Full three-minute version: https://youtu.be/zv11tpyhGa4
There is a remarkable short video from Gordon Aitken that spells out why DB schemes are fighting a losing game to keep invested in growth assets. For Aitken, the future for growth is in DC pensions; I’ll extend his optimism with CDC (which is even less dependent on de-risking than DC).
A few thoughts of my own which go beyond Aitkens. Time Horizon is important for confidence in investing in equities. If you know that your pension fund is finite in its function and only lasts as long as its current membership (there being no new pensioners.
The problem with DC is the lack of certainty of the Time Horizon for Trustees. They cannot construct a single default pension fund to pay a lifetime inflation linked income, there has to be freedom which may be useful to a few but a useless both for the many. It means that default funds when approaching decision time have to cater for a range of options including purchase of annuity, cashing out or transferring to a SIPP where income drawdown or wealth management can go on independently of defaults.
This if for a few, DC’s attraction – it can be all things to all men but as the saying goes, it makes it master of none of them.
For the investment in long term assets such as domestic equities (private and public) there must be certainty of how long the money is going to stay with the trustees. If that certainty is limited, then growth must be hedged to meet the likelihood of freedom being exercised by members being offered it. So long as individual pots are promoted as a feature of “flex” then the only alternative “fix” of a later life annuity. That means more de-risking in advance of the purchase of the annuity to take out annuity of pricing of the annuity.
DC is driving people for whom all the options that guided retirement and pension freedoms provide , down a road where they are stuck with a less than optimal investment pathway.
Meanwhile CDC offers a much simpler and more efficient way to get a collective pension. It remains invested in equities for ever- or so long as the CDC takes new members on a whole of life basis. We often talk about the importance of freedoms but don’t talk about the cost of freedom which is principally the need to de-risk DC defaults in accumulation and decumulation.
DC is a good step to restoring pensions to equity investment but it only goes so far – it must de-risk. CDC goes a lot further and more profitably for those wanting pension and not freedom.
Here’s the full 3 minute YouTube video from Gordon
The answer is to encourage the re-opening of DB pension schemes.
After all they are the most efficient in terms of value for money for contributions paid in. Even more efficient than CDC because the sponsor’s guarantee replaces the proprietor’s capital.
The employer sponsor has an interest in ensuring the fund is invested productively as that reduces future employment costs and thereby supports the organic growth of the employing company with no loss of assets to an overseas private equity owned financial vehicle.