DB and DC are not the same. We have destroyed the corporate DB sector by applying the wrong rules , we are now applying the strategies that ruined DB to our DC workplace pensions. We must stop insuring and start investing.
Our correspondent “Jnamdoc” commented on yesterday’s blog on DB
We ignored a key finding of the Myner’s review that actuaries were not well placed to give investment advice – the solution foisted upon us by the “industry” (through cosy chats and backdoor lobbying) was to eliminate investing. Instead we stood back and allowed them to dream up the LDI model which requires no actual investment expertise. Govt accepted this, and became complicit, as the model funnelled funds to the Treasury at a time and at prices no sensible investor would buy them (ref the “idiot premium” previously referenced in this blog).
We are now in an even more ridiculous situation, as a Nation, of rushing to the cliff to hand over well funded schemes to a handful of institutions, with a huge chunk of profit in-built, and who will on large invest in a pile of low aspiration gilts.
Those institutions are oc course insurance companies who are in the process of eating the corporate DB pie, spitting out schemes that don’t meet their profitability criteria and absorbing surpluses for the benefit of shareholders and not the members or sponsors to whom surplus assets rightly belong.
The DC problem is different but gets the same treatment.
With DC pensions , you get your employer’s money paid to your provider through payroll and you get a good scheme chosen by your employer to build up your investment. That’s it.
But the measure of “good” is determined by the same people who organised the DB schemes which are now being pensioned off to the insurers. The pension actuaries giveth and the insurance actuaries taketh away.
You may think that your DC pension scheme is an investment plan but it isn’t. It is most often a replica of the DB strategy of matching assets to liabilities. Take this strategy which exists in most plans where BlackRock are managing the investment default.
Forget the token allocations to property and commodities, this is basically a 60/40 fund which morphs into a 40/60 fund over 30 years of a saver’s life. It makes assumptions which are driven by an actuarial view of what people do.
- People have a target retirement date,
- People become more risk averse the closer they get to retirement
- People will fund bonds less risky than cash and
- People will take tax-free cash from a 40/60 equity bond fund to match their tax-free cash.
If you look at this explanation of how your default is managed, there is nothing here that talks about growing your pot, everything here is couched in terms of “needs”. The “investor” needs less risk from their mid thirties and by the time he/she gets to their target retirement date , they need a fund that will, for the next 25-30 years be sufficiently disinvested from growth assets to meet the needs of later life.
This is the thinking, not of investors, but of actuaries who think they know what people need.
Actually, when I reach my target retirement date (and I have no idea when that is) , I will want to draw an income from my pot that is sustainable, that will last as long as I do. That’s what most people want to do, and the latest projections I can get based on “me” is that I have 24 years to live but I could live between one day and more than 40 years.
If I die tomorrow, what the market does today is of no interest. If I live 40 years, I will rue my conservatism if I’ve spent the last 40 years invested mostly in bonds. At 60, I am 60/40 – I am not in de-risking mode.
There is no evidence anywhere that over a 40-50 year timeframe , investing in corporate bonds and gilts provides the investor with more money than in equities. Yet we start investing our saver’s money into bonds and disinvesting from equities in their mid 30’s.
That is the mistake we made with DB pensions repeating itself. We must disinvest from actuarial thinking – which is based on buying out liabilities through insurance, and start reinvest in DC thinking, where our aim is to make our money last as long as we do.
The reality is it is the pot size that determines when
Retirement can be funded at the chosen expenditure rate
The sooner the individual understands this the better
Illustrations projecting growth only and ignoring inflation
hide the reality and mis-sell fooling the willing victim that they can
provide at trivial cost
Henry you say you lost 12% of your fund recently how does it feel
to defer taking benefits for three years to compensate?
If we are to have growths we should start a consultation on what replaces non Dom regime now otherwise political dogma will stop inbound capital investment under a Labour policy.
An individual minimum tax to mirror the one third of the Finance Bil on company tax