Richard Hancock
70 comments By Richard Hancock
"We are on the cusp of answering the central question of pension design – how to ensure that as many people as possible are able to save for a reliable income for life in retirement through pension plans which are structured, run and invested on their behalf in a cost-effective fashion."
I disagree as to what is the central question. There is far too little focus on pensioners' outgoings in retirement and too much focus on their income. If they had more flexible outgoings, they could tolerate more flexible incomes. So I would focus on ensuring as many people as possible do not have to rent their accommodation in retirement. That means we need much more affordable housing, so that most people can buy their own home and pay off the mortgage before they retire.A surplus is a thing of beauty, but beauty often doesn't last: falling asset values and/or falling discount rates may turn a surplus into a deficit. I'd be exceptionally wary of taking advice that was predicated on the endurance of surpluses. It's also worth considering one other con: if pensions schemes don't transfer assets to insurance companies (via buyouts or buy-ins), those insurance companies will not be able to make investments that might also benefit the economy. Tread with extreme caution.
"Atradius UK Pension Scheme has concluded a £190m buy-in deal with PIC securing benefits for 361 current pensioners and dependents, 344 deferred members and 66 active members."
I did wonder how they could possibly have secured benefits for active members, given those members are by definition still accruing benefits, but the PIC website makes it absolutely clear: "The transaction secures the pensions of both deferred and pensioner members of the Scheme, along with benefits accrued to date for current active members.""Following this argument through, the end of ultra-low interest rates should lead to a shift away from debt corporate financing to equity, according to Goodhart and Pradhan."
Does that imply "compression" of the equity risk premium?
More generally, how are Japan coping? Perhaps we could apply robotics, rather than simply plump for more migration of human beings?Thanks for clarifying that "the trustees are preparing the scheme for buyout". My immediate thought on reading that "Telereal Pension Plan has completed a [...] full scheme buy-in" was: why did they not go for a buyout? I assume there are all sorts of legal steps that need to be taken before a buyout can take place. It would be interesting if this could be explored in more detail in a future article.
"The PPF believes the government would be the most appropriate provider of risk underwriting for the public sector consolidator."
Bang goes the free lunch.
(BTW, typos in article: "apprxomately" and "independnet".)Where does "with assets at £33.4m (€38m) and liabilities at £15m" come from?
I've had a look at the (very long) annual report and it does show "Closing net assets of the scheme" as being £10,201,980,000, which is consistent with the "£10.2bn in assets under management" included earlier in your article.
FYI, the annual report also includes: "The funding level at the last actuarial valuation as of March 2022 was 119% and at 31st March 2023 is estimated to be 143%."I found the idea of a "final buy-in [...] insuring the benefits of its remaining members" to be hard to square with the "buy-in [being] completed by the open fund".
From a quick internet search, I discovered: "The ITB Pension Funds [consist] of the Open and Closed Fund"; "The Open Fund consists of Defined Benefit and Defined Contribution sections"; "Employees of the Participating Employers may join the ITB Pension Funds (Open Fund) DC Section subject to eligibility conditions."
So it sounds like the DB section of the Open Fund is not open to new members. But if it is open to new accruals for existing members (making them "active members"), is it possible to buy-in an insurance policy that covers benefits for active members? Seems like that would be difficult to price, if an insurer was looking to charge a one-off premium. So is the DB section of the "Open fund" actually really closed (i.e. both to new members and new accruals)?Shame that this article has so many typos (e.g. "British Pensions") and weird punctuation (e.g. "which is highly inefficient, at creating") -- it would have been appropriate it the two authors (David Pitt-Watson and Hari Mann) had worked collectively to weed them out. And are the references to "Holland" meant to be references to the whole of the Netherlands? If so, why not use "Netherlands" rather than "Holland"? And, BTW, are the Netherlands still as in favour of this type of pension offering as they used to be?
"According to Kramer’s analysis, 70% of pension funds score an information ratio of more than zero, meaning their investment returns outpace the returns on their liabilities." Strange to focus here on the information ratio. Surely the excess return tells you whether "their investment returns outpace the returns on their liabilities"? I assume a positive (i.e. "more than zero") information ratio is only possible if the excess return is positive.
I'm dubious about the use of promille figures. You report a "contribution rate for members at 0.60‰ (promille)", but wouldn't this be more easily understood if reported as "6 bp" or "6 basis points"? (Or is it that figures express promille are more commonly used in Germany than figures expressed in basis points?)
"[...] George Osborne’s freedom and choice reform that gave individuals aged 55 and over the freedom to access their defined contribution savings as they wish, as opposed to having to buy an annuity."
The changes are widely misrepresented with respect to the requirement to purchase an annuity. The requirement to purchase an annuity by age 75 was removed from April 2011 (in Finance Act 2011). So there was no requirement to purchase an annuity, even before George Osborne's 2015 freedom and choice reform.
It would be much more accurate to write: ""[...] George Osborne’s freedom and choice reform that gave individuals aged 55 and over the freedom to access their defined contribution savings as they wish."
See my earlier comments on https://www.ipe.com/pension-freedom-policy-was-rushed-says-fca-chair/10033175.article ."The Court of Appeal has overturned a High Court ruling blocking the transfer of a £12bn (€13bn) back book of individual annuity policies from Prudential to Rothesay Life."
That's disappointing, though perhaps not terribly surprising. It seems like the court is potentially being reduced to simply applying a "rubber stamp", as mentioned in the original ruling (https://www.bailii.org/ew/cases/EWHC/Ch/2019/2245.html). I would hope that, in future, sales literature for annuities will now explicitly spell out the possibility of a "Part VII" (Financial Services and Markets Act 2000) transfer."The Asset Management Taskforce also said UK pension schemes should be required to explain how their stewardship policies and activities are in the members’ best interests."
Roll out the boilerplate text?This all sounds rather complicated. Given the apparently inexorable move to DC, what can you deliver with PEOPs that couldn't be delivered with PEPPs?
"The DC pension comparison was an insured annuity bought with a retirement savings pot."
Strange that they should assume an annuity purchase for DC pensioners. Is it just to provide a headline-grabbing comparison between CDC and DC? (I'm a firm believer that all options have both pros and cons: none of DC, CDC and DB is a perfect solution.)Thanks for highlighting the report. It appears to be free to download from the Natixis website; a general internet search directed me to the 2019 report, but it's easy to find the 2020 report on their website.
I appreciate this is mainly of interest to Swiss readers but, as a UK reader, it wasn't clear to me precisely what is being done here. I assume that the non-interest bearing account is of benefit to the Stiftung Auffangeinrichtung BVG because it would otherwise have to use an account with a negative interest rate.
This is a very strange piece of analysis. From the assumption that all UK DB schemes "are targeting full funding on a gilts flat liability basis (a proxy for targeting buyout)" to the assertion that, if schemes have assumed unrealistically high returns from equities, they should diversify their portfolios to include assets which will, as if by magic, match those unrealistic return assumptions. Surely the more obvious conclusion would be that contributions need to increase?
Ignoring any moral arguments, it does seem sensible to save to fund oneself in retirement, wherever possible. One practical problem with planning on being a "free rider", is that the state system might not be so generous in 20/30/40/50/60 years time.
Commented on: 2025-02-23T12:20:41.960
Viewpoint: can collective DC usher in a new era for UK pensions?