One of the joys of Michael Johnson’s 40 or so papers on pensions is that you never know what to expect next. Johnson deliberately sets himself apart from the industry to rail at it. He is at his best when dissenting and when he is buried, I hope he finds his way to Bunhill Fields burial ground to lie alongside other those other non-conformists Blake , Defoe and Bunyan!
But i come to praise Johnson, not to bury him; I wish him a long and happy life and I hope he will produce many more papers like the wonderful “Auto-Protection, auto-drawdown at 55, auto-annuitisation at 80”.
There is of course nothing new in thisconcept, it was pioneered by David Hutchins in developing the Alliance Bernstein Retirement Bridge product that sits within many of the master-trusts we use for workplace pensions. It is the solution put forward by NEST to provide its pensioners with a way to spend their savings and it’s the idea that the Cooper report puts forward to save Australians from destitution once they’ve blown their “super”.
As Johnson points out, the idea tips its hat to the paternalists on the left and to the freedom-seekers on the right and it requires little intervention from Government, for we are already there! This might sound like me criticising Johnson for stating the bleeding obvious but the paper accords to Pope’s definition of wit
“true wit is nature to best advantage dressed, what oft was thought but ne’er so well expressed”
Weirdly Johnson is proving a “pension conformist”.
Try as he might, Johnson cannot break away from the pension conventions that have grown up in Britain since the canny Scots initiated provident schemes in the 18th century.
Johnson concludes that from 55, we are on our own, illustrating this with an amusing graphic (well I laughed).
Johnson quotes Warren Buffet’s self-help solution for cliff-jumpers, to invest savings 90% in the S&P500 and 10% in cash and drawdown from cash only in times of equity crisis. This seems utterly reasonable so long as you have a reasonable knowledge of financial markets (as Buffet’s followers seem to have).
But Johnson recognises that people will not choose Buffet’s solution, so he suggests that it is chosen for them (with the substitution of DGFs for the S&P500 and a new cliff-edge at 80 where real assets are swapped for gilts and investment returns swapped for a guaranteed annuity).
The Johnson solution is straight out of the insurance company handbook and is hopeless, but that is the charm of Johnson, he never lets detail get in the way of a good theory and a market solution is an easy short-cut.
How pensions are paid (is not like this)
A very great amount of money is paid out as pensions in the UK. Johnson has not yet made the leap to understanding what it is to be a pensioner, but in financial terms, it is the reliance on a regular stream of payments to meet outgoings. Evidence that Johnson isn’t quite there yet can be found in his paper. He argues that a percentage of the pension pot should be earmarked for drawdown each year and perhaps paid monthly from 55.
Although Johnson hopes that the auto-drawdown process would be moved back to 60 asap, he is still arguing for a tipping point at least 7 and currently 12 years below my SRA and I am 55. Were I to draw any income from my DC pot right now, I would reduce my money purchase annual allowance to well under half my current annual contribution to savings.
This may appear a trivial point in the overall scheme of things, but it reflects a failure on Johnson’s part to engage with the psychology of the thin. Once you start drawing on your retirement savings, you move from save to spend, and for most of us, that financial watershed needs to be at least a decade if not two decades later than our 55th birthday.
What’s more, when we start drawing on our savings, we want a replacement income to what we’ve received when at work- and we’re paid monthly or weekly. Annual withdrawals have no meaning to the average worker, the afterthought that these might be paid monthly is the thinking of a man who has been living from capital for some time.
Johnson is still struggling with collective pensions (but getting there)
One of the bizarre assertions in the body of the paper is the assumption that the individual guaranteed lifetime annuity is what people talk are describing when asked what they want from their DC pot.
Johnson quotes research from Aon and others which confirms that 70% of us when asked what we want at retirement say an “inflation-protected secure income till death”. But this does not describe an annuity, at least not one bought in the UK recently. Only a tiny proportion of annuities bought in the UK over the past 15 years have been inflation protected. What people are asking for is what they get from occupational defined benefit schemes and the state pension.
Johnson actually states that
“lifetime annuities , in particular, possess a unique advantage; as insurance against longevity, they have no competition”
this is of course bunkum, as every state or DB pensioner knows, Johnson doesn’t know what it is to be a pensioner, his thinking is solipsistic and born out of his auto didacticism.
Never the less, there are germs of understanding of how a collective solution to the problems of longevity, at least in the recognition that it might be cheaper to buy-out cohorts of 80 year olds using a bulk-annuity.
Johnson is getting there.
Nearly there Michael.
The auto-didact is the person who considers himself an expert through his own study. Johnson gets to his conclusions on his own, he will not be taught.
The joy of reading his papers is seeing him struggle to the bottom of the ladder and watching others willing him to step up and join them.
At the top of the ladder which Johnson is now climbing are eminent thinkers such as the 70% of the population who have already worked out what they want.
Now Johnson just has to join them!
Michael Johnson’s paper on auto-protection can be found here; http://www.cps.org.uk/files/reports/original/170322132755-Autoprotection.pdf