SeLFIES (Standard-of-Living indexed, Forward-starting, Income-only Securities).

The SeLFIES bond is a single, liquid, low-cost, low-risk instrument, easy-to-understand for even the most financially unsophisticated individual, because it embeds accumulation, decumulation, compounding and inflation-adjustments. SeLFIES is good for governments too, as the bond lowers the risk of individuals retiring poor, improves balance sheet management, and funds infrastructure.

Arun speaking on a more august platform!

Behind Arun Muralidhar’s discussion at yesterday’s Pension PlayPen is a very radical but long-held belief questions the capacity of ordinary people to organise their retirements around a DC pension pot.  PIC , as part of the report on the engagement of its staff, interviewed  a staff member in his forties who spoke for many of us

What Arun is proposing is that instead of investing the money we put by for later life, we could spend it on “SeLFIES” – his pet name for strips of income paid back to us by Government in return for our money today. So , for instance , I could swap £1,000 of my savings for a promise of an income of £10 per month from 2028- when I intend to retire to my 85th birthday (a period of 18 years). Ok, I made the numbers up but Governments have been taking this seriously. You can already do this – thanks to Arun – in Brazil, the Dutch are taking it seriously. In the light of the PIC report , perhaps we should too.

Problems with SeLFIES

There are a lot of reasons not to offer SeLFIES as an alternative to investing.

1. Over time, investments in real assets will almost certainly deliver more pension
2. Arun’s simple system does not insure us against living too long
3. If generally adopted, it would render large parts of the workplace pension regime redundant.

Impact on financial services industry

I will deal with (3) quickly, it is of course “special pleading”. There is a view that financial service companies are now the gatekeepers to what we get, a view that is opposed by common sense and the consumer duty

Anyone who thinks that we provide pensions for the poor , has not worked in financial services.

Longevity a rich person’s problem

A more substantive objection comes from an old spar, who rightly points out that a pension is for life- not till your 85th birthday.

Steve continues that it is for the state to shape the state pension to improve income for low earners

that’s because it doesn’t deal with longevity risk for the buyer! It ideally need reforms to a state pension to make it lower for the first twenty years and much higher after although technically that’s possible using deferral.

I personally have little trust in the Government not to mess around with pensions after I’ve paid the money in (based entirely on experience) so wouldn’t buy it as they are the counterparty I trust least but I can see why some people might.

Arun replies

This bond has probably less risk than other gilts – called pecking order of default. if you understood longevity risk adequately, 1. it addresses the longevity issue for poor and minority populations who have less than economy average LE.

2. without this instrument, no insurance company can give.you  a low cost, flexible real annuity as you should know.

And 3. I designed a bond, LIVE (LONGEVITY-INDEXED VARIABLE EXPIRATION) for cohort-specific actual longevity risk. These are bonds, not pensions and compare favorably to “really bad” annuities on every parameter – complexity, cost, flexibility, small amounts etc.

Your colleagues would be nuts if they didn’t use this instrument to hedge your book. We didn’t design this instrument for the rich elite – we designed it for the masses/the uncovered Uber driver, the people who cut your lawn etc.

I am a fan of pensions of the “wage for life” variety, but i can see that for many people, there is an attraction in a secure income paid by the Government at an acceptable rate which doesn’t insure me against living too long.

The loss of investment performance

Most financial economists will side with John Exley who spoke at last week’s CISI event to suggest that pension schemes should invest in gilts to the exclusion of all else. The counter argument from Con Keating followed shortly after

Where John and Arun would agree, is that it is not for the purchasers of pension to take on market risk, though John is talking about large employers and Arun , the”uncovered Uber driver, the person who cuts your lawn”. We might include people who work at Pension Insurance Corporation or indeed Andy Haldane when, as economist for the Bank of England, he professed “not to have the first idea about pensions“.

People have blind-spots, and managing their own financial risks is one of them. I spend some time with steelworkers who have swapped the certainty of a “paid for them” pension for a market driven income derived from a pension pot. Brave as steelworkers are, I can tell that uncertainty does not make them happy. The “utility” of Arun’s proposals is in the certainty they bring people who don’t want to be their own CIO.

Critical to this is choice. No one should be denied the opportunity to invest in the markets and convert pot to pension as they choose. But there is little choice for people who don’t want to do this and that is where Arun’s proposals have their place.

Can you imagine being a saver into Nest, or People’s or Now or Smart or Cushon and having the chance to buy a strip of retirement income every time you and your boss paid into the workplace pension? Most of us can, and most of us would side with the man from PIC in not having a clue what happened to the money or how it was going to come back.

Arun Muralidhar has sympathy and empathy with us, he recognises the need and his life work is to encourage first debate and then action to give people the choice not to take choice with their retirement income.

Is this right for Government?

The Government needs long-term money (it’s behind Mansion House’s productive finance agenda). But the Government is losing long-term money as defined benefits sell out of gilts and into corporate debt – in readiness for buy-out. Insurers , famously, don’t buy gilts so who will?

If the Government can see a way to replenish its gilts stock through the issuance of Selfies, it might well do so. It’s happened in Brazil, and while we don’t share Brazil’s demographics, we are not so well off not to need the retirement savings of our workers to pay today’s bills.

Thanks Arun

It was generous and kind of Arun Muralidhar to get up in the middle of the night to speak to Pension PlayPen’s coffee morning. He created a profound impression on me and the people I’ve spoken to since.

SeLFIES (Standard-of-Living indexed, Forward-starting, Income-only Securities).

The SeLFIES bond is a single, liquid, low-cost, low-risk instrument, easy-to-understand for even the most financially unsophisticated individual, because it embeds accumulation, decumulation, compounding and inflation-adjustments. SeLFIES is good for governments too, as the bond lowers the risk of individuals retiring poor, improves balance sheet management, and funds infrastructure.