Getting buy-in for Colm Fagan's proposals for a smoothed AE fund

[Brendan Burgess]

I am a big supporter of these proposals as I have repeatedly said.

I think it's worth trying to figure out what the blockages to acceptance are and how they might be overcome.

This thread is about Colm's proposals for a smoothed fund, but they could easily apply to an alternative version of it.

Most informed people who look at it agree with most of the general principles

• Pension funds should be fully invested in equities during their working life
• They should stay invested in equities in their retirement
• Lifestyling is nonsense
• Some form of smoothing/risk-sharing is a good idea

It's important to note that I say most people and most of the principles. This thread is not for discussing the merits of the proposal. It's for those who support the proposal to figure out how to get buy-in.


Colm's proposals won a big prize from the UK Actuaries which shows that they are at least worth considering.

Why are the following not more fully buying into it or rejecting it outright?

• The senior civil servants responsible for implementing AE
• The Minister for Social Welfare and the government generally
• The Society of Actuaries
• The Pensions Council
• The Pensions Authority

I am not sure about the role of the last three bodies but I would imagine their endorsement or support for it would influence the other two.

Am I leaving out any other influencers?

 

[Brendan Burgess]

These are not my views. I am trying to articulate why people would object.

Non-technical barriers

The Civil Servants are out of their comfort zone

The Civil Servants don't understand it as it's very complicated and technical

The general pubic thinks that equities are risky

The Civil Servants are afraid of innovation

The Civil Servants are just too busy with implementing AE

Suspicion of something which is "too good to be true"

The industry is opposed to it as it excludes them. So they will spread FUD - fear, uncertainty and doubt

It will be too tempting a pot for a financially strapped government to raid at some time in the future.

 

[Brendan Burgess]

How might these barriers be overcome?

 

[Duke of Marmalade]

• Pension funds should be fully invested in equities during their working life
• They should stay invested in equities in their retirement
• Lifestyling is nonsense

+Many
Boss, It would be good to get some universal bedrock which we nearly all can agree with. So we have yourself, @NoRegretsCoyote and Yours Truly fully paid up to the above, that's not a bad start.
The fact that the strawman had lifestyling central to the "default fund" (expected to be chosen by >90%) shows how not paid up the DSP were and still aren't.
So why did the DSP embrace that fallacy? As Civil Servants they understandably looked to the market to see what was normal and of course they especially looked at the UK AE system. It would have been remarkable if they had taken a fundamentally different tack. Having made their bed they are sticking to it. I think that explains the DSP approach. Why the other bodies have not embraced Colm's proposal, I will leave for later.

But it is worth asking why the conventional wisdom of lifestyling to low yielding assets in retirement has taken such a hold. It is partly historical as both the UK and ourselves were fixated for many years that the retirement solution had to be an annuity - it was in fact compulsory for second pillar pensions.
At root cause of course is the volatility of equities and the mirror of Colm's argument that the growth potential is at its greatest at retirement is that the fear of volatility would be at its all time high and getting higher throughout retirement.

If we are going to make an omelet that maintains high growth assets in retirement we are going to have to break some eggs. I see some of the criticism from official and professional circles as a search for the perfect - some tend to ask enough questions to crash the plane (reference to earlier anecdote). I think the mantra of the DSP in their strawman roll-out was that the search for the perfect would miss the best solution, or something like that. Colm's proposal is not perfect. It is a lot better than lifestyling IMHO. Is it best?
Enough for now.

 

[Colm Fagan]

Why are the following not more fully buying into it or rejecting it outright?

• The senior civil servants responsible for implementing AE
• The Minister for Social Welfare and the government generally

In answer to the question as to why the Civil Servants and government haven't bought into the smoothing proposal, here's what I posted on the other thread (about my Irish Times Opinion Piece). BTW, I only noticed the newer threads on smoothing this morning. I'll try to respond to some of the other questions later in the day.

The question has been asked as to why I have failed to persuade Civil Servants of the merits of my proposal. Some in this parish have suggested that my character flaws, e.g. my irritation with critics and refusal to engage with them, may be part of the reason. That may be true, but the last message I got from government was that "to my knowledge, the proposal has not been tested in a market setting (i.e., that no commercial pension scheme has adopted the approach proposed) and consequently, there is a lack of evidence as to observed outcomes."

Doh. Of course it has not been tested in a market setting - it's completely novel and hasn't been tried anywhere in the world, ever. And of course no commercial pension scheme has adopted the approach, because it's designed for a national auto-enrolment pension scheme, not for a commercial one. I have always insisted that it will not work in a commercial environment. The lack of "commercial" angle may be part of the problem. It could even be more important than my character flaws.

If we as a country take that approach to new ideas and concepts, will we ever achieve anything?

I should add, of course, that I am not asking government to endorse my proposal without question. All I ever asked was that they commission an independent consultancy, e.g., ESRI, to kick the tyres in order to check its viability. That's all I'm asking now. It won't cost much compared to the enormous benefits to society and to the state if it does work - a more than 50% improvement in value for money compared with a more "conventional" approach to AE. Brian Woods and I have offered to make all our calculations and stochastic simulations available to whoever is appointed to do the work, together with our other studies and analyses, and to help them in whatever way we can to complete the evaluation.

Is that too much to ask?