I am hoping that we can find ideas from abroad that can help us deliver what was discussed in last week’s retail CDC debate, namely a simple product that provides more income and doesn’t run out before we do.
Yesterday, in another excellent session from Pioneering Pensions, Stefan Lundberg introduced us to Bonnie-Jeanne MacDonald from Halifax Nova Scotia who talked to us about how the Canadian authorities have embraced the idea of “dynamic pension pools”.
Her version of what we have variously been calling a decumulation or retail CDC is explained in full here . The social policy issue is pithily summed up below
I had thought we would be hearing more of the Canadian scheme experiment with CDC, which I have discussed on this blog five or six years ago. I asked about them , they are going fine but Bonnie was keen not to be distracted by schemes when the urgent job in hand is to get her compatriots a “made for them product that provides a more affordable lifetime income than an annuity“. Her emphasis was on affordability – as in the UK , Canadians cannot afford to swap their savings for annuity income which is too expensive.
Let me quote more
As Canadians contemplate how to turn their savings
into income, they are trapped between two extreme
and inadequate decumulation options: buy a life
annuity from an insurance company or move their
accumulated savings into a personal retirement
income fund …where they must
individually manage the fund’s investment and
Life annuities have traditionally been very
unpopular and remain so today. Nearly all Canadians
rely on the second option instead, attempting to
finance their income needs throughout retirement
without running out of money.
In her conversation with Stefan, Bonnie-Jeanne also introduced us to a Canadian asset manager which is pioneering the development of such products. I like the idea of asset management as setting out to solve social problems.
We need asset management to drive the UK equivalent of Canada’s $1.5 trillion conversion of pot to pension and as I wrote yesterday, we need to think big, bringing together those taking pots from our big master trusts, sole employer trusts, SIPPs , GPPs and legacy non-workplace schemes to consolidate as much in sterling.
A wage that rises and falls with the market
Her concept is not as ambitious as that of WTW’s approach which aims to smooth the income arising from the product over the lifetime of an average retirement career (till death do us part). Instead , the dynamic pools distribute income in line with the fund’s immediate resource. The principle advantage of this approach is in the pooling of “longevity risk” – of your money running out before you do
DP pools operate on a risk-sharing principle. While
protecting a single individual from outliving their
savings is often prohibitively expensive, the same
protection becomes affordable when spread across a
In a DP pool, any funds left over when a member
dies remain in the pool, so those who die earlier than
average subsidize those who die later. This gives
retirees the freedom of not holding on to savings
to cover the possibility of living beyond their life
expectancy, providing a substantial boost to their
lifetime retirement payments.
In a traditional annuity, longevity pooling is
bundled with prohibitively expensive investment
guarantees; a DP pool offers the former without
the latter. This innovative design allows members
to take advantage of longevity pooling while
also harnessing the equity risk premium—that is,
the additional returns expected to be earned in
exchange for taking on investment risk.
From the member’s perspective, registered savings
are voluntarily directed to a DP pool, which provides
a lifetime pension income that is adjusted each
year in response to actual investment returns and
the pool’s mortality experience. Because they are
“dynamic”, pension payments may fluctuate from
one year to the next—much like systematic RRIF
withdrawals will fluctuate according to the financial
performance of the underlying assets. However,
unlike self-managed RRIF savings, DP pools address
the risk of running out of money in old age.
Her research and pilot experience suggests that people are prepared to accept variable income , though how much variation is a question that we will continue to debate in the UK. In my opinion, there must be some certainty in month by month pay-outs though purists would argue otherwise
But Henry your interpretation is wrong, as a matter of fact, not opinion. #CDC regulations require real target pensions and pensions in payment to go up or down as assets increase or decrease to maintain assets and “liabilities” in balance. It really isn’t that tricky.
— John Ralfe (@JohnRalfe1) November 10, 2022
If the upshot of this debate is that we get a non-smoothed CDC style fund option, then I will consider it a partial win, if we can get to a wage for life solution based on smoothed income I will be happier still. But either way , the question is how we can get sufficient scale into the pools to make them efficient and more importantly , providing a wage for life solution for the silent majority of savers who are under-served by investment pathways and full financial advice.
The NIA’s Dynamic Pool’s report closes with a six-point action plan for the Canadian Government to ensure that this kind of pooling gets universal adoption
We know, through our auto-enrolment experiment that we need to apply one further objective – “the creation of a stronger nudge – a default retirement option”, which can point to one pathway above others – to be taken unless a choice is taken otherwise. In my view, a fund that provides an income for life more affordably than an annuity and more predictably than an investment linked drawdown, is that pathway. It is the pension pathway
As soon as I have the video link to Bonnie’s conversation I will post it, for simple ideas like hers are infectious. The infection has spread to Australia where Q-Super and other of the mighty Superannuation Funds are now offering a version of what she calls “dynamic pooling”.
Those on the call were asking if it might be used in the USA, where 401k and IRAs have the same difficulties.
Canada is showing leadership here, I am pleased to see that we too have thought leaders who are coming to the fore. Stefan is one, Simon Eagle is another. I would remind my readers that Simon is going to be speaking on Tuesday to the Pension PlayPen and the event is free to those who register. Details below.