Pensions Council rejects Colm Fagan's proposal despite its independent consultant endorsing it

Re this article - can someone clarify if the line quoted below is part of the current proposal design please?
"On retirement, they would have the option of buying an annuity from a pensions firm that guarantees a fixed monthly amount or putting the money into a so-called approved retirement fund (ARF)."

Also, I'd like to acknowledge how disappointing this must be for Colm after all his work. Having a novel, pioneering proposal rejected, at least in part, because it's novel and pioneering must be very frustrating - as in, again from the article: "The council also said it did not find precedents elsewhere for the alternative investment approach advocated."
 
The current proposal is simply to pay a lump sum. You can by a World cruise with it if you want. It is understood that this is how the DSP envisage it. 100% lump sum, tax free up to €200k. They see it as a follow on from the SSIA.
They have indicated that in time they might develop pension products. Everyone is assuming this means ones along current annuity/ARF lines.
 
Tucked at the back of the Pensions Council release is the independent report itself. It is totally supportive of Colm's proposal. In fact it recommends its own simplified version (which I haven't examined yet).
The most striking exhibit of all is the comparison with the proposed DSP lifestyling model.

The PC make a passing reference to this superiority but then mention that the author highlighted some risks (most of which apply to the current DSP proposal and indeed some of which are actually mitigated by Colm's proposal) . The rest of the PC letter and its own report is precisely what they would have written a year ago, it ignores the independent report almost entirely. And then it gives as one of its arguments for rejecting the proposal that we are running out of time, when it took 7 months after they received the report to publish their conclusion. :mad:
 
Where are the reports available? When I go into PC I get a placeholder for April 3.
 

Interesting. I had suggested to Colm to tone down his claims as they might be seen to be massive exaggeration. But clearly they are not.
 
based on a formula – known as smoothed values – that average the return of equities over time. This may differ from market values at any given time, but offer some protection from market volatility.
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So basically the state steps in to shore up the fund in periods of poor performance. Completely in opposition to one of the key objectives of AE which is to reduce future reliance on the Exchequer!


I am not on board with all aspects of AE but the idea that we should put in place a model-based system rather than an outturn-based one was never feasible.
 
Dr Strangelove said:
So basically the state steps in to shore up the fund in periods of poor performance.
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Not at all.

There will be periods of poor performance and outperformance. The state will not and should not get involved.

A period of poor performance will usually have followed a period of outperformance so there will be "reserves" in the kitty to smooth it out. And the poor performance will be followed by outperformance which will continue the smoothing.

There could be a 20 year period of negative stockmarket returns so the fund could be in deficit for a long time. But the state should not get involved.

Brendan
 
Dr Strangelove said:
So basically the state steps in to shore up the fund in periods of poor performance. Completely in opposition to one of the key objectives of AE which is to reduce future reliance on the Exchequer!
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I think you're missing a piece of the puzzle.

During bear markets, the value of the fund would drop, like you would expect. It does this to a lesser extent however than if no smoothing was in place. The reverse happens during bull markets. The buffer account shores up the fund when the market value is lower than the smoothed one.

I'm someone who has their entire pension in equities. I've made my peace with the volitility which goes with that, but if someone offered me a way to mitigate some of the volitility, while keeping the superior returns which equities offer, I'd bite their arm off!

The state is passing up on a huge opportunity here.
 
Thanks for your kind words! Yes, it is disappointing, but the logic of what I'm proposing (or something on similar lines) is so compelling that it has to win through in the end. It's a pity that it's going to take so long for the powers that be to realise that, but it's OK so long as we get there eventually.
There are good answers to every one of the PC's objections. I hope to get round to all of them sometime. I'll start now with one of the simplest - the equity risk premium (ERP).
The covering letter to the Minister includes the sentence:
"The Council found insufficient evidence to provide assurance of the consistent future outperformance of this approach (i.e., investing in equities)."
As mentioned at the start of an article I wrote for The UK Actuary magazine (which the five actuaries on the Pensions Council should have read):
In the long term, returns from ‘risky’ assets (‘equities’) exceed those from ‘safe’ assets (‘bonds’) by a significant margin – otherwise, why take the risk? Future equity outperformance – the equity risk premium – was recently estimated at an average 5.5% a year by 1,756 US economists (Fernandez et al., 2021). There will be times, possibly years, when equities fail to deliver the expected outperformance and even give negative returns in absolute terms. Over a contributor’s lifetime, however, from date of joining until final pension payment, which could be 70 years or more, the equity risk premium can be relied on to do its job.
The views of 1,756 economists are good enough for me. Incidentally, I don't think there's a single professional economist on the Pensions Council. I wonder where they sourced the "insufficient evidence" mentioned in the letter?
 
I am not convinced by colm’s proposal …Is all of this not based on the assumption that the equity Risk premium will always exist ?
The rules of the investment game may have changed and how would one ever know if or when it had until way into the future ?
Can the past really be expected to be “replicated” just by waiting long enough?

If everyone in the market believes in a risk premium won’t it disappear?
 
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Re-reading the report, I'm going to correct myself. The fund / smoothed value wouldn't necessarily drop, even during a bear market, due to the smoothing effect.

The other huge benefit of this approach is that you are invested for life. Again I'd bite someone's hand off for this type of arrangement. I'm going to have to take my inexpensive occupational pension fund, and inevitably end up having to setup an ARF, with much higher charges, and paying someone for the privilege of doing so.

 
Hi Colm,

What would be the impact of your proposals if equities only beat bonds by, say 1 or 2%, in the long-haul? Presumably, your approach is still going to lead to better outcomes than the alternative? As well as socialising the risk and smoothing returns, it would also have still protected Joe & Josephine Punter from poor decision making and hefty charges. What sort of outcome can future AE contributors look forward to if long-term equity returns are anemic in the now-chosen approach?!
 
Everybody agrees that people should be in equities for the vast bulk of the accumulation phase. Nobody asks "what if?" about that. There are no certainties here. We see how on reasonable projections the independent expert reckons that the Alternative Proposal is streets better than the lifestyling proposal of the DSP, but for sure this might prove to be wrong. Here's a thought. Let's say equities do go into terminal decline. What sort of world is that? It would likely be one where there is huge economic hardship. Is it really tenable that pensioners would be smugly enjoying their lifestyle protected nest eggs whilst the workers are struggling to make ends meet?
mtk said:
If everyone in the market believes in a risk premium won’t it disappear?
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It is an interesting thought. It is a question of supply and demand. Modern Portfolio Theory is centred on the concept that the market thinks in terms of a one year horizon. At the one year horizon there will always be a chance of big losses. If this risk gives rise to a discount in the share prices i.e. a risk premium, it is straightforward statistics that the risk reduces in proportion to the average return as you increase the horizon. Thus pension savers with a very long horizon get a sort of free lunch. Now if Colm's proposal became the norm throughout the World it would significantly increase the demand for equities and would reduce the ERP.
 
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Reactions: mtk
mtk said:
If everyone in the market believes in a risk premium won’t it disappear?
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Yes, it's a good question, and one that Brian and I have considered. The argument is, if I understand you rightly, that if we manage to tame the volatility of equities, then it's less risky to invest in them and the equity risk premium will contract or maybe even disappear.
The answer is that, even if every country in the world were to introduce smoothed AE pensions, the total volume of assets under management will still be tiny compared to the massive amounts swilling round in the coffers of really rich people - private offices, Russian oligarchs, etc. In other words, all the AE money will belong to the little people. They'll still have buttons compared to the really wealthy. So the ERP, like the poor, will be always with us.
PS: I've just seen the Duke's reply to the same question. I don't think it's inconsistent with what I wrote.
 
Your own answer to your question is on similar lines to what I'd reply. AE contributors would still capture the (smaller) ERP. There might be more of an issue for members approaching retirement to decide if they wanted to keep contributing to the AE scheme if SV (smoothed value) is much greater than MV. They have to balance the excess over MV they must pay to join the scheme against the lower rewards from being in equities. On the other hand, it's likely that, if the ERP is lower, then that's because the volatility of equities has reduced, so the SV is less likely to diverge much from MV.
You're also right that charges would be much less. There would also be much less frictional cost. I recall significant frictional costs at my own retirement, in moving from an accumulation to a decumulation product. The transition is completely seamless under smoothed AE. You keep exactly the same account; you just start drawing from it rather than adding to it. Is your last question not the same as the first?
 
Duke of Marmalade said:
They have indicated that in time they might develop pension products. Everyone is assuming this means ones along current annuity/ARF lines.
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I imagine there is fierce lobbying going on from Brokers Ireland to keep the ARF and annuity in the remit of the open market. Even though it will take decades for the pension pots in AE to be anything worth getting involved in.

Duke of Marmalade said:
And then it gives as one of its arguments for rejecting the proposal that we are running out of time, when it took 7 months after they received the report to publish their conclusion. :mad:
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AE was first mooted in 2006. And we're running out of time now!! Do they somehow believe that AE will be up and running in January 2025? The legislation hasn't even been drafted. I am predicting it won't go live until 2026.
 
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