QE cooked the 4% rule and LCP explain why.

Dan Mikulskis and Phil Boyle have produced an epic as one of LCP’s “on point” papers.

The 4% rule is one of the few rules of thumb that we are left to cling on to when facing what Bill Sharpe called “the nastiest hardest problem in finance”. It says that you can draw down 4% of your pension pot and derive an inflation proofed income that lasts as long as you do. Well it did when William Bengen devised it back in 1994 and for the next 16 years it held good.

But, according to Mikulskis and Boyle’s analysis, things went a little wrong, primarily because the safe haven assets (gilts) employed by investors and advisors to secure income, now yield -2% against inflation. There is also the little matter of costs and the paper assumes that a typical investor will be paying 2% pa to have their wealth pot managed. This is a little optimistic. SJP, in its market analysis , included in its 2020 Value Assessment, could boast that they were competitive at 2.4% pa.

I intend to write again on this paper over the weekend when there will be time to do it justice.

The paper’s main finding is that sticking to a 4% rule is three times more likely to lead to failure (ie running out of money) than in the market conditions of a decade ago

apologies for rogue blue lines

What is most interesting is that the paper argues that portfolios heavily weighted to gilts and other low-risk investments may need to be re-risked and take on board growth assets. Try telling that to the Pension Regulator lads!

The report also has a number of recommendations:

  • Investment strategies, drawdown portfolios and spending rules need to be reviewed, as the world has changed dramatically in the last decade
  • Wealth managers and the financial services industry should review whether fee levels have adjusted sufficiently to reflect the new environment of low interest rates and low inflation;
  • Government and regulators should support and incentivise those who are willing and able to work beyond traditional retirement ages to make their retirement pot more sustainable

To which I would add that for most people , the chances of getting work beyond 60 are diminishing fast, the capacity to hire a wealth manager is slim and the chances of affording their services slimmer still. For those in an income bracket or with independent wealth sufficient to afford the care and attention that the report brings to the subject, this report is a must read. However for the vast majority of the UK population , it reinforces what most people think about pensions – they are just too hard.

Why is there no pension aisle in the Money Super Market? Why don’t you hear Martin Lewis opining on the 4% rule, it’s because this stuff is just too hard!

Let’s face it – if people want to follow the investment pathways called drawdown, they had better be appraised of the risk. This report should be abridged and distributed to everyone who gets a Pension Wise interview


My recommendation to Dan and Phil (both of whom are top actuaries) is “don’t give up on CDC”.

If you want people’s drawdown managed at workplace pension rates (0.5% pa) then don’t give up on CDC.

If you want professional management of your assets within that kind of cost , don’t give up on CDC.

If you want to ensure that money lasts as long as you do, don’t give up on CDC!


It’s catchy, if I was running a record label, I’d be adapting that old Jackson Five ABC song!

Because drawdown as a mass market product looks cooked.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to QE cooked the 4% rule and LCP explain why.

  1. Pingback: Pensions as usual; day 2 without contingent charging – pensions as usual | AgeWage: Making your money work as hard as you do

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