This is a really excellent discussion between Steffan Lundberg and Moshe Milevsky. Moshe literally wrote the book on what the Americans call “modern tontines” and what Royal Mail calls a wage for life (an AgeWage). It’s called “How to Build a Modern Tontine” .
Moshe the man
Although not many/enough people follow Moshe on Twitter, his feed kicks off with a tweet which explains the man and his humor.
Conversation over today’s coffee. WIFE: “Bitcoin is at $13K. I told you we should buy!” ME “It’s a tulip bubble” WIFE: “That’s what you said at $2K” ME: “Well, even bigger bubble now” WIFE “I can’t believe anybody actually pays you to talk about money…”
— Moshe Arye Milevsky (@RetirementQuant) December 7, 2017
Reading through the feed is a delight and I look forward to spending actual time listening to, reading and hopefully corresponding with a great spirit. Thanks Steffan for introducing this man’s work.
He is not just an educator but a learner, having recently studied history at the University of Edinburgh.
Moshe , pensions and finance
The discussion starts with the idea of human capital as a bond. This refers to the idea that the vast majority of your value on your personal balance sheet when you are young is your capacity to earn in the future.
Moshe wrote a book called “are you a stock or a bond”, which refined the idea that our human capital is predictable and safe like a bond but could be entrepreneurial and our future earnings unstable like equities. The idea is that people take risks with their human capital should invest safely and vice versa.
By the time you get to the end of your life your human capital has converted into financial capital. You protect your human capital with life insurance and the like and you protect your financial capital with pensions (and the like).
Moshe now becomes very interesting around “de-risking” arguing that the pensions industry is too paternalistic, demanding that people fit into a model where , as they get older, they default into an annuity fund.
The lifecycle model with “full annuitisation” appears to be a bastard offspring of the original conception of lifestyle where the insured annuity hi-jacked the tontine approach where funds remain invested and pooled mortality without end. This of course involves the idea of people coming together – either in a scheme (See below) or a fund (the tontine idea).
This is an important insight because it has its parallel in the way pensions are moving in DB-land.
And this discussion about avoiding de-risking – which allows for growth assets backing income payments (DB/DC and CDC) is challenged in the interview (minute 24) by an intervention from Arun Muralidhar who asks how you can price annuities without having a risk-free hedge to measure the true cost.
I know this is academic speaking to academic, but Moshe replies by explaining the natural hedge which is “the law of big numbers”. This idea is to get a large group of people together and work out what happens. We have of course been doing this for 100 years or so and we now have a good idea of what can be achieved by way of an investment return (what Con Keating calls the CAR – the contractual accrual rate) and a good idea of how many people join the pool (as they become spenders rather than savers) and how many people leave the pool (when they die).
All of which is relevant as I’m about to have an argument/conversation with Arun at Tuesday’s Pension PlayPen coffee morning and will try to argue the Moshe position while accepting that there are a great number of people who are wanting zero risk with their retirement savings (and want Arun’s idea – the SeLFIE) – more of this elsewhere on this blog.
Space for Arun and Moshe
Moshe probably considers himself a “stock” and Arun considers himself a “bond” and we have to accept the happiness of stock people includes taking risks that make bond people sad. The utility works the other way round , Arun is very happy buying bonds into the future that pay him a guaranteed income at minimal risk while Moshe would find putting his money into a SeLFIE like being a tiger locked in a cage.
Arun and Moshe are fundamentally different and the glory of Steffan’s podcasts is that he gives space for both, which is what I hope we will find comes out of Tuesday’s coffee morning.
Whether we end up with a pension system that defaults to annuities (as appears to be happening to UK DB plans) or to tontines (as may be happening to DC schemes) is one of the big questions we need to answer over the next 10 years. The deep pockets of UK companies have enabled us to get a DB pension system that can afford to meet its promises by exchanging assets and liabilities for insured annuities though many would argue that that cost has been met by a lack of investment in production. DC savers may not have the deep pockets to exchange their savings for annuities and may demand higher returns with more risk through tontines ( or whatever they end up being called – let’s say CDC for now).
The glory of Moshe’s discussion with Steffan is it lays out this fundamental difference in approach. Hopefully in following this blog, you’ll be enthused to listen to the conversation at the top and to come to the Pension PlayPen event with Arun, next Tuesday at 10.30am.
I hope that Mr Equity and Mr Bond can be friends, as Moshe Milevsky and Arun Muralidhar are both my kind of guys.
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