Irish Times opinion piece by Colm Fagan: "Auto-enrolment plan seriously flawed"

Brendan Burgess

Brendan Burgess

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www.irishtimes.com

The Government’s plan for pension auto-enrolment is flawed - there is a better way

The Government's proposed Bill for a national auto-enrolment pension scheme incredibly completely ignores what happens after retirement
www.irishtimes.com www.irishtimes.com

There is a better way. Members should remain in the auto-enrolment scheme post-retirement, drawing from their accounts as needed to secure a regular income in retirement.

This would allow retired workers to continue to benefit from the directors’ duty to look after their interests. They would also continue to benefit from the scheme’s bulk buying power.

By pooling retired members’ investments with those of active employees and utilising the opportunity, unique to auto-enrolment, to smooth the ups and downs of stock market fluctuations, retired members could expect to earn high and stable investment returns. They would not have to pay for investment advice, either directly through fees or indirectly through commission to intermediaries.
 
One of many flaws in the scheme. Not being able to make AVC's is another as well as the retirement age being that of the State pension. For those in an occupational pension scheme, the Normal Retirement Age is an arbitrary number in the range of 60-70. Most are 65 but if you want to access your fund from 60 onwards, there is no issue. With auto enrollment, you cannot access your money even if you wanted to.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
While I have not read the (paywalled) article, from the quoted section I get the distinct impression the author does not understand what Pension Auto Enrollment is all about.
"Directors duty"? It is not large companies pension scheme, it is for the small employer with low paid staff who have nothing. Aka reducing the pension burden on the State.
 
Brendan Burgess said:
"By pooling retired members’ investments with those of active employees and utilising the opportunity, unique to auto-enrolment, to smooth the ups and downs of stock market fluctuations, retired members could expect to earn high and stable investment returns."
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Like what happened in Waterford Crystal where the ponzi scheme failed, retired members were fully protected, and active members lost their shirts?
 
Towger said:
While I have not read the (paywalled) article, from the quoted section I get the distinct impression the author does not understand what Pension Auto Enrollment is all about.
"Directors duty"? It is not large companies pension scheme, it is for the small employer with low paid staff who have nothing. Aka reducing the pension burden on the State.
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You won't have read then
Colm Fagan, a retired actuary, is a Past President of the Society of Actuaries in Ireland
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T McGibney said:
Like what happened in Waterford Crystal where the ponzi scheme failed, retired members were fully protected, and active members lost their shirts?
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Nowhere near the same. Autoenrollment is defined contribution for starters. And the rules were changed after Waterford Crystal so active members are no longer at the back of the queue and the State will step in where both the scheme and employer are insolvent.



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Hi @Towger
In relation to your question on
Towger said:
"Directors duty"?
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I suggest you read Head 15 of the Draft Bill:

Head 15 Responsibilities and functions of the Central Processing Authority
Provide that -
(1) The purpose of the CPA is to act as the custodian of the auto-enrolment system in order to provide participants or their dependants or legal personal representatives, with relevant benefits accrued under the AE retirement savings system, in respect of service as an employee.
(2) The moneys and other assets from time to time held by the CPA on behalf of the participants in the AE retirement savings system shall constitute the Fund of the Scheme.
(3) The CPA shall, at all times, exercise fiduciary responsibilities in discharging its functions.
........
and Head 16, which sets out the duties of the Board of the CPA.
The draft Bill can be found at :
 
Thanks. I see from the Bill that DSP appear to have lost control of Auto Enrollment, with the CPA now going to be a QUANGO under the Pensions Authority.
I read director as the Employer/Company Director, in what Brendan quoted. With a max of 16 funds, there will be many people keeping an eye on them.
 
Brendan Burgess said:
By pooling retired members’ investments with those of active employees and utilising the opportunity, unique to auto-enrolment, to smooth the ups and downs of stock market fluctuations, retired members could expect to earn high and stable investment returns.
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I agree with most of the article but this part is not at all well explained.

On a thread long ago Colm could never explain how the "downs" could be smoothed without some kind of sovereign guarantee. This would tend to work against the objective of reducing future state liabilities....
 
NoRegretsCoyote said:
On a thread long ago Colm could never explain how the "downs" could be smoothed without some kind of sovereign guarantee. This would tend to work against the objective of reducing future state liabilities....
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This is indeed the key thrust of Colm's proposal which would be impossible to cover in an IT OP and for which he recently won a commendation from the UK actuarial profession.
Your objection is a very valid one to make and Colm has spent a lot of research and analysis in answering it. The key is that the "downs" are only temporarily smoothed and ultimately the market is king. But it is the fear of temporary "downs" that has people directed into low yielding assets at and during retirement - the hubris of "lifestyling". Colm has devoted an awful lot of intellectual energy and analysis to demonstrate that under his proposal there would be no need for a State guarantee. However, it would all be too much for a blog like this
 
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Hi Duke,

Does the Society of Actuaries in Ireland have a position on Colm's proposals?
 
"This combination of measures would ensure more than 50 per cent better value to members, on average. The required contribution for an adequate pension would fall from 6 per cent to 3.9 per cent from employees and employers, and from 2 per cent to 1.3 per cent from the State. The total required contribution would fall from 14 per cent to 9.1 per cent – and expect to deliver higher benefits to members."

Given that the State contribution will be paid for by taxation it certainly seems to me that the points raised should be seriously considered, that's a pretty saving for all parties.
 
JimmyB99 said:
Hi Duke,

Does the Society of Actuaries in Ireland have a position on Colm's proposals?
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Jimmy, you are new to this parish but that is a very good question. Long term contributors probably know that in my real world alias, I too am a fellow of the Society (totally by the way, I am indeed a fellow in every sense, do they call female counterparts Fellows these days?)
I digress; I do have some sense of the reaction of the Society both in terms of its membership and in terms of its official line. I think "mixed" is the appropriate euphemism on both fronts*. There are certainly many who passionately believe in it and many more, like my good self, who believe it requires a thorough review and investigation by the likes of the ESRI, which is what Colm is asking for.

*Einstein got a "mixed" reaction to the special theory of relativity in 1905 and only got his Nobel prize in 1920, for something else.
 
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Dear Fellow,

Lassies in your profession are known as Sheelahs - hence, SSAI

Also, it's reasonable to write 2022 instead of 2023 for the first two or so weeks in January. Being a full century out is just showing off how good a New Year's party you were at.

[In bed with proper man flu and will maybe comment more seriously later.]
 
Duke of Marmalade said:
There is nothing in the AE scheme suggesting the State pension will be reduced. Are you sure you know what you are talking about?
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I an not betting on the State Pension keeping up with inflation, once Auto Enrollment starts to pay out properly in 20+ years.
 
Towger said:
I an not betting on the State Pension keeping up with inflation, once Auto Enrollment starts to pay out properly in 20+ years.
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It would be helpful if you amended your original post to say that you see a danger that AE will be used as a cover to reduce State pension. As it is you are stating categorically that AE will be a replacement for State pension - that is not in the Bill.
BTW I think you may be right.
 
@Duke of Marmalade You're losing the run of yourself, comparing me to Einstein! For one thing, I don't have his hair!

Back to more serious matters. In answer to @JimmyB99's question on what the Society of Actuaries in Ireland thinks, it's important to bear in mind that my proposal upends a lot of conventional actuarial thinking, so I'm not surprised that it hasn't been accepted unanimously as the best thing since sliced pan.

What I would love, but which I'm not seeing, is a good old-fashioned barney, with people saying something like "Colm, you're talking through your hat when you say, on page x, that blah-blah-blah." No-one has picked out a single sentence in all I've written - more than 100 pages, taking my paper to the Society of Actuaries in Ireland and the one to the Institute and Faculty of Actuaries in London - and claimed that it's rubbish. I wish to God they did.

The least I hoped for was a request to government, who have the greatest vested interest in this, to commission an independent evaluation of my proposal, to check if it holds water.

I cannot for the life of me understand why that request hasn't been made. Neither can I understand why government itself hasn't made the request of independent experts, e.g. ESRI. They tell me through official channels that "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." It's a novel idea, so of course it hasn't been tested in a market setting and of courses there is a lack of evidence as to observed outcomes! If Ireland Inc takes that approach to everything, we'll never do anything new or different in this country. Here is a fantastic opportunity to lead the world. We should be grabbing the opportunity with both hands.
 
I think that most people looking at it would agree with the principle. I think it's a great idea mostly.

But the practical problem is that there would be a very big fund which a later government might access in an emergency. this should not happen but the risk is great. by the time this would be established, the country will be well and truly bankrupt and unable to pay public sector pensions and the social welfare pensions. I doubt that a populist government would just sit there and say "we can't borrow from it "

Brendan
 
@Brendan Burgess I would agree with you if we were talking about something like the NPRF, where assets weren't allocated to individuals. Here, though, irrespective of whether returns are being smoothed or not, every cent will be allocated to an individual member, so any government "withdrawals" from the scheme will be seen, quite rightly, as stealing from members. No-one will stand for that.
 
@Colm Fagan
Fascinating paper, I think I’m sold, and given the audiences it has been presented to without being disproven - it must be robust. Amazing work.

One point struck me when reading the line.

“ If someone is comfortable investing close to 100% in equities pre- and post-retirement, then the advantages of smoothing don’t apply, or apply to a lesser extent. Workers in this category will typically be above-average earners and will probably also be comfortable making their own allocations to different asset classes and individual shares, before and after retirement.”

I don’t think this is necessarily true, as you appear on paper to have, in essence, created an asset class with equity like returns with almost no volatility. Whilst someone willing to take equity risk into retirement may not suffer the lower expected returns of lifestyling, they must still surely prefer the same expected return at a fraction of the volatility that your fund offers?

Extending that line of thought - If this behaves as new asset class with a hugely superior risk/return profile, it should render any other form of pension investment completely irrelevant (to rich and poor alike). If this became adopted worldwide, would there be any unintended consequences with literally ALL of the pension money in the world being directed into equities?

I’m not sure of the relative scale of pension monies in the investment universe to create any form of distortion but does this materially impact government/corporate bond prices (I know pensions are one of the major buyers of these)? Do bond yields then by necessity rise to closer match the risk/return profile of this ‘super equity’ asset class you have created? Does this have implications for the cost of government and corporate debt funding etc?
Does the huge increase in demand for equities impact the level of historic ERP on which the benefit of this idea is derived?

Clutching at straws here but almost seems to good to be true!
 
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