We have fine voices among our fine mature thinkers; among them Derek Scott. Here are comments he has made on this blog; prompted by Andrew Young who he grew with over 60 years ago. The comments are about state and private sector paid us in retirement.
They have both influenced my thinking which neither as fine or mature is nonetheless increasingly “collectivist”
Of old
The fear in the 1960s and 1970s, I think, was not that occupational schemes would literally shrink overnight if the state created a funded earnings-related pension. Rather, policymakers and employers worried that a large national funded scheme would compete with, displace, and eventually replace employer provision.
The argument went something like this:
Many larger employers had already built substantial occupational pension schemes. If employees and employers were required to contribute to a new national funded scheme, there would be less money available for existing occupational pensions.
Over time, employers might decide that the state scheme was “good enough” and reduce or abandon their other provision.
A larger and larger state investment fund would concentrate economic and political power in government hands, something that many business groups and some politicians disliked.
So the concern was about long-term crowding out, not the immediate destruction of private sector occupational pensions.
What actually happened under SERPS was rather different.
Because SERPS was designed with a contracting out option, many occupational schemes expanded their responsibilities instead of shrinking. Employers that contracted out had to provide additional benefits at least equivalent to those forgone under SERPS.
In effect,
SERPS established a benchmark level of earnings-related pension.
Occupational schemes could substitute for that benchmark.
Employers and employees received National Insurance rebates in exchange for occupational schemes absorbing responsibility for SERPS-equivalent benefits.
In that sense, SERPS arguably strengthened occupational pensions, especially defined-benefit schemes, because it effectively made them part of the state’s pension architecture.
Large occupational schemes became larger and more comprehensive.
The irony is that this apparent victory for occupational pensions came at a price. Once many occupational schemes were standing in for part of the state pension, government inevitably became much more interested in tinkering and interfering in their design:
- preservation rights for early leavers;
- guaranteed minimum pensions;
- revaluation and indexation rules;
- survivor benefits;
- actuarial certification;
- reductions in NI rebates
Reductions in debates meant that contracting out changed from being marginally profitable by additional investment of rebates, to being “loss-making” because rebates were no longer cost/value-neutral, and then rebates were eventually removed altogether.
So the occupational pensions sector was not undermined in terms of scale; contracting out often made schemes bigger and potentially more effective.
But it was undermined in a different sense: employer pension schemes ceased to be entirely voluntary and discretionary arrangements, and became quasi-public institutions carrying statutory obligations which became more and more onerous through repeated government and regulatory interference.
So in the last 80 years has there ever been a structure that implements a viable pension policy?
Contribution (DC) scheme, you carry that risk alone. CDC schemes attempt a middle ground by pooling the risk among the members themselves.
This creates a specific cross-subsidization:
The Mechanism: In a CDC scheme, members pool their money into a single collective fund. Instead of buying an individual annuity, retirement income is paid out from this collective pot based on average life expectancies.
The Risk Shift: If a member dies early into retirement, their remaining share of the collective pot does not go to their estate or heirs. Instead, it remains in the pool to fund the payouts of those who outlive the averages.
The Reality: The structural risk is effectively moved onto those who die young. Their under-consumed wealth is absorbed by the collective pool to subsidize the long-term income of members with greater longevity. If all goes well.
If those managers offering a pension screw up do those members who live long face the risk of a reduced income in retirement?
By how much have Post Office pensions in payment increased over a bull market?
I could chose to select my DC investments to match those of a CDC scheme’s asset allocation and if I did that at the same cost, I could enjoy the same benefit. I might even set the allocation for a little more growth and beat the CDC income.
But, and here’s the rub, I don’t know how long I will live.
I might feel under confident about choosing my investments but not want (or afford) professional help. I might well then be more cautious, trying to ensure the funds are there when needed just in case I live an extremely long time, being worried about withdrawals being unluckily timed and balancing that with enjoying life whilst I can. My DC would then likely under perform CDC, whether I chose to try to go it alone or bought the guarantee and annuity provides.
I hope to make it to a ripe old age with my faculties reasonably intact. Genetics, family history, demographic factors, and my efforts to control my diet and fitness give me some cause for optimism, but the number 20 bus might wipe that aspiration out tomorrow. If you want to make God laugh tell her your plans.
Someone wealthier might be more concerned about preserving wealth for the next generation, be happy to pay the fees of an adviser or take great interest in the investments, and best meet their goals with DC. Someone poorer would perhaps be more concerned about having absolute guarantees needing to know that their basic needs are definitely covered. Like many people, I’m in the middle.
I’d like to leave something to my kids, and I have some other resources and secure income already, so CDC could potentially give me the opportunity to use some of my pension funds to ensure I would never run out of money whilst having a better income than DC would provide.
This time it’s different…really.
However, there are new features emerging.
Imagine a very large IPO with few shares available which obtains two concessions: a NASDAQ listing without the customary waiting period and founders with no standstill agreement or waiting period. so they would have been able to sell at the IPO or soon after.
Would index funds have to buy at any price as a result of these concessions? Of course, after a period of frenzied buying, the market would “correct”.
If you can’t identify who has the risk, then it is likely to be you.
I feel very lucky to have retired