The fight for fungible pensions continues!

“The tragedy of British pension arrangements is that the attempt to force safety on private arrangements is forcing them into collapse. Worse, it has allowed the older generation of pensioners to extract all the risk-bearing capacity of private sponsors for their benefit, so moving the younger generation into permanent insecurity. This is a scandal.”

Martin Wolf, writing in the FT, sheds light on the intergenerational carve up which has left the young with the bones and pensioners with the meat.

The use of the language of “intergenerational transfers” is no doubt aimed at those who argue against re-opening collective models.

Woolf’s article

Equities are the only sensible foundation for private pensions

is only available to those with an FT subscription, but for early-bird readers of this blog, I am happy to share gift-links giving you access to his analysis.

 “A free lunch, but you must be prepared to wait for your meal”

The core argument that Wolf employs is that the  volatility in equity pricing creates an opportunity . The opportunity is for an investor with a sufficiently long time horizon to make extraordinary returns. In a well-ordered world, multi-generation pension funds ought to be such investors.

The danger is that such funds (and still more so individuals investing on their own) will exhaust their room for manoeuvre before their investments pay off.

Whatever your reservations about the communication of a CDC arrangement, the fundamental advantage it has over individual DC is that it has an infinitely extendable sweet spot where risk can and should be spread. That “spread” can be across a cohort of savers or between cohorts, but the key is that collective pensions are fungible.

I’m both pleased and sorry to re-read a blog I published 7 years ago which made exactly this point about CDC.

If I put £1000 pounds into a collective DC scheme, there is £1000 pounds of pension benefits in the system which I can have back but which in the meantime can be used to pay others income in retirement. That money-converted into benefit is fungible

If I put £1000 into annuity, that annuity is mine and no-one else’s, it is not exchangeable and I can’t have my money back, no one else gets the benefit if I give it up- an annuity is non fungible.

When you lose the fungibility of pensions , you lose pension investment’s unique power.  John Ralfe may call this a shameful con but what has he to offer the young?


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , . Bookmark the permalink.

Leave a Reply