Independent evaluation of Colm Fagan's proposed smoothed equity approach

Good news! Heather Humphreys, Minister for Social Protection has asked The Pensions Council for an independent external evaluation of my proposal for a smoothed equity approach to auto-enrolment.
It was a brave decision by the Minister: the smoothed equity approach is novel; it hasn’t been tried anywhere in the world. I am confident however that her decision will be proved right and that the experts appointed will agree that it delivers close to double the value for money of the scheme currently proposed by her department and that it eliminates sharp movements in pension account values, to such an extent that members' accounts can be administered like high-interest savings accounts.
I have many people to thank, but one name stands out. Brian Woods worked with me from the start, almost five years ago. I owe him an enormous debt of gratitude. Special thanks too to the UK Institute and Faculty of Actuaries, whose decision last October to award my entry joint first place in the Frank Redington Pension Prize marked welcome international recognition of the proposal’s merits. National recognition is proving more elusive.
Of course, there is no guarantee that the experts appointed by The Pensions Council will support my claim but the potential payoffs – contributions more than €1 billion a year lower and benefits higher than the scheme currently proposed by DSP – are enormous and easily justify the cost of the assignment.

Colm

That is great news. Well done.

Brendan

Very nice proposal Colm, hats off.

It is critical that the proposed panel of experts appointed have zero conflict of interest or exposure to vested interest lobbying.
If I were in the business of administering the "old" style fund, I'd be quite put out to be potentially done out of the business of several hundred evaluations & adjustments/year & I'd probably do something about it.

Watch that space.

Thanks @Brendan Burgess I appreciate your terrific support too, almost but not quite in the same league as Brian!

Thank you too @Horatio I agree that conflicts of interest could be an issue. To be honest, it's going to be impossible to find people completely without some conflicts of interest. Academics maybe, but they're often too divorced from what's happening in the real world. I do hope that Brian and I will have the opportunity to interact with the experts appointed to complete the evaluation. I recognise though that the process from here is largely out of my hands.
I repeat my praise for the Minister. It took some courage on her part to propose the independent evaluation.

Well done for persevering Colm, the outcome is a direct result of the dedication Brian and yourself have given to this topic.

Thanks @nest egg You've been very helpful too, in a quiet way.

BTW, I would be interested in views by AAM contributors on something I posted on LinkedIn this evening, in response to a reply from Yvonne Lynch, CEO of the Society of Actuaries in Ireland, who said she hoped the review would be completed promptly:

"Thanks Yvonne. I've been thinking about the review. It would be wrong if a group of experts met in camera, then imparted their conclusions to the country ex cathedra. What we really need is a vibrant national debate. The issue is so important and the numbers so huge that as much brainpower as possible should be marshalled on both sides of the debate - actuaries, economists, academics, demographers, behavioural scientists, etc., - all testing the logic of the proposal at seminars and meetings where experts on both sides put forward their views. Those discussions should then feed into the "independent" evaluation, so that it's a dynamic process, not a static one. A national discussion on those lines would also help the nation arrive at a consensus more quickly.
You and your colleagues in the SAI could instigate that national discussion and encourage other bodies, such as the IAPF, SSISI, IEA, etc. to contribute to it."

What does anyone think of that idea? If you do think it's a good idea, how best do you think we should go about having that wide-ranging debate? I'm sure that AAM readers have excellent ideas on what's good/bad about the proposal, where it could come a cropper, etc.

Colm, well done on getting this progressed.

How will you monetise it? e.g. Have you ‘patented’ your approach in some way or created some IP?

Coming up with the concept and getting it to this point deserves a lot of credit. I must confess that I had misclassified you as an angry old guy shouting at the clouds and ranting about the pensions industry generally. I was wrong, mea culpa.

Well done Colm. Not only for the idea but for the perseverance.

Under your proposal, wouldn't that eliminate a lot of the admin as every member would be invested the same way? (It's been a while since I read your proposal )

Colm Fagan said:

It would be wrong if a group of experts met in camera, then imparted their conclusions to the country ex cathedra. What we really need is a vibrant national debate.

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Hi Colm

That strikes me as calling for two different things.

You have had a vibrant national debate on the issue - on Askaboutmoney, at the Society of Actuaries, at various other seminars.

The review is a separate issue. Of course, they should meet with you and challenge you on the proposal. And they should meet with others. But a public debate is separate.

A public debate would take a long time. It's important to get a decision on this before the implementation of auto-enrolment.

Brendan

Great news, well done!

Gordon Gekko said:

Colm, well done on getting this progressed.

How will you monetise it? e.g. Have you ‘patented’ your approach in some way or created some IP?

Coming up with the concept and getting it to this point deserves a lot of credit. I must confess that I had misclassified you as an angry old guy shouting at the clouds and ranting about the pensions industry generally. I was wrong, mea culpa.

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Hi Gordon. Thanks for your kind words. You're not alone in having classified me like that, so no need to feel bad about it!!
On the monetisation point, the quick answer is that there isn't a cent in it for me. On the contrary, it has only cost me money up to now. The biggest single cost related not to the core smoothing idea - I never thought I could patent that - but to the longevity protection set out in Section 5 of my paper to the UK actuaries (pages 16 and 17). I was very proud of that idea, which can be applied beyond AE, i.e., at age 75, convert your account into 15 identical subaccounts and take one subaccount every year. If you die before 90, the unclaimed subaccounts are paid to your estate; if you live beyond age 90, a new subaccount appears by magic every year, funded by a deduction from the return credited to the subaccounts in the first 15 years. I spent a few grand on lawyers, seeing if I could patent the idea, but they concluded that I couldn't. Money down the drain.

Steven Barrett said:

Under your proposal, wouldn't that eliminate a lot of the admin as every member would be invested the same way? (

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Yes, Steven. Not only that, but returns (for the single fund) only need to be calculated once a month (or even once a quarter) given their stability from month to month. Crediting every single member with exactly the same return every month (active and retired) will make it so easy for everyone. This month's "interest rate" will be discussed in the pub, in the hairdresser, with the guy in the tyre repair shop while you're waiting for your puncture to be fixed, etc. Over time, people will get quite clued in to what is causing the interest rate to rise or fall in a particular month. The movements will be small compared to what we in the industry are used to, but they will be significant for people who think in terms of bank accounts.
I believe that this stability will be very important for smaller employers, given the variety of payroll systems in operation. There is no guarantee that money will get to the administrator on the same day every week/month for each worker. With a unit-linked approach, this could cause problems if funds are allocated a day or two later or earlier than they should be allocated. No such problems with the smoothed approach.

Brendan Burgess said:

You have had a vibrant national debate on the issue - on Askaboutmoney, at the Society of Actuaries, at various other seminars.

The review is a separate issue. Of course, they should meet with you and challenge you on the proposal. And they should meet with others. But a public debate is separate.

A public debate would take a long time. It's important to get a decision on this before the implementation of auto-enrolment.

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I take your point, Brendan. I hadn't thought about it much. The two processes could run side by side. My understanding is that the ESRI (who I think are most likely to be asked to do the work - although I confess to knowing no more about it than anyone else) are tied up for the next few months, so would not be able to take it on immediately anyway. They'll also need a lot of time. There's more in the proposal than I thought. They will need to call on a range of disciplines to evaluate it. That will give plenty of time for the national debate to get started and for the "independent evaluators" to listen to it, if not contribute to it.
By the way, I don't envisage this "national debate" requiring me to "educate" others and take on opponents. Lots of people - including many on AAM - have a very good understanding of the proposal and would be more than able to debate the issues with all-comers.

Brendan Burgess said:

You have had a vibrant national debate on the issue - on Askaboutmoney, at the Society of Actuaries, at various other seminars.

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Coming back to you again on this, there hasn't really been a good debate on it, other than on AAM (for which I thank you). I presented to the Society of Actuaries in January 2021 (remotely, and not very well). That discussion wasn't great. Besides, it is well over two years ago. There has been absolutely no discussion of it since then. It has never been discussed at the IAPF. That to me doesn't qualify as "a vibrant national debate". I would like some of the real heavy hitters in the world of economics to get involved. They haven't as yet.

Hi Colm

You should submit a paper to the Dublin Economics Workshop which is on in September. Most of the "heavy hitters in the world of Economics" will be there.

It's past the submission date, but I would think that they might make an exception to include you.

Brendan

Brendan
Thanks a million, and thanks for writing to Ciaran. Let's see if he comes back to either of us.
Colm

Hi Colm

You are welcome.

I suggest you send him a proposal for a paper directly.

Brendan

Brendan Burgess said:

Hi Colm

That strikes me as calling for two different things.

You have had a vibrant national debate on the issue - on Askaboutmoney, at the Society of Actuaries, at various other seminars.

The review is a separate issue. Of course, they should meet with you and challenge you on the proposal. And they should meet with others. But a public debate is separate.

A public debate would take a long time. It's important to get a decision on this before the implementation of auto-enrolment.

Brendan

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I agree with Brendan on separating the topics. I would add to this, focus on the task at hand - ensuring the review happens, and happens as quickly as possible.

On the public debate, while I'm sure there are many on here who would happily take part, myself included, the reality is that pensions are a niche sport. I fear the quality of any discussion would bring limited value. The only way it might work is if you could convince the powers-that-be to enact a citizens assembly.

For the reason already mentioned, it's highly questionable if there is enough political will / public appreciation of the topic to call one. It would however be a good way to maintain momentum, as the results of the review could then form a key element of the debate.

nest egg said:

Focus on the task at hand - ensuring the review happens, and happens as quickly as possible.

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Of course I agree, but there's nothing I can do to influence either the RFP for the review or how quickly it happens. I can't imagine that the Pensions Council will be able to pull a readymade RFP out of a hat. Then there's the availability of independent "evaluators". I understand, for instance, that the ESRI has a huge backlog of work. Thirdly, it's going to take the appointed firm some time to assemble the expertise required to do the job. They need to have macro and micro economists, financial economists, behavioural economists (for the psychology of workers and media if market values are falling but the smoothed fund keeps showing increasing smoothed values), etc. Strangely enough, actuarial expertise is way down the list of requirements. It's only required for the longevity proposal in Section 5, which is peripheral to the main paper. Also, it's quite straightforward.

nest egg said:

the reality is that pensions are a niche sport. I fear the quality of any discussion would bring limited value. The only way it might work is if you could convince the powers-that-be to enact a citizens assembly.

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Once again, I agree. I smiled at the thought of the Citizens' Assembly being convened to discuss the smoothed approach to AE!

However, there are many bodies which would be well capable of hosting excellent discussions on it. For example, the IAPF has never considered the smoothed approach. There are many other pension institutes, none of which have considered it either. There's also the Irish Economic Association, The Dublin Economics Workshop (mentioned above), SSISI. Even the Society of Actuaries in Ireland - it's only consideration of the smoothed approach was over two years ago, when my ideas weren't nearly as well developed as they are now (besides which, I didn't give a good account of myself, for which I partly blame the forced remoteness in the middle of the pandemic).