I have mentioned before the folly of relying on the RSA for any rigorous analysis. The RSA is a political construct, not a respected academic body like the PPI or the IFS. All that RSA wants to achieve via its ‘reports’ are a big headline, which they then relentlessly milk for all it is worth.
Here is the rigorous analysis that they base their 37% better outcome from CDC on:
“Let us start with the same assumptions about saving period (40 years accummulation, 20 years decumulation), annual returns and retirement age (65) we used for Ms Canny and Ms Hasty. Let us assume that during the saving period, the IDC pension costs 0.3% per annum more in total charges, both declared and not declared during the saving. And assume that, in the five years running up to retirement, the IDC pension is invested more conservatively and, as a result, loses 1% of its return. It is then used to purchase an annuity which, after all costs, yields 80 pence in the pound.
This scenario does not include any advantage a collective pension might have due to a more aggressive investment approach, other than in the five years leading up to retirement.
… Table 3 shows how each of these differences affect the pension outcome.
Table 3: Improvement in pension outcomes from a move to collectivity Lower Cost (0.6% vs. 0.3%) +10% No Annuitisation (Annuity Cost 80%) +22% Less Conservative Investment (1% for 5 years) +5% TOTAL +37%
The result is startling. The CDC pension offers around a 37% better outcome than the IDC.”
They conclude by saying the result “is startling”. Actually, the result is LAUGHABLE. The result is exactly what they wanted to achieve and to get there they assumed that CDCs achieve higher investment returns throughout the 5 years before retirement and during the 20 years (their assumption) of retirement.
They do of course name check the Government Actuary as saying that CDC produces 39%. The Government Actuary (GAD) actually said “In theory this improvement is in the order of 20 to 25 per cent, but in the simulation it is as high as 39 per cent for some members.” Thirty nine percent of course sounds better than 20 to 25!
Get under the skin of the GAD report and you will find that the GAD gets to its conclusion by assuming an equity risk premium of 4% per annum and investment of CDC assets 100% in equities.
Now, call me old fashioned but like the PPI and the IFS, I like to start with FACTS rather than ASSUMPTIONS.
This natty little report from Credit Suisse http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf tells us that the equity risk premium over the last 33 years is about 1.5% in the UK (see Figure 1) and nearly negative 4% (-4%) in Japan i.e. in Japan, equities have returned 4% LESS a year than bonds EVERY YEAR for the last 33. Where is the premium in Japan?
Across the whole world, the equity risk premium is close to ZERO over the last 33 years. Maybe even -0.1%
As for costs, Lane, Clark and Peacock produce a lot of FACTUAL information about Dutch pensions (not assumptions like RSA). Read this for example: http://www.lcp.uk.com/news–publications/news/2012/pa/2012-10-02-netherlands-pension-costs-survey/
Or this: http://myinvestorcircle.com/news/dutch-schemes-resist-attempts-source-data-costs 356 Euros a year. That doesn’t feel cheap to me. TPAs run DC at £25 a member a year here. The report itself is written in Dutch and I can’t find a way to translate it because it is copy protected, but I’m sure LCP would be happy to supply an English version if you ask them. Dutch charges are not cheaper, nor are equities a one-way bet. In short, all the ASSUMPTIONS that RSA make in their analysis are contradicted by fact.
Your civil servant friend is right.
I’ll leave the last word to Andy Cheseldine at LCP http://www.moneymarketing.co.uk/channels/corporate-adviser/news/dutch-pensions-halo-slips-as-benefits-cut-and-overestimated/1044123.article
- Those Dutch Pensions – a Civil Servant writes (henrytapper.com)
- “What’s expensive for a pension these days?” (henrytapper.com)
- Whatever we do, let’s do it together (henrytapper.com)
- Those Dutch pension cuts in full! (henrytapper.com)