The OECD have produced another tombstone on pension policy around the world. Thanks to my friend David Harris for dropping it on my toe this Christmas. You can read the content online here or download it as a PDF for $36, but you may want to read this first before you do – my story starts at page 161 which tells us
A new gospel?
The first thing that strikes me about this is a consideration of what has happened to move this subject so far up the OECD’s agenda. Suddenly this subject is getting attention after years languishing in the Apocrypha of pension thinking. Do we have a new gospel?
Trouble with names
Clearly the OECD would like to find a new name for a wage in retirement but a “non-guaranteed lifetime retirement income” is about as snappy as a jellyfish.
Wages normally go up, sometimes come down and generally grow faster than inflation (AEI beats CPI). But none of this is guaranteed – guarantees are reserved for death, taxes and annuities
The complex has yet to be made simple
If the OECD can agree what these thing’s aren’t, they have more trouble pinning down what they are.
But in truth, there are only two models in the showroom
There follows 30 pages of text ,much of which is academic . But there is enough in it for gems of concise comparison to shed light on the differences between what we’ve been calling scheme based and retail CDC
The funding ratio approach is “scheme based” as it’s based on DB without the guarantees, while the profit source approach is “pot based” as it’s based on DC with smoothing.
Though each model comes with a number of options
For all the noise, it really isn’t very much more complicated than that. If you are working for a large employer who wants to run a CDC scheme you will find yourself with one method of doing things and if you want to convert your pot to a wage in retirement , you will find yourself getting a pension based on your and others investment and longevity experience.
I will – over the Christmas period – read all of this section of report and give it the attention it deserves. The OECD’s Pension Outlook series intends to give us a framework for thinking about pensions much as our PPI does. I suspect that this chapter is as close as we have yet got to a helicopter view of how the world is responding to the idea of pensions without guarantees.
It is now up to individual “jurisdictions” to pick their poison – as my friend Steve Groves would put it.
