Pension Awareness – includes seeing how your pension can grow.
At Pensions Mutual, I am forever arguing with our team of actuaries that CPO+5 means nothing to the millions of people who’ll be relying on pots and collective pensions for their retirement income.
I argue that you should take the Government’s target of 2% and add 5 or 6% and declare a target that people understand. It could be 7 or 8% return on your money. Of course it is a ” “hope for” not a guarantee. This is not the place to go into how pots turn into a drawdown nor how CDC contributions turn into pensions but either way there has to be some way of estimating what you’ll get!
Thanks to Andy Smith for this examination of how he gets to CPI+5% as his long term “hope for” target!
From the discussions I have with Chris, Sophie, Adam and David (our actuaries) , I don’t get an impression they would argue with Andy’s thinking.
Of course, not being an actuary, CPI +5% means nothing to me but if you tell me the target for the Government is to limited inflation to 2%, I get happy enough with a long-term growth of 5% more than I need to keep pace with the cost of living increases.
Actually, I’d prefer to pretend inflation will be 3% because the Government seldom hits its targets and I still think 5% is achievable, the more for looking at Andy’s charts and following his logic.
We have to project forward when running a CDC scheme because we are offering an income that’s more than just an increase in the value of the pot, it is a pension, a wage for life, deferred pay – call it what you like!
To make that promise (not a guarantee) we need our “best estimates” and in this world we need the certainty of time. The certainty of time comes from taking the long view, the 30 year old view and that can be modelled by actuaries with much greater accuracy of achievement v expectation.
So thanks Andy, I’m a layman talking to an actuary. I get what you are saying and I hope you understand I try to translate your writing into something I can explain to myself and others!
I expect a bit more, indeed a lot more, from actuaries attempting to explain market returns.
Don’t just tell me that UK equities (or a more diversified global mix) have historically delivered CPI+5 or more.
Show me the initial yield from then to now, show me the underlying growth, show me the starting valuation multiples, show me the assumed terminal valuation multiples, and show me what you’re assuming about sterling.
And do the same for debt markets and other investable assets like property while they’re at it.
I understand, Henry, your instinct to want to replace the actuarial language of “CPI + 5” with something ordinary people can understand. Essentially, that your money might grow by about 7–8% in the long run.
But in making a number “accessible”, you and your actuary friends risk making it look easier than it is by ignoring market, inflation and currency fundamentals.
I see CDC as being aimed at those (the majority of the public?) who want to know they are not making a terrible decision joining the scheme, that will be reassured they will not run out of money and, if things go according to planned expectations, they will get a bit more than their minimum needs met in retirement.
I don’t see it being aimed or suitable for those who have high net wealth and are confident they can better the returns themselves or who want to maximise funds for inheritance. Some advisors will consider including R-CDC a useful addition to an annuity/drawdown mixed solution for DC decumulation, others will shun it. But those who have DC of <£100k struggle to find an advisor anyway.
Describing CDC as a “wage for life that is aiming to grow to beat inflation” helps that first group and will be of less interest to the second. To reassure the prospective member that description could be accompanied with illustrations along the lines of “If someone on a typical (median) wage had paid X% matched by an employer in for the past 20 years they’d now retire on a pension of £Y.” and “If a pension had started being paid from the scheme 10/20/50/100 years ago it would only have failed to keep up with inflation W% of the time and would only have been cut V% of the time”.
The communication is key and needs to be designed to answer the questions the typical prospective member has, highlighting the features they are looking for and with clear warnings of the potential downsides, e.g. loss of death benefits.