

I want to round off this post with a final question:

Why do I have to make these decisions?

I’m really interested in investing and pensions (I suspect many readers are too). But most people find pensions boring and confusing. Should people have to make these kinds of decisions? As I mentioned before, I think it’s better to make saving and investing as painless as possible than to encourage forced and painful engagement.

The reality is very few people will choose the funds into which their pensions invest. The government and the financial services industry have reluctantly come to the conclusion that it’s better for people to be saving something, anything, even if it’s not perfect than to be saving nothing. Faced with bizarre questions like the one in this post today, most people will (quite sensibly!) run and hide.

Unfortunately, it is rare to find open Defined Benefit schemes. The true beauty of these schemes is not the (usually) higher retirement benefits. Rather, it’s that those savers did not need to make any investment decisions for their pension. They could get on with doing what they are paid to do and leaving the scheme to deal with the complexities of investing.

Then again, that probably means more readers for my blog…

All the best,

Young FI Guy

Mrs YFG: our ideal life

I was listening to a ChooseFI podcast this week and it set off my idea for this post about our ideal life.

The podcast asked me to think about my ideal life post-FI. If money was no object, how would my life look? I’d never really thought about it in that way and so I got home and immediately directed Mr YFG to get thinking too.

Mr YFG’s ideal life

I think he kinda has it. He gets to pretty much do what he wants (within reason…)

Mind you I think what would make him happier is me being FI too and having me at home. Me at home means that I’m not stressed or miserable from work. Plus he’d have less housework to do as I’ll do my fair share. Mr YFG isn’t really the adventurous type. He can find as much enjoyment in a book or a lazy afternoon as he would from a ‘once in a lifetime’ trip. He likes things relaxed and to do things in his own time. I think what he enjoys most about his current lifestyle is that he gets to dictate his pace of life, and not having it dictated to him.

My ideal life

I get to wake up naturally (sans alarm), make and enjoy a cappuccino and go feed the guinea pigs. Yes, we have pets and our guinea pigs will feature heavily.

I enjoy crafts and making things. Over the years I have made cards, clothing, calendars, candles, jewellery, do cross-stitching, knitting, furniture up-cycling. You name it I’ve probably tried it. With varying degrees of success… My current obsession is making a patchwork quilt. I get frustrated because I don’t have the time I need to dedicate to doing these things right. So, I often rush them or just don’t get round to them. With only a few hours over a weekend to dedicate to what I want to do (and not what I have to do), I can’t get much crafting done.

So I can see my days involving crafts and possibly making my own clothes (again another wild fantasy). I like gardening and sorting out the garden and so I suppose that would feature in summer too.

The next thing I enjoy is cleaning, de-cluttering and organising. I am seriously considering a career post-FI as a professional organiser (yes…you can get a qualification for this…from APDO). Nothing makes me happier than upending a room to put it back together and to donate or chuck things we don’t need. I’ve done this since I was a child (on a Thursday as it was bin day on Friday). I would enjoy an evening session of organising and de-cluttering my room.

I could do babysitting, dog walking and general help for my friends and family. I have an idea of being a kind of fairy godmother who has the time and wherewithal to help those who are still working and are time poor.

Would we move house?

Not unless something horrible happened, no. We love our home and it’s a perfect location for London. Even no longer working in London wouldn’t mean we moved. We are in the suburbs and with great transport links. Moving away from London would mean less convenience and more reason to need a car (shudder).

We would continue doing up the house as bits fell apart, repainting and tiling etc. There is still a good amount of work to do on our neglected gem of a house (two decades of no repairs). We are firm believers in Do It Ourselves.

With Mr YFG being at home most of the time, our house is well looked after. When we go on vacation we often find the places we stay in a less clean and tidy condition than our own home.

If we did move, we would probably keep the house to rent out as it would do well rent-wise. And if we moved I can only imagine it would be to East Anglia (the round hump on the east side of the UK for those foreigners). That’s where Mr YFG hails from and it’s a beautiful, relaxing part of the country.

Would we travel?

Mr YFG and I like a holiday as much as the next person. Our version of travel is going to a nice hotel to relax and eat good food and sit on a beach and have a few walks, for a week max. We don’t hike and we don’t do extreme trekking or camping (no electricity? What is this, the dark ages!).

We find the idea of being away from our home for more than two weeks uncomfortable. We like to have a base and our home comforts.

Would we get a car?

We don’t think that post-FI life would need a car, at least not to begin with. We’ve talked in the past, quite strongly, about why we don’t own a car. We have taxi services and Uber and good train links. I can’t think what we need a car for other than visiting family and friends outside London. I suppose that will be more frequent. The thought of having to own a car is tiring and unappealing – parking it on our street alone is a joke – there’s been a number of fights down the years over parking spaces… Thankfully, being car-less, we can stay clear of all those shenanigans. Then there’s the cost of having a car. For now, I can’t see any way that it makes economic sense. But, We will see.

But let’s be honest….

I have these grand ideas for how I will relax once I hit FI. In reality, I’m very scared of leaving my profession. A lot of my self-worth is tied up in being a lawyer and tied to my status and salary. I enjoy the validation I get from my clients and from the size of my paycheck. Often, I even actually enjoy my job(!).

However, I am tired most of the time and don’t want to work anymore. I desperately want to have more free time and I dread Sunday nights. I don’t want to have to get up early, commute and wear work clothes and do things I don’t want to do. I don’t want to work late nights for no more pay or appreciation.

That said, the thought of open-ended free time disturbs me. This is why I have to think carefully about my ideal life and put things into play before I hit FI. I will need hobbies, a job that can offer me flexibility, less or no commute and the right level of brain activation.

What does your ideal life look like?

I’d be really interested to hear what your ideal life looks like. Does it look a lot different from how you live now? Would it change significantly after Financial Independence or retirement?

Pension costs and transparency inquiry

The Work and Pensions committee is launching their pension costs and transparency inquiry (link)[1]. According to the committee, they are seeking your views on whether the pensions industry provides sufficient transparency around charges, investment strategy and performance to consumers:

The Inquiry will examine whether enough is being done to ensure individuals:

  • get value for money for their pension savings;

  • understand what they are being charged and why;

  • understand the short- and long-term impact of costs on retirement outcomes;

  • can see how their money is being invested and how their investments are performing;

  • are engaged enough to use information about costs and investments to make informed choices about their pension savings; and

  • get good-value, impartial service from financial advisers.

Eight Questions

I became aware of this latest inquiry from Henry Tapper, founder of the Pensions PlayPen and a director of First Actuarial. The inquiry has asked for submissions to eight questions, which I copy from Henry’s blog (link) [2] with his highlighting:

  1. Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
  2. Is the government doing enough to ensure that workplace pension savers get value for money?
  3. What is the relative importance of empowering consumers or regulating providers?
  4. How can savers be encouraged to engage with their savings?
  5. How important is investment transparency to savers?
  6. If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?
  7. Are independent governance committees effective in driving value for money?
  8. Do pension customers get value for money from financial advisers?

Paul Lewis weighs in

Paul Lewis (of, among others, Radio 4 Moneybox fame) was quick to offer his pithy answers.

For the most part, I agree with Mr Lewis. Here are my responses to those eight questions.

Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?

They do not deliver higher performance – FACT. The evidence from the FCA is unambiguous: “there is no clear relationship between charges and the gross performance of retail active funds in the UK”. The FCA produced a comprehensive, detailed analysis of this (link)[3]. This is the same for not only individual savers but also for institutional pension schemes investing hundreds of millions or pounds.

Is the government doing enough to ensure that workplace pension savers get value for money?

No, the government isn’t doing enough. The FCA has found time and again that people do not have trust in pensions (link)[4]. It’s not possible to think you are getting value for money if you think you are getting mugged off. In fact, the government isn’t doing enough to help people save full stop. 2% contributions for auto-enrollment will not leave anyone with enough in their nest egg to worry about value for money.

What is the relative importance of empowering consumers or regulating providers?

You can’t put it in the consumers’ hands and expect them to correct deficiencies in the market. The providers have the ability and funds to make life easy for consumers. Besides, this isn’t the right question to be asking. I’m sure readers of this blog are very interested in their finances and investing, but most people aren’t. They don’t want to be empowered, they want someone to make it easy for them so they don’t have to worry about something they’re not interested in.

How can savers be encouraged to engage with their savings?

I echo Mr Lewis: Do savers need to be engaged? Do they want to be engaged? I think the answer to both is: No. It’s better to make saving and investing as painless as possible than to encourage forced and painful engagement.

How important is investment transparency to savers?

Very. Lack of transparency leads to lack of trust. Lack of trust leads to lack of saving. It’s important to remember that opacity comes from somewhere. It is a symptom of a market that is too complex and not focused on consumer outcomes.

If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?

Yes. Both in time and money. But most importantly, in hassle. It can be utterly painful to switch providers and you often have a nerve-wracking wait while your money is being transferred in the ether. These are savers life savings yet time and again providers flout the transfer guidelines. ISA transfers that should take 30 days, can take half a year. This has been a problem for years and the regulators have done little about it. It’s all well and good encouraging savers to shop for the best deals, but if doing so is painful, then savers will not do it. (link)[5] (link)[6]

Are independent governance committees effective in driving value for money?

Somewhat. But IGCs (link)[7] will naturally be focussed on compliance as their number 1 priority. Value for money will always be a distant second. So when there is any ‘doubt’, bureaucracy is followed and improving investors’ outcomes is sidelined.

Do pension customers get value for money from financial advisers?

Rarely. That’s because it’s not cost-effective for most IFAs to offer non-regulated services. It’s these services: planning, asset allocation, behaviours, guidance that are the biggest determinants of financial success or failure. The regulatory regime forces IFAs to focus on products and makes it non-cost effective for the most people to access financial advice (the ‘advice gap’). IFAs need to buy food for their family too (and cover their insurance and compliance costs), we can’t expect them to reduce their prices to a loss or do it for free.

Your thoughts!

You can send your own responses to the committee, and I urge you to do so. (link)[8] The committee opened up responses on its ESA/PIP inquiry and received a flood of submissions that greatly contributed to the committee’s findings.

I would really like to hear your thoughts – please do leave a comment on your responses to some or all the questions.


All the best,

Young FI Guy



[1] – https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/pension-costs-17-19/

[2] – https://henrytapper.com/2018/08/05/thinking-the-unthinkable-franks-at-it-again/

[3] – https://www.fca.org.uk/publication/market-studies/ms15-2-3-annex-4.pdf

[4] – https://www.fca.org.uk/publications/market-studies/retirement-outcomes-review

[5] – http://www.thisismoney.co.uk/money/experts/article-6002491/TONY-HETHERINGTON-leaving-investment-service-Smart-idea.html

[6] – https://www.telegraph.co.uk/finance/personalfinance/savings/11512350/Shambolic-Isa-transfer-errors-continue-to-hit-savers.html

[7] – https://www.fca.org.uk/firms/independent-governance-committees

[8] – https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/inquiries/parliament-2017/inquiry11/commons-written-submission-form/

Asset allocation and the UK efficient frontier

Asset allocation is the single most important factor in determining the returns of an investment portfolio

CFA Society UK

We would do well to remember that asset allocation is the most important thing for investors. A lot of the noise in the financial media is about selecting funds. Even I fall foul of that, talking about the funds I invest in, and not about my asset allocation. We live in a bizarro-world where the advice on which fund to buy is heavily regulated. But advice on asset allocation is almost ignored. The reality is how you allocate your investment funds across assets will be the biggest determinant of your investment return.

What I do

Rather than talk about the theory, let’s go straight into what I do. Overall, I’m 90% equities, 10% bonds in my portfolio. Including my various cash balances, I’m probably about 80% equities, 10% bonds, 10% cash.

I’m much more invested in equities than the traditional 60/40 portfolio. That’s because I’m after long-term investment growth and, historically speaking, the greater the allocation to equities the greater the long-term growth return on your investment. Another reason is that I can stomach a lot of the volatility that comes with having an equities-dominated portfolio (more on that in a bit).

The last reason is that I’m more worried about Inflation risk and Shortfall risk than Capital risk.

Hold on, there are three types of risk?

There are actually lots more types of risk. Inflation risk and Capital risk are the ‘big two’ for investors, but there is a third, often overlooked risk, Shortfall risk.

Capital risk is the risk that your investment may be worth less in the future than it is today.

Inflation risk is the risk that the purchasing power of your investment will be eroded by inflation.

Shortfall risk is the risk that your investment will fall short of the amount you require to make your financial goals.

In this respect, no one asset is ‘low risk’ in all regards. Cash has a low Capital risk, but high Inflation and Shortfall risk. Equities have a relatively high Capital risk, but a low Inflation risk. Over the long-term, it has a low Shortfall risk.

Circling back, for me, I’m more concerned that my investments will be eroded by inflation and that my portfolio will fall short of what I require to continue to be Financially Independent.

Notice what I didn’t say

The words ‘volatility’ and ‘uncertainty’ are missing from those definitions. Yet, that is what lots of Financial Economics refers to when we are talking about risk (and I’ll be using that later too).

But I’ve never heard anybody say: “Ooh I’m not going to invest in equities because the standard deviation is 18% compared to 12% for bonds.” Rather, the conversation is usually framed around what risk investors are comfortable taking and what risk they can afford to take. You can see that ‘comfort’ marries up with Capital risk and affordability with Inflation risk. The final consideration is what level of risk is associated with the return I require to meet my financial goals. This risk requirement matches up with Shortfall risk.

Investing is not a ‘have your cake and eat it’ type of thing. You will have to trade-off between those three risk types. And what’s suitable will vary for each investor. Unfortunately, financial economics tends to ‘fall down’ when we start getting pesky people with all their emotions involved!

That’s why I don’t like the term ‘risk’. It’s a red herring. I prefer the term risk tolerance (considered with my other three factors: Time-horizon, access and affordability. See link).

The efficient frontier

The fundamentals of investing are based on Modern Portfolio Theory (MPT)The theory states that risk-averse investors can build an investment portfolio to optimise their expected return based on a given level of market risk. It’s often boiled down to: the trade-off between risk and reward. The risk we are talking about here is volatility; not the three risks (capital, inflation, shortfall) we’re talking about above. That’s because volatility is easily observed and measured – it’s much more difficult to calculate the three risks we care about (although some smart people come up with some ingenious attempts).

From MPT it’s possible to build an efficient frontier. The set of optimal portfolios offering the maximum possible for a given level of risk. Plotting these points creates a curve. The idea is that investing in any portfolio that is not on this curve is undesirable.

A UK passive investor frontier

Using the amazing Portfolio Charts calculators I’ve created a set of efficient frontiers for a UK passive investor. I’ve looked at three simple portfolios:

  1. World Equities / Long-term duration Gilts
  2. World Equities / Intermediate duration Gilts
  3. World Equities / Short-term duration Gilts

I’ve created 11 points for each portfolio ranging from 100% in World Equities to 100% in Gilts. At each point, I plot the average annual return and the standard deviation ( how much the returns differ from the average).

Here are the charts:

(real average annual return with reinvestment on y-axis (note: not CAGR), standard deviation on x-axis, ticks at 10% intervals, data since 1970).

World Equities / Long-term Gilts

World Equities / Intermediate Gilts

World Equities / Short term Gilts

At 100% in world equities, the average annual return is just shy of 7% with a standard deviation of just under 18%. Each portfolio curves downwards as we move from Equities to Gilts. With the return falling sharpest as we move out of Equities into short-term Gilts (T-bill equivalents). This is more obvious when we plot the curves on top of each other.

Using the Efficient Frontier

There are two ways of using the Efficient Frontier.

The first is to look at whether your portfolio has a lower return than the frontier curve at its level of standard deviation. For example, if our portfolio is returning 5% at a standard deviation of 15%, Modern Portfolio Theory tells us that our portfolio is sub-optimal. We would benefit by moving into the portfolio at the frontier.

The second use is to ride along the frontier to the most efficient point on the curve. This is where use diversification and derisking to get a ‘better’ risk-adjusted return. If we draw a line from the 100% equity point, to the 100% bond point, this the frontier we’d get if there was no diversification benefit from holding equities and bonds together. So when we ride along the efficient frontier, part of our change is from derisking – accepting a lower return for less volatility and part is from diversification – getting a higher return because we are putting our eggs in multiple baskets:

Finding the sweet spot

Using this technique we can find the sweet spot – the mix of risky assets that delivers the best risk-adjusted return. To do this, we need to find the return on a riskless asset. The closest we have is cash. According to the Barclays Gilt Survey 2016, the 50yr real return on cash is 1.4% per annum. If we plot this on our graph and find where it meets a tangent with our efficient frontier we can find the sweet spot:

This chart shows that something around a 50/50 World Equity/Intermediate Bond portfolio would give the best risk-adjusted returns (i.e. 50% VWRL, 50% VGOV). Thus my somewhat flippant phrase in my How I invest my money post: “There is good evidence that on a risk-adjusted basis a more even split between bonds and equities is superior (in risk-adjusted returns).

But the return on cash varies significantly over time, were one to look at the 2010 Barclays Survey, the real return was 1.9%. If we plot that, we get a much different answer:

Our graph now tells us that something around 60/40 to 70/30 is the sweet spot.


Cash isn’t riskless. In terms of nominal volatility it might be, but once we account for inflation cash is anything but risk-free. We must also bear in mind that we are, generally speaking, less fussed about volatility than we are about capital loss and inflation erosion. So even if we’ve found the ‘sweet spot’ we still need to tailor it around our needs for our risk comfort, what risk we can afford and what risk we are required to take.

At this point, you’re probably cursing me for making you go through all that math for nothing. But I hope it underlies an important point about investing: you can’t invest based on numbers alone, you must also consider the qualitative side too.

A final chart

I have one final chart for you. This is a look at the spread of annual returns based on my portfolio allocation. Again, courtesy of the amazing Portfolio Charts:

(again, real average annual returns, since 1970)

I’ve input my asset allocations based on my How I invest my money post. First off, you can see that the return and standard deviation are relatively high, well towards the top right of any of the frontier curves above. You’ll also notice that in 27 years out 100 this portfolio would lose money in real terms.

Another interesting thing is that 77% of the time did the portfolio returned less than 2.2% or more than 12.2%; which highlights why you have to take average returns with a pinch of salt – investors rarely get the ‘average return’.

Lastly, you’ll notice two huge outlier returns. The loss is -41%. That’s right, you would have lost almost half the value of your portfolio in one year. That year was 1974. However, 1975 saw the other massive outlier, a return of 45%. (note that the UK data is patchy pre-1975, thus the shading).

Would you have been able to stomach such a massive drop? Well if you’d have been invested in this portfolio 10 years ago, you’d have seen a drop of 23% in 2008, followed by a gain of 21% in 2009.

I hope I wouldn’t flip my lid and keep cool in such market turmoil. Though that is easy to say before it happens. I know that one day, there will be such an occurrence. Hopefully, by putting this out here, it’ll keep me honest for that day.

All the best,

Young FI Guy



Please do visit the amazing Portfolio Charts which is an excellent data visualisation resource for investors: portfoliocharts.com

Part of the inspiration for this post was from Karsten at Early Retirement Now who created efficient frontiers for US investors to ask the question of how much bonds diversify from equities: https://earlyretirementnow.com/2017/04/26/have-bonds-lost-their-diversification-potential/

The other inspiration is Monevator’s piece on UK historical asset returns and asset allocation: http://monevator.com/uk-historical-asset-class-returns/

If you want to, you can look at the underlying excel spreadsheet: Link