My partner has come up with a very simple way to improve DC.
Her suggestion is this.
Large DC plans simply set a level of pension they can afford to pay from the funds within the plan and this is adjusted up or down depending on whether the whole arrangement is in surplus or in defecit.
When she is asked about guarantees she suggests that
anyone in this arrangement has the guarantee that they can opt-out into a personal pension and manage their retirement affairs themselves either through purchasing a guaranteed annuity or through drawdown,
There has been a fair bit of modelling going on over the past five years by David Pitt-Watson, by Kevin Westbroom and by Dutch, Danish and Swedish authorities which confirms that if you are prepared to give up on certainty, you are likely to get more in retirement from your accumulated pot.
I won’t rehearse the numbers in detail but the average seems to be an expectation you’d get about 40% more from an uncertain pension than from a guaranteed one, more in good times , less in bad times.
But as ever, the comparison of how much more is not publicly shared. My partner has a third helpful suggestion.
When someone gets a pension statement, it shows two levels of projected pension, the level from the collective without guarantees and the amount with guarantees.
We do take decisions on guarantees; if we want to post something, we work out how important it is to get the item guaranteed delivery and weigh up the cost of the guarantee against the likelihood of the item not arriving on time and the extreme impact of the item never arriving at all.
While we don’t think of them as such, these are value at risk calculations and if we are not making them about letters, we are making them about travel plans or paying school fees and goodness knows what else.
In the vast majority of situations we live with uncertainty and accept that there are levels of certainty we simply don’t need. If we want to be certain about our lives and tie everything down, we circumcribe our lifestyles accordingly. We make no plans, take no risks and live within our limited means.
Nobody blames people for “locking down” in this way, it’s just not what most of us choose to do.
That’s because most of us are not control freaks and know there are aspects of life we cannot control, aspects of our health and those of our family and these include not just the threat to life but the threat of outliving our personal resources
And in a very Micawberish way, we not only factor in the potential for things to go wrong, but the chance of “something turning up”.
This week we discover that we have huge extra energy resources in this country from seems of shale that can be fracked to keep us going a few years more (till we stop needing to burn energy like we do today (we hope). I remember during the 1973 oil crisis being told that 2010 the world would have run out of energy, things have just continued to turn up.
I know very few people who articulate our belief in the future, Hilary Salt is one, I suspect I am another.
Our view of the future is framed not by some random sense that “something will turn up” but by a belief in human endeavour and the capacity of our species through even the darkest of times to generate wealth, security and happiness for us and our offspring.
For us , a guarantee is a door shut on the future. It is the opposite of belief it is the purchase of an insurace against disaster at the expense of the opportunity of success.
But everyone should have the right to buy into certainty and the information available to understand what is being given up, as well as what is being preserved by the guarantee,
I attended a presentation by Jim Cowan who runs the Benefits strategy for RBS yesterday morning, he was talking about the “new paternalism”, the new paternalism looked like the old paternalism, what Debbie Harrison referred to as obligation on the fiduciary.
We have tried for the past thirty years to transfer the risk from collective fiduciaries (Government,employers, financial institutions) to individuals, and to use Jim’s phrase, it hasn’t stuck. The risk reverts to the Government, the employer or the bank/insurer when people do not take the rational decisions to save, or save the wrong way or buy guarantees they cannot afford.
So we don’t really risk share, we just outsource that risk for a while.
The obligation on the fiduciary is to manage the collective endeavours to produce collective outcomes and to allow those who want to opt-out of that enterprise to do so.
Stella’s brilliant idea is truthful. It acknowledges that a collective approach without guarantees has a risk of late or even non-delivery, it allows individuals to work out if they can live with those risks and it gives an alternative solution which clearly demonstrates the cost of shutting the door on the future.
The only way we can test whether she’s right is to put the idea into action. If we can get Government to allow our occupational pension schemes to buy in DC pots in exchange for unguaranteed schemes pensions (and by “occupational schemes” I include the PPF) then we can give people meaningful choice at retirement.
Because for most people with DC pots, there is no real choice, they have to close the door on the future by buying an individual annuity and there is no meaningful alternative.
- Heavyweight support for CDC – the Dutchmen strike back! (henrytapper.com)
- Those Dutch pension cuts in full! (henrytapper.com)
- Those Dutch Pensions – a Civil Servant writes (henrytapper.com)
- Play up Primark! (henrytapper.com)
- A democratic way to improve DC investment. (henrytapper.com)
- Should you turn down a 30pc pension rise? (telegraph.co.uk)