Is CDC too big a bet on world stock markets?

James Sharpe, who runs his own boutique actuarial business, has made an important challenge to those of us who take the optimistic view that we can link our prospective pensions to the performance of world pension markets.

He has presented his argument on twitter and I’m republishing the thread of tweets in which he explains why he thinks CDC will not work.

The question that most people of my age (early sixties) have today is whether to fund our pensions from a bet on equity markets or to bank the growth we’ve had so far and exchange our pots for an annuity.

James Sharpe’s argument is that relying on equity markets to pay your pension is dodgy. It’s worked with the US stock market but not with most other major markets and his conclusion is that CDC (and its variants) will be a failure. I know this view is popular with others who use financial economics as the basis for decision making.

There are readers of this blog who will come back and argue from the top of their ladders of abstraction that James is missing the point and I hope that James Sharpe’s twitter thread will prick the sides of their intent.

But I will remain at the bottom of the ladder and put forward some more mundane arguments

  1. I remain attracted to a world where 10% of my salary buys me a pension of 50% of my salary – I know that that was based on dodgy mortality assumptions, optimistic views of investment growth and a lot of “best endeavours” with no guarantee at all , but…
  2. I object to Roy Ransome and his Equitable Board, being used to justify a post 2000 world where all the optimism was replaced by a ” life insurance model for annuities is a giant call option. The strike price as benefit paid and option premium the capital insurers are required to hold”
  3. Should I not have the option to choose to have my pension paid to me with the risks attending an equity based investment strategy and mortality factors based on those whose mortality pool I find myself in?

I really don’t want to have my pension paid at the expense of my son’s, I would like to share risk with people of my old age, meaning I prefer my pool to be those who have reached the minimum normal retirement age.

And I definitely don’t want my type of pension to exclude those who want a guaranteed pension based on the giant call option, from doing so.

Thanks to James Sharpe for challenging my way of thinking, I can see that my approach to getting my pension paid is dependent on an optimistic view of world markets delivering me the growth I need to fuel my increasing income demands over time. But I don’t see buying  an annuity , even with the improved yields that prevail today, as temperamentally suitable to my entrepreneurial character!

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 Is CDC too big a bet on world stock markets?

  1. John Mather says:

    Would you be pooling risk under the guidance of those who advised
    Invested in LDI ?

    Gearing up to invest in a falling market did the collective
    schemes risk sharing idea no favours

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