Is there an argument for the State to issue a new kind of pension bond to compete with annuities
Arun Muralidhar believes there is and he has evidence that such bonds are popular, in Brazil.
This blog asks whether now is the time to consider the creation and use of such bonds.
If you want to read about “SeLFIES” , I have a blog given over to how they work
But in summary they are a way for people to pre-fund a retirement income by buying bonds that release an income later in life. You are giving the Government your money for the time being and they’ll give you it back as you need it later in life.
The problem with such a Government bond is that is singularly lacking in popular appeal.
Given a choice, most wealthy people would rather have an investment driven product with inflation protection delivered through exposure to real assets than a Retirement Security Bond secured by the Government.
While most people who are not wealthy are keener to have cash than income as their source of security.
So this looks like a product that would require Government intervention and a Government that wants more pension investment to go to it, rather than the private sector.
I’m not sure the Government wants that either!
Relentless enthusiasm gets you everywhere!
Credit to Arun, he is persistent. His idea pops up all over social media and I seem to have become his maven.
This post by Ros Altmann contains an interesting discussion with Steve Groves (both of this parish) on entitlements to the state pension and focusses on intergenerational fairness.
I am a little embarrassed to be referenced in the conversation as a supporter of these SeLFIES as I am not clear I am!
If I had a way to turn back time, I would have supported the use of SERPS as a means of providing a state funded second pension to those who do not have a private retirement income. I would have supported a carer’s pension based on the notional income carers should have got for taking work from the health service and social security.
I have a great deal of sympathy for friends like Andy Young and Bryn Davies whose life has been devoted to the prevention of poverty in retirement through the establishment and maintenance of PAYG tax- payer funded pensions.
And I support the purchasing of gilts to ensure retirement income to those in funded pension schemes. This despite the appalling consequences arising from herding into leveraged gilt purchasing through LDI. I remain a fan of the gilt.
But I stop short of endorsing the use of what are akin to deferred annuity bonds in Nest and other workplace pensions. We are engaged in re-creating a second pillar pension that is independent of the state. We are trying to break away from gilt-dependency.
What I see as needed is the capacity within these schemes to absorb pension savings – either through payroll contributions or transfer of other pots, to provide the service described
- Steady income
Safety (I can’t lose it all)
Lifetime income (assurance of having income for life)
Control and access (to my money)
Reversibility (not locked into a product)
A high investment return
The product that the DCIIA is describing is either whole of life or decumulation – only CDC. That product is currently requiring investment management and this may include the purchase of SeLFIES, but we must establish the infrastructure first.
I think the SELFIES are a great idea.
Your assumptions are sound but are being trumped by current regulatory overreach.
In particular when you say :
“We are engaged in re-creating a second pillar pension that is independent of the state. We are trying to break away from gilt-dependency.”
The opposite is correct.
If you piece together the impact of TPR regulatory over-reach aligned with Insurer bias in the regulatory design, this forces schemes down a one-size fits all ‘investment’ and funding approach, which -through the backdoor – results in a very significant dependency on gilts either through acceptable ‘fast-track’ self sufficiency (ie funding to insurer level with insurer type assets) or to buy-in / buy-out. The reason for this is the Regulatory / Insurer perspective that only insurers are smart enough to manage and pay pensions. This is backdoor SERPS but without the proper oversight.
If the Regulatory model in effect makes gilt-buyers of us all, surely it would be better if we could do that directly, and eliminate the (buy-in) handler’s not insignificant margin?
Jnamdoc, re- reducing gilt-dependency. I agree with you that DB schemes are still in thrall to gilts, but not so DC which will be increasingly gilt-less over time as we move away from liability matching and more towards a collective approach to pensions which does not assume closure, end-games and de-risking are the objectives.
Henry, we need to welcome Arun’s concept because the principal aim of DC arrangements should be the creation of future income to pay pensions, not the accumulation of a pot of money that makes that objective unnecessarily challenging. Then, we can discuss to what extent those income streams are provided by investment in equities or bonds. Also, it might get the Treasury/DMO to engage with the idea of issuing plain annuity gilts never mind deferred ones!