NI , Selfies, Sidecars – here are some questions on “adequacy”

I have some friends who have worked in Government, in the Treasury and DWP and who understand state first and second pensions better than me.  There are many in the private sector , such as Steve Groves, who are asking the right questions from outside.

But none so succinctly , knowing the inside,  as my friend Mr Andrew Young (who has not been to Arun’s presentations), Here are his questions to Arun over the weekend

Straight questions and here are the straight answers from Arun Muralidhar.

1) how are they priced?

We take the current inflation-linked curve and use a Nelson-Seigel extrapolation for cash flows before and after the curve. In Brazil, the government published the pricing model before the launch and announce the bid-ask price thrice a day so you can

buy-sell.

(2) I assume the proceeds are just part of government borrowing like National Savings  So are not “funded”. No harm in that but not a big deal. 

These funds are like all other DMO proceeds. I wanted the IMF/OECD to monitor the usage, but they are useless. So maybe some academic group/think tank.

(3) there is no longevity cover. Or of course risk to government – so that is fine in a sense. 

Not in this bond as hopefully it allows insurance companies to compete very simply by quoting how much you will get for life cover by turning in your 20-year SeLFIES. If Lloyd’s quotes you £4.75/year and Standard Life £4.80, you know who is more diversified. I also designed a Longevity Indexed Variable Expiration (LIVE) bond for folks who do not want to deal with insurance companies – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3522653

(4) what % of Brazilians have opted in, which sections of society. Are they material?

One issue; they did not want to upset private financial institutions until it was well entrenched. As of May 25, 320,415 had bought voluntarily (many repeat purchases) for an AUM of R$5bn and 150,000+ bought the education bond for AUM of R$1.5 bn. In other words, 10% of Treasury Direct purchases are in these bonds and rising.

Have to start slow as DMOs are super conservative. In UK, between Nest, Self-Employed and regular DC, it could grow in a hurry.

If we are going to have a national debate over adequacy , it must start with those we are not providing enough for and work out how we get them putting away money – rather than just relying on benefits (pension credit). We had the second pension, which was linked to earnings, there has always been a link between incentivising people to save and helping them to work and earn, Here are the answers from Andrew to Arun late one Sunday night!

I couldn’t resist a Quick Look at your answers. Many thanks.

I can see their merits. In the same way as National Savings and indeed gilts have merits.

I am unclear – with the references to mark Fawcett and Nest as to whether they are intended as retail products, as I assumed was the idea, or institutional. Of course can be both.

Whatever it is, I am not so sure that government is keen on having even more guaranteed future cash liabilities on its books – although there is always the counter argument that a bit more easy borrowing has merits!

It seems stupid to ignore the capacity of Nest as a retail brand. Nest is already open to the self-employed and has been 15 years since it opened its doors, the self-employed are even professional partners and look down on Nest (stupidly IMO) or they simply went self-employed to get away from the bureaucracy of the workplace (including the workplace pension).

There are two aspects to adequacy, for the DWP it is a means to move people of dependency on benefits and into self-sufficiency. For the Treasury it is about working out how to incentivise it without creating even more problems for the country’s finances.

Small wonder that Muralidhar has pointed his SeLFIES at the Treasury, they may need to have this kind of solution in place to get savings amongst those who do not save. They may be able to link the savings to products (water, power, travel etc) but bottom line, they will be borrowing more money to solve a problem which is here and is costing the Treasury a lot in pension credit bills.

My hope is that the jigsaw can be put together to produce a picture that makes sense. Arun thinks he has an image that other ideas can group around. He may be right, we need to have new ideas and what I have seen so far from sidecar saving has left me less than impressed.

Push on Arun, this blog will do what it can to give your idea a nudge toward centre stage.