My blog yesterday, praising Willis Towers Watson for having the courage of its convictions has received considerable attention, with comment generally being unfavorable , ranging from the politely skeptical
Interesting stuff, Henry. The fact that you are happy with downside risk is key. I might also accept this for part of my retirement provision.
As well as the median outcome have you seen a distribution of other outcomes eg “in 5% of scenarios you’d be 40% or more worse off?”
— Mike Harrison (@HigherEdActuary) November 21, 2020
Through frustrated disbelief
I do not think the modeling matters. The fundamental problem with CDC is that expectations are raised and two different groups/generations think they own any excess investment return but do not own any shortfall -likely outcome dispute -“Reinventing Equitable Life”
— PMG_Barnham (@pmg_Barnham) November 21, 2020
To outright hostility
Yes he is a “pension scammer”. None of his calculations are risk adjusted- so, guess what, if you invest in higher risk assets, the expected return is higher. It is just #cdc snake oil. @HigherEdActuary @pickfos @glesgabrighton
— John Ralfe (@JohnRalfe1) November 21, 2020
Collective DC works because individual DC doesn’t.
So what is the bar that CDC has to beat – what have been the outcomes of DC over the past 20 years? The question has been posed by Andrew Young @glesgabrighton.
I’m happily in a position to provide answers to that question with over 1m data points as evidence. But rather than swamp this blog with data, let me show you evidence from two anonymised data sets, representing rates of return achieved by savers going back to the start of the millennium.
Here is an example of an excellently managed group of workplace pensions that have delivered substantial excess value over the average returns for nearly 32,000 contributions.
The average return achieved by this group of savers was just over 6% against a benchmark (representing the return invested in the Morningstar UK Pension Index) of 3.29%. This data set represented contributions from 2004 to the present date and shows what very good DC schemes can do (this one was rated close to top decile with a score of 87 out of 100)
By comparison , here is another data set of just over 11,000 DC savers with contributions going back to 1997.
In this case, the average return (including the glory years of the late 1990s) was nearly 6% pa per year, but this scheme barely achieved half that. For this group of savers, the average achieved return was just over 3%.
I have many other data sets I could point to but the picture will be the same, returns on DC savings are typically in a band of between 3% and 6% after all deductions.
The bar is not a high one for CDC to beat.
How to beat the bar.
This chart shows what is being taken out of a DC pot in charges by a variety of providers and shows that the investment return of 5% would at best have left an internal rate of return (IRR) of 3.3% and at worst 1.2% pa. The SJP return (which would have compared favorably) would have been 2.6%.
I suspect that most people are still thinking of getting a rate of return on their contributions to DC of 8% or so, but the reality is nothing like that. The grim reality of DC is that it delivers miserable returns after charges and that is because even if you deduct 1% pa from the return on a typical balanced fund since 2000, you are unlikely to get more than 3% on your money.
The best way to beat the bar is to pool resources, keep admin costs to a minimum, invest professionally with minimum transaction costs and only take from the fund what is needed to sustain the product. This is in essence how a CDC scheme adds value in the accumulation phase over individual DC plans.
For a full analysis of how CDC creates efficiencies over DB, I suggest that you go to this WTW landing page , download and read the two reports that WTW have put in the public domain. The landing page is here
The main gains on DB are created by not having to build in what is typically a 15% prudence margin in assumptions on distributions and to enjoy exposure to growth assets on a much higher proportion of the fund. This is mistakenly considered taking on greater risk. It is no such thing, it is taking advantage of the risk premium that can be enjoyed by open pension schemes that are not guaranteeing pay-outs.
CDC has structural advantages in terms of outcomes over both DB and DC and this is the basis of Simon Eagle’s claim that CDC will give you 57% more than the guaranteed income of an annuity or the safe drawdown rate.
No doubt this will enrage the bearded one and his acolytes but the attractions of CDC are clear and should be shouted about. Well done Simon Eagle for shouting about them.
Postscript – a word about modelling
Actuaries like modelling and a number of CDC modelling exercises have been carried out. Here is the work of Aon published in 2015 which is in the public domain.
More recently, WTW have provided us with the results of their 2020 modelling
Collective Defined Contribution pensions would on average be 70% higher than traditional DC and 40% higher than typical DB,’ Willis Towers Watson
The reality is that both DC and DB pension schemes are poor at distributing wages in retirement in terms of value for the money spent on them. CDC is not some wonder kid, it is simply doing the job that DB and DC pensions aren’t. The bar isn’t set that high.