Why didn't some other country think about smoothed AE years ago?

C

Colm Fagan

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I posted the following on LinkedIn yesterday. The topic of why smoothed AE wasn't introduced in other countries previously has been puzzling me for a while. Here's what I wrote about it:

The Pensions Council rejected my AE proposal despite the independent expert (that it appointed) agreeing that it could MORE THAN DOUBLE the size of workers' pension pots. The Pensions Council refused to engage with me when deliberating MY proposal, so I have to resort to LinkedIn [and askaboutmoney!!!] to rebut its criticisms.

I'll take each in turn.

In this post, I'll deal with what is probably the most ridiculous of all (although there are a few candidates for the title), namely that "Council did not find any precedents for an investment approach akin to the proposal in global, national, or provincial pension provisions". In other words, how in God's name could Ireland come up with an idea that hasn't been thought of somewhere else first? I won't bother dignifying that question with a response.

There is a serious underlying question, though. My proposal is not rocket science, so why didn't some other country think of it years ago if it really can MORE THAN DOUBLE THE SIZE OF WORKERS' PENSION POTS (I love putting those words in capitals!!!)?

There could be a sinister reason. I have heard it said (I don't know if it's true) that, when NEST was being launched in the UK, the insurers, pension brokers, pension consultants, asset management companies, etc., lobbied the (Tory) government in an effort to stop NEST from eating their dinners. The compromise agreed was that NEST would look after the accumulation stage (when there are no margins for providers) but that, when workers got to retirement, they would then be turfed out, to be cannon fodder for advisers, insurers, consultants, brokers, asset managers, etc., keen to get their hands on the juicy lump sums emerging at retirement.

Our DSP plans the same approach. Under its proposals, workers will be turfed out at retirement and forced to hawk their savings pots around the market. I hasten to add that I'm not suggesting that anything untoward might have influenced the Irish government's decision.
 
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Good job that the Pensions Council wasn't asked to comment on the feasibility of the smoking ban as it would have been rejected as it had not been tried anywhere before.

Or they wouldn't have allowed a referendum on Gay marriage as we were the first to pass it by popular vote.

They wouldn't allow Stephen Donnelly to introduce health warnings on alcohol, as that has not been done before.

We were the first country to stop our state investment fund from investing in fossil fuels. (I wonder if there is any crossover with the Pensions Council?)



Brendan
 
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Brendan Burgess said:
Good job that the Pensions Council wasn't asked to comment on the feasibility of the smoking ban as it would have been rejected as it had not been tried anywhere before.
Click to expand...
New York City had a smoking ban before we did.
Brendan Burgess said:
They wouldn't allow Stephen Donnelly to introduce health warnings on alcohol, as that has not been done before.

We were the first country to stop our state investment fund from investing in fossil fuels. (I wonder if there is any crossover with the Pensions Council?)
Click to expand...
The Pensions Council would have been entirely correct to urge caution in respect of each of these measures, particularly the second one.
 
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Hi Colm

I am working my way through the report now. They just note that it has not been tried elsewhere. It's not their reason for advising against it.

Comparable models

The Council found no examples of an investment approach akin to the Alternative AE proposal in national, state, or provincial pension provisions globally. While some private sector arrangements share similarities, they rely on manual intervention rather than a long-term mathematical formula. Buffer accounts in collective defined contribution schemes differ in that they are established upfront, rather than over time.

In terms of international comparisons and products in different markets, the proposal could be compared to variable annuities which involve guarantees and hedging strategies as well as cash-balance plans found in the US and Japan, crediting a nominal account with a fixed for floating rate.
 
Brendan Burgess said:
I am working my way through the report now. They just note that it has not been tried elsewhere. It's not their reason for advising against it.
Click to expand...
Hi Brendan. In researching my reply to your question, I made an interesting discovery. Firstly, I haven't got past the covering letter by the Chair of the Pensions Authority to the Minister. That states that "... Council .. does not recommend it as the structural basis for the approved AE system. The Council's position reflects its assessment across the following five areas as requested by you in your letter.".
The letter then went through the five areas, seeing negatives for each. Under Heading 3: "Similar approaches elsewhere", she wrote: "The Council did not find any precedents for an investment approach akin to the proposal ..." Technically, I suppose you could say that she's not citing it as a reason for advising against it, although it does relate to the introductory paragraph, which indicates that it was one of the reasons for recommending rejection.
The interesting discovery was that the Minister's letter did not mention the two most obvious headings on which she should have asked for a view: value for money and volatility of returns for members.
Why were these two obvious areas missing from the letter? Was it because everyone knew in advance what the answers would be, i.e., double the value for money and minimal risk of members seeing the value of their pension pot falling (it would never have happened - not even in a single month - in the period 1990 to 2019 for the UK or US market)?
Forgive my scepticism but I have an unfortunate history with the Pensions Council.
In 2021, I persuaded them to consider doing a feasibility for my approach, but they concluded (as per the minutes of the May meeting - agenda item 3) that:
due to their doubts around the feasibility of a feasibility study they will not pursue this further.
That minute would be quite funny if it weren't so disastrous for the country's interests: I'm saying that my proposal saves the nation (collectively) around €1.5 billion a year when the scheme reaches a mature stage.
As if that wasn't enough, I managed to persuade them to look at my proposal again in 2022, after I won the major award from the Institute and Faculty of Actuaries in the UK. This time, they managed to "lose" it as an agenda item, without explanation, between meetings, but not before recording (in the December 2022 minutes) as follows:
The Council members exchanged views and agreed on the importance of offering consumers a choice rather than mandating one investment approach. It was discussed that in Ireland individuals value the ability to freely decide between alternatives. Council members saw issue with the implicit presumption of outperformance of equity markets in the AE design proposal.
Once again, this minute would be funny if it hadn't such dire consequences for the country.
Presumably they hadn't heard that, in the UK, around 99% of members opt for the default fund. So much for individuals wanting choice.
Also, intelligent professionals querying the existence of the ERP is quite extraordinary.
Therefore, I knew what to expect from the Pension Council's evaluation of my proposal.
 
Guys - could you read the thread title before posting.

This thread is about a very specific issue.

I have had to delete a number of posts from this thread.

Feel free to discuss Colm's proposal generally in the other thread.

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

Article this morning in the Irish Times "Pensions Council rejects proposal to load auto-enrolment with shares" - www.irishtimes.com/your-money/2024/04/03/pensions-council-rejects-proposal-to-load-auto-enrolment-with-shares/
www.askaboutmoney.com
 
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