The shift in private retirement coverage from traditional pensions to individual retirement plans has made the goal of a comfortable retirement a risky, costly gamble. A fortunate few will retire wealthy while the majority watches as their contributions are gutted by high fees and their account balances plummet every time a corporation reports a losing quarter. A new retirement system, built upon guaranteed returns and lifetime payments, as provided by Guaranteed Retirement Accounts, is needed to restore the stable, secure retirement that should be the right of all those who have worked their entire lives. Meanwhile, only one part of retirement is certain: workers nearing retirement are watching their individual account balances and crossing their fingers, hoping that another market downturn doesn’t postpone their retirement for years to come, or wishing there were employers willing to hire workers that many consider too old to work.
Sounds familiar? – it isn’t. This is a report on the American 401K by a group of American commentators whose analysis of DC pensions is much the same as that of UK commentators; eg that as an individual retirement savings system, individual retirement plans don’t cut the mustard.
The report , which you can read here , confirms what we in the UK know, that unless there is an element of collective insurance, the enterprise of workplace savings will throw up some winners among the wealthy and condemn those at the bottom of the contribution ladder to 100% participation in not very much.
Collective insurance is , in its loosest sense, what defined ambition is all about. At the one end of the scale is the insurer which offers blanket terms which accept that the very best risks subsidise the poorest risks. Where the blanket terms are set at below 0.5% for every member of every company in the land, you have NEST or NOW or People’s Pension and let’s hope some enlightened “for profit” insurers,
But this is only the start of the push towards collectivism. The next target is the individual annuity which is the most hopeless way of delivering guaranteed pensions to the nation, one could imagine. Collective annuitisation , using pooled mortality and embracing economies of scale enjoyed by large DB plans and to an even greater extent the state pensions is a logical next step.
Somewhere, deep in the bowels of AonUK (or more likely India) Kevin Wesbroom is leading a research project which we hope will shed light on the options open to risk sharing between employer and employee (and perhaps the tax-payer). I can think of many such models but we need the deep actuarial research Kevin can provide to work out how fast we can move towards what DEMOS refer to as “guaranteed retirement accounts”.
Guarantees are important but they should not be purchased individually, their cost at an individual level prohibits the prospect of a decent pension. Guarantees work collectively and work through pooling of risk, of costs and ultimately they imply a pooling of intent between generations.
The work we do over the next five years will be in an environment dominated by “individual retirement accounts” and we will have to wait till we get a savings system as efficient as the Dutch collective DC approach. On average £ for £ , Euro for Euro, the Dutch system pays out 39% more than ours (Towards Tomorrow’s Investor).
The DEMOS report shows the shift to individual accounts and the damage it has already done to the elderly America
The retirement security of American families has crumbled in the past generation. Workers retiring in the next 20 years can expect to receive only 65 percent during retirement of what they made during their working years, a drop of 16 percent from their parents
Another American study which I was sent yesterday by Thomas Schildhimmer who I met at our pensions lunch is even more stark. It demonstrates that 401K in the states is 50% less effeceint that its DB counterpart. If you doubt the quality of the research read it here. The report is called “A better bang for the buck”. You can guess what lies behind the better bang!
Many people in this country laugh at David Pitt-Watson, at collective DC and at Defined Ambition. But the goal of David and of CDC and DA is to get us back to where we were, to stop the slide towards “lower for all but a few” and have the ambition to work together to make pensions “better for all”.
We should not let that new dawn fade.
- The best pensions in the world (telegraph.co.uk)
- Abolish the 401(k) (salon.com)
- Obama takes first shot at retirement IRAs (fellowshipofminds.wordpress.com)