NoRegretsCoyote
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I would in general agree with these.
- Pension funds should be fully invested in equities during their working life
- They should stay invested in equities in their retirement
- Lifestyling is nonsense
Sorry Brendan, butneither are a good idea in the AE context.
- Some form of smoothing/risk-sharing is a good idea
I think that should be the default during working life, yes.Everyone should just be 100% invested in equities and they live with the booms and busts?
There is no way to do that! I'm not an efficient markets hypothesis zealot. Some assets like property really are prone to booms and busts. But for equities there really is no better estimate of a portfolio's value than what you could sell it for today.I would be prepared to give up some of my gains in exchange for knowing that my fund was not going to fall by 50% all of a sudden.
I don't know the best way to do that.
Cash Flow is also a major input to the derivative so no hope of any analytical evaluation of its payout at some future point in time. However Colm argues that the open ended value of the members' accounts is their market value, as smooth value is only a device for determining its allocation and distribution.This fund is a derivative of the market index with a payoff that is determined by a function of the historical index (smoothing function).
There is no doubt that the issues involved when market values are significantly and for a long time below smooth values need to be addressed. The opposite scenario where market values exceed smoothed values and the government does a smash and grab or Joe Duffy whips up the mob to storm CPA House are just silly IMHO.Another risk is what if investors stop joining, e.g. another option/fund is introduced, like the differences pre/post 2013 for public sector pensions (maybe due to pressure after underperforming the market for a while, the now accepted terminology for which is 'Joe Duffy risk').
The people in the old scheme may have overpaid for the previous generation retiring but don't have anyone left to overpay in a market drop when they retire. I think this may have been mentioned already, though I think it was government risk that was discussed.
Hopefully Joe won't use Gay Byrne's old accountantThere is no doubt that the issues involved when market values are significantly and for a long time below smooth values need to be addressed. The opposite scenario where market values exceed smoothed values and the government does a smash and grab or Joe Duffy whips up the mob to storm CPA House are just silly IMHO.
Now in the depressed scenario you have really identified two risks. The first risk is that people stop joining or contributing and switch to a conventional arrangement. Colm demonstrates that there is a very significant headroom before this is rational, so powerful are the cost and ERP benefits of his proposal.
The second risk is that Joe Duffy (now in retirement) launches the Smooth with Joe AE alternative. It is a valid challenge. There would of course be significant barriers to Joe launching his new vehicle by which time AE Tried and Trusted might have recovered full health. It is for sure the sort of issue that an independent review would want to explore.
I would like to put flesh on my responses by referring to Table 1 on page 9 of my paper to the Institute and Faculty of Actuaries. Here it is for ease of reference:Smoothing involves the use of parameters which will be permanently up for debate and will be very hard to explain to a non-expert. Risk-sharing involves current pensioners dipping into funds hypothecated for future pensioners when market values are depressed. There are big implications here. AE really does mean that it is "your money" and not someone else's and as you've said yourself there will be a Joe Duffy moment at some stage.
Anyway if your purpose is (a) to extend pension coverage; (b) no incremental cost to the state; then smoothing and risk-sharing shouldn't feature.
The first parameter "up for debate" is "p", the weighting to give to each month's market value. I state on page 8 of the paper thatSmoothing involves the use of parameters which will be permanently up for debate and will be very hard to explain to a non-expert.
That point still stands.As you know, what's important to the investor is not the absolute value of an index but the change in its value over time. The "5%" index in figure 8 (you wrote figure 6 but I think you meant figure 8) grows by 72.8% between years 15 and 20 - month 180 to month 240. That's an average growth rate of 11.56% a year. The "4%" index grows by 71.9% over the same period, an average of 11.44% a year. As you can see, the two growth rates are very close, implying that the choice of 4% or 5% assumed growth rate in the smoothing formula isn't important in the long run.
What you can't have, of course, is moving from the 4% index to the 5% index, i.e., moving from the blue line to the orange line in figure 8. That's what I meant by the statement that "careful governance will be required." The important point, as demonstrated by the graphs and my sample figures above, is consistency over time. This is an area where the economists in the ESRI will add value.
Risk-sharing involves current pensioners dipping into funds hypothecated for future pensioners when market values are depressed. There are big implications here. AE really does mean that it is "your money" and not someone else's and as you've said yourself there will be a Joe Duffy moment at some stage.
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