Christmas is a time for dreaming, walking in the air and ding donging merrily on high.
So my Christmas day blog describes a dream that could become reality, only if the world turns out a special way.
And maybe it will. I went 5 times to see Olafur Eliasson’s exhibition at the Tate. He talks about the possibility of looking back at this *soon to be gone* decade as the years when we put the brakes on climate changed and the next as the decade we put that train into reverse.
So it could be with pensions. For the first two decades of this millenium, we saw the new dawn of second pillar defined benefit pensions fade from corporate life. Pensions became liabilities , not the hope for the future that we’d built in the late twentieth century.
Now we celebrate 2019 being the year of the insurance buy-out, that net collective pension deficits are only £71bn and that we have 10.5m new savers into DC pensions pots, which may never pay a pension.
My vision for pensions may seem as unrealistic as Olafur’s for climate change but- as Olafur points out in every room of his Tate Modern “In real life” exhibition, “real life” doesn’t have to be the way it was, it can be shaped by our actions.
Which is what I mean by wishing us a “happy Christmas and a happy new year!”
In real life
Yesterday my pension pot for the first time reached a target I had set it in 2000
I have saved hard throughout my life and have not “de-risked”, I am 100% invested in growth assets, my primary investment fund is the LGIM FutureWorld fund that invests for environmental, social and governance “good”.
I have also a very good DB plan, I’m an #OKboomer and I’m proud that I have made the most of my career so I can have a long and happy retirement. Many people – like my son Olly, could do as well as me, if they put their money where my mouth is and saved as hard as me and with my conviction. I am damned proud of myself.
But I am in the top 1% of retirement savers. My savings are real life but they are not (yet) a pension. They become a pension when I buy an annuity or concert to flexi- drawdown or use UFPLS . I doubt that 1% of the population will understand this paragraph and that is why we need a better way to turn our pension pots into a retirement plan
Yesterday I hinted at what is to come…
In yesterday’s blog, I hinted at a way of using the PPF to make my dream of a “future world of later-life content” come true.
Here is some more detail.
At present , the PPF invests , not in real assets , but in various abstractions called derivatives which take positions to take advantage of shifts in the valuation of Government and Corporate debt. Almost half of the £32bn in the PPF is invested in derivative contracts. This gives rise to a question from one of my readers
Henry, is the whole thing not a bit self-fulfilling and self-congratulatory – one leg of government (PPF) relies upon a derivative strategy that benefits another leg of government (HMT), the net effect being to ensure the compression of gilt yields and continued access to cheap borrowings. That’s more than convenient. Then the comparative impact of this endless supply of cheap debt (otherwise known as future taxation), artificially increase the prices of any assets with a yield, and sets unsustainably low hurdle rates, denying the economy access to growth.
My response is “yes”, the PPF is currently restricting rather than creating growth in the economy and for it to move from lifeboat to sovereign wealth fund, it will have to make a change in the way it looks at itself, as fundamental as the way that Olafur Eliasson has changed the way I look at climate change.
What I am dreaming of is a PPF which is strong and confident enough to move beyond the limited ambition it has set itself (to be sufficient by 2030 and move towards a vision of itself as the lifeboat that carrie ordinary savers to a “future world of later life content”.
I dream of a PPF which allows not just distressed DB schemes but distressed DC pension pots to be absorbed. A PPF where people approaching their retirement can exchange their pension pot for a wage for life paid from the public fund , backed by the £6bn reserves the PPF has already built up and funded for the future – as all state pensions are – by our future money.
I do not suppose that these pensions should be guaranteed. As Con Keating points out in another comment on yesterday’s blog
The PPF is already CDC in nature – it can cut benefits
We must get used , in a future world of later life content, that our retirement income is subject to market forces, just as our past income was. I have never relied on my wage for future security in work, for I know my next month’s income could be my last, my next bonus dependent on many matters beyond my control, the existence of my company, now I am back being my own boss, dependent on my health and aptitude.
Living with conditional indexation and the 2% chance of nominal cut in my pension income is not a fearsome prospect to me and i don’t believe the risks of a properly maintained CDC plan, risks that many could not embrace- if the alternatives created equal or greater risks.
The PPF could offer a “transfer-in” CDC scheme to compete against drawdown, cash-out , annuities and commercial CDC and do so as a genuinely public service on a genuinely not-for-profit basis and it could do so within the next five years.
My dream of a future-world of later life contentment
IF you are reading this on Christmas day, happy Christmas, if post Christmas I wish you a a happy year and if in 2020 , I wish you a prosperous new decade.
The PPF is a diamond in a coal mine, that rare thing, a properly run funded pension run by the Government for the people.
I believe it is lacking in ambition and that its success should make it aspire to more, I think it should aspire to solve the issues that people have with their DC pension pots.
I think it suited to morphing into a dc as well as a db lifeboat and of offering people scheme pensions in return for their pension pots.
Who shares my dream?