Pensions Council puts Colm's AE proposal out to tender

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Colm Fagan

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Yesterday, the Pensions Council put out a tender (RfQ they call it) for consultants to assess my proposal for a smoothed equity approach to AE pensions. This is as requested by Heather Humphreys, Minister for Social Protection.

Here is the link.

I have written to Roma Burke, chair of the Pensions Council, to reiterate the offer from Brian Woods and myself to make ourselves available on a pro bono basis to whoever is awarded the assignment, to share with them our analyses, programs, spreadsheets, etc. - without, of course, wishing to influence their conclusions.

I also mentioned to Roma that my paper for the Institute and Faculty of Actuaries, which is appended to the RfQ, is now over 12 months old and my thinking on some (non-core) aspects has moved on slightly. I will be happy to share my up-to-date thoughts with the winning consultants.

This is a fantastic opportunity for consultants to get their teeth into a completely novel approach to auto-enrolment that claims to deliver close to double the value for money and to save Irish employers, workers and the state close to €1.5 billion a year when the scheme is mature. The approach, if it works, has universal application: it will work in any other country in the world that has already introduced or plans in future to introduce auto-enrolment.
 
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Q11 of RfQ said:
11. The impact of a 1 in 200-year adverse event (market or longevity/mortality or combination thereof) occurring after 20, 50 or 100 years on the sufficiency of the proposed buffer account, and hence on the potential costs to the State should it be insufficient.
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Anybody who answers this question is a spoofer:cool:
 
RfQ said:
The Council is seeking an analysis of the proposed model and to understand the sources of outperformance compared to the AE system as currently set out in the Draft Heads and General Scheme of the Automatic Enrolment Retirement Savings System Bill 20221 .
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Ooops! The Draft Heads gives us no indication whatsoever of the nature of the investments including charges pre retirement and gives nothing at all on post retirement. I think they mean the Strawman.
 
Colm Fagan said:
I have written to Roma Burke, chair of the Pensions Council, to reiterate the offer from Brian Woods and myself to make ourselves available on a pro bono basis to whoever is awarded the assignment, to share with them our analyses, programs, spreadsheets, etc. - without, of course, wishing to influence their conclusions.
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Well done on the proposal and bringing it this far.

The outcome from a meeting is surely that you would be influencing the conclusions. Not that there is anything wrong with this, it would be important for those analysing it to have full information.

However, to suggest it would not influence the conclusions could come across as being disingenuous, in my opinion, although I am certain this is not the case.
 
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Hi @llgon
I suppose what I'm trying to say is that I wouldn't try to browbeat them into submission, to get them to accept my point of view.
 
llgon said:
Well done on the proposal and bringing it this far.

The outcome from a meeting is surely that you would be influencing the conclusions. Not that there is anything wrong with this, it would be important for those analysing it to have full information.

However, to suggest it would not influence the conclusions could come across as being disingenuous, in my opinion, although I am certain this is not the case.
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A lot of the spadework seems to be validating Colm's calculations and assumptions including the stochastic work. This could be done of course without any input from Colm but his offer to provide all necessary back-up is presumably to leave more space in the tight €50k budget to address the more subjective elements.
 
Duke of Marmalade said:
A lot of the spadework seems to be validating Colm's calculations and assumptions including the stochastic work. This could be done of course without any input from Colm but his offer to provide all necessary back-up is presumably to leave more space in the tight €50k budget to address the more subjective elements.
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Hi Duke. Yes, but any consultancy worth its salt cannot just take my (or Brian Woods') word for how smoothing works, either back-testing results (we looked at UK, US and Japan over a 30-year period) or simulated future experience (2,000 simulations of 60-year experience in future). That work alone will consume much of the 50k "expectation". Then there are the time pressures. The only other tender I could find on etenders.gov.ie with that short a time between publication and deadline for submission was for a toilet refurbishment. That says it all - and they'll probably pay more than 50k for the toilet. To cap it all, I couldn't find the RFQ on the etenders.gov.ie website. I suspect it hasn't been put up yet!!
 
I attach a spreadsheet showing how the smoothed return is calculated, based on the cash flows and returns shown on the spreadsheet.
The main purpose is to enable any consulting firm that is thinking of responding to the RFQ from the Pensions Council to understand how I calculated the smoothed returns. They can play around with the spreadsheet, varying cash flows or index values. It's also easy to change the weighting for current market value in the smoothing formula (I've assumed a 1% weighting for current market value).
A few comments on the spreadsheet:
1. I assumed a simple progression of cash flows, growing arithmetically for ten years, staying constant for the next ten years, then declining (but remaining positive) for the next ten years, reaching zero after 30 years. Cash flows are assumed to go negative after 30 years. The smoothing formula changes slightly when cash flows go negative. The changes to the formula are set out in the last two paragraphs on page 14 of my entry for the Frank Redington Prize. However, this refinement isn't relevant to the attached spreadsheet, which only looks at the period while cash flows are positive. The adjustment for negative cash flows is for the honours class!
The assumed progression of cash flows is broadly as we would expect, given that AE will be rolled out on a gradual basis, with contributors paying regular (monthly) contributions until retirement, then starting to make withdrawals from the fund.
A key assumption is that cash flows are independent of market returns, i.e., workers don't increase their contributions if markets are going gangbusters, nor do they reduce contributions or cease contributing entirely if markets suffer a sustained downturn. The first part of this is obvious, as contributions are a fixed percentage of earnings and no AVC's will be allowed. My argument is that the second part is also assured, since workers are most unlikely to cease contributing if markets are going poorly, since that would result in them losing the benefit of the employer's matching contribution and the state's contribution.
2. The smoothing formula used in the spreadsheet seems at first sight to differ from the formula on page 8 of the paper; however, a bit of algebraic manipulation should show that they are the same. The formula in the paper shows the smoothed value at the start of the month (cash assumed to arrive at the start of the month) while the formula in the spreadsheet shows the smoothed value at the end of the month.
3. There is a difference between the columns "Market Index" and "Market Index (adjusted)". The first shows the value at the start of each month of 100 invested on 1 January 1990, while the adjusted market index allows for the fact that contributions are invested every month.
 

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  • Smoothed returns UK 1pc to MV.xlsx
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I've also written a comprehensive note - a long one (21 pages currently!) - with my own responses to the questions in the Pension Council's RFQ. The title of the note is "Thoughts on Pensions Council's RFQ" and is in the pensions tab of my website https://www.colmfagan.ie/pensions.php
Needless to say, the 21 pages cover a lot of ground. Some of the posters on this forum (particularly pension advisers) are far better qualified in some of the areas where I've ventured to comment. For example, I say this in relation to extra costs at point of retirement under the AE scheme proposed by the DSP compared with my smoothed proposal (pages 8/9):
"Retirement itself can prove costly for members of DC schemes, including AE schemes such as that proposed by the DSP. At retirement, workers must cash their interest in the accumulation account, take their retirement gratuity and reinvest the balance in a different product (annuity or ARF), incurring frictional exit and re-entry costs in the process. Experience also shows that when investors, particularly less sophisticated ones, leave the market (as they must do in order to cash their interest in the accumulation product), it can take some time to muster enough courage to get back into it. While the delay may help them to avoid the risk of substantial losses, being out of the market is costly on average. Members also need to consult closely with pension/ investment advisers in order to make the right choices, and reward them appropriately for their efforts, either through fees or commission.
Under the proposed smoothed scheme, the member holds exactly the same investments, earning exactly the same returns, post-retirement as they did pre-retirement (less the 25% cash taken at retirement). The only choice is the percentage of the fund to withdraw each year, between the specified lower and upper limits (3% lower and 8% upper, with higher upper limits after age 80, have been suggested but are by no means written in stone). The decision on percentage withdrawal rate will depend on personal circumstance, e.g., someone with a part-time job post-retirement might take a lower percentage; on the other hand, someone not yet entitled to the state flat-rate pension might decide to take a higher percentage until such time as the state pension kicks in, etc. Whatever decision the member makes on the percentage to withdraw can be changed subsequently, provided it is made for demographic or personal financial reasons rather than to exploit differences between smoothed and market values. That objective can be achieved relatively easily, even by simply requiring the member to give good advance notice of intention to change the percentage. There is also no requirement for members to specify a retirement date in advance. Under the scheme proposed by the DSP, members must specify their planned retirement age at date of joining. My understanding is that it will be the age at which they become entitled to the state pension, irrespective of the physical and mental demands of the member’s occupation."

I'm sure that there are lots of other sections in the note that people could get stuck into. I would appreciate that feedback.
 
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What is going on here?
Quick background. The Pension Council's previous minutes reveal a disdainful dismissal of Colm's proposal - "Irish people want choice", "The equity risk premium might not happen". They even rejected the concept of an evaluation of its feasibility "it is not feasible to have a feasibility study".
The PC's official remit is to advise the Minister on all things pension. What a kick in the teeth then, when in April the Minister rejected the PC's view that an evaluation of the proposal's feasibility was not feasible. She ordered a fully independent evaluation. To be fair the PC followed the orders fairly promptly. An RfQ was issued and a party was appointed in July and, I understand, the appointee reported 2 months ago.
It is reasonable to say that this is the most significant advice the PC has ever had to give the Minister and also one of considerable urgency (he plan to progress legislation in Autumn already scuppered).
So why the deafening silence on the PC website. The below snapshot of their deliberations published on the website suggests that they are in a state of paralysis.
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@Duke of Marmalade . You're trying hard to goad me into breaking my self-imposed public silence of the last few months. You've succeeded!
Ever since I first went public with my AE proposal over five years ago ( 2018 submission on government's strawman proposals ), I have been trying to get confirmation either that the proposal is sound or is a complete load of BS. Today, over five years later, I still don't have an answer. It's not as if it's small beer. I'm claiming that my proposal halves the required contribution for an "adequate" pension, from 14% to 7% of earnings (3% workers, 3% employers, 1% state). The saving to the nation when the scheme is mature will be over €1.5 billion a year. - not to be sneezed at.
The timeline of my efforts to have it evaluated is as follows:
  • There was no reply to my 2018 submission on the strawman. I don't know if officials in the DSP even looked at it.
  • I then presented to the Society of Actuaries in January 2021. They told me that they weren't a "learned body" (by which I think they meant they don't run exams) so they couldn't evaluate it; however, they refused my request to ask government to commission an assessment of the proposal. I don't know why.
  • Getting no joy there, I tried the Pensions Council in April 2021. Unfortunately, no joy there either. As the Duke notes, their minutes (Agenda item 3 in the May minutes) record that "due to doubts around the feasibility of a feasibility study" they would "not pursue this further". The chairman (Jim Murray at the time) called me with the bad news.
  • I then heard that the UK Institute and Faculty of Actuaries were running a competition for "what would be a sustainable and effective UK pension system for the people". I adapted my proposal for the UK and entered the competition (it was open to a worldwide entry). I got joint first place, but they decided that none of the entries deserved the top prize. Not quite a full seal of approval, but they never told me what they saw wrong with it.
  • The UK award emboldened me to try again with the Pensions Council. The chair (now Roma Burke) raised it at the November 2022 meeting (Agenda item 7). Discussion continued in December (Agenda item 8), at which members noted "the importance of offering consumers a choice" (no reference to the fact that 99% of NEST contributors in the UK go for the default fund) and "questioned the presumption of equity outperformance" (from a group that includes five actuaries, who should know something about economic theory). No-one mentioned any of the claimed advantages, in particular that it halved the cost of an "adequate" pension. Nothing happened at that meeting and there was no further mention of it in subsequent meetings. Unlike the previous PC discussion in 2021, I was never told they had quietly buried it.
  • I continued to lobby politicians and officials in various Departments. Eventually, the Department of Enterprise, Trade and Employment persuaded the Department of Social Protection to do something. In April 2023 I got a letter saying that Minister Humphreys had asked for an independent external evaluation of my AE proposal. The bad news was that she had asked my old friends in the Pensions Council for it. She also asked them "to prioritize this piece of work in advance of progressing the legislation required to underpin the AE system through an Act of the Oireachtas, which is scheduled to take place in the autumn." The Pensions Council issued an RFQ in June 2023 (which managed not to mention my name once in 39 pages - some feat). The indicative budget of €50k to evaluate a proposal that claims to save the nation more than €1.5 billion A YEAR was interesting, to say the least. I gave my own answers to the questions in the RFQ, to help whoever got the assignment. I don't know if they used any of it. I have heard nothing officially since then, because minutes of meetings from 19 July onwards haven't been published on the Pension Council's website, despite the commitment to transparency in the Council's Rules of Procedure.
Despite the Minister's request to have the evaluation in time to bring legislation before the Oireachtas in the autumn, we still don't know officially if the PC has received the evaluation (I understand that it received it in mid-September), whether it is going to publish its own evaluation of the evaluation, whether they have given it to the Minister, whether it is going to be available for public scrutiny.
The biggest question for me still is: why is there such a reluctance to get into the bowels of my proposal, to check if it really does what it claims? If anyone on AAM can give me an answer to that question, I really would appreciate it. Also, any suggestions on where I go from here. Thanks.
PS: Regular contributors will know that I'm not exactly a spring chicken. I can't wait forever. Unfortunately, in the past, I've had to wait to be proved right. It took 24 years for my first actuarial paper, in 1977, to be recognised as having some merit! I'll be well dead if it takes anything close to that for this one to be vindicated!
 
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On the surface, nothing appears to be going on. They have gone to ground, but still expect it go live next year...
 
Hi @Towger You're right. It may be just coincidence, but preparatory work on the Department's own plan seemed to stop completely around the time Minister Humphreys referred my alternative approach to the Pensions Council for an independent evaluation.
A quick update: The minutes of the July 2023 meeting were put on the Pensions Council website yesterday afternoon, shortly after I posted about them not having been published! The minutes don't give much away, not even who the winning bidder was. The most interesting bit is the sentence "The Chair noted that this work will form part of a larger response to the Minister", which seems to imply that the Council will give its own evaluation of the independent evaluation before reporting to the Minister. I would have liked to have been asked to comment too, but they seem to have decided against that.
 
Very interesting. Thanks for posting @nest egg. I'll post separately on NEST's saga with TCS and others in relation to its admin system. It's been an unmitigated disaster.
The DSP hasn't a hope of running the scheme as proposed, with all the bells and whistles of unit-linking, fund choices, default funds (of which around 50 will be needed, not the one specified in the Draft Heads of Bill), etc. for anything remotely close to the proposed 0.5% of assets under management. Therefore, the required contribution for an "adequate" pension will be even more than the 14% of earnings mooted earlier.
Eventually, they'll realise that the smoothed equity approach is their only hope. One fund for everyone, active and retired, will be so much easier and cheaper to run and for members to understand and will give more than double the value for money. Total required contributions for an adequate pension falls to 7% of earnings.
 
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