Private Pension Options A Quick Comparison The

Private Pension Options A Quick Comparison

The Pension Problem • PENSION – An income from retirement until the death of the recipient. (plus add-ons for dependents) • SOLUTION – Save and draw down during retirement – Save, and then buy an annuity – Save collectively and “pool” the longevity risk

Solution 1: Save a lot and draw down • Advantages: Works well for those with lots of assets (who don’t need a pension per se) • Disadvantages: – You don’t know how long you will live. Either you need to save a lot, or you might run out of money. • If you want to be 95% sure you will have enough you need to save 83% more [Almeida and Fornia] • 25% of those retiring early in Australia have run out of private pension savings by the time they are 70

Solution 2; Buy an Annuity • Advantages: Annuity gives a dependable pension • Disadvantages: – They are costly. Government statistics suggest indexed annuities cost 20 -25 pence in the pound. – Promised annuities need to be invested in bonds; the wrong investment? – Variable annuities difficult to regulate – Create timing risk.

Solution 3: Diversify, or collectivise the longevity risk (CDC) • Advantages: Higher and more predictable pensions. • >30% higher than annuity; • 83% higher than drawdown (though inheritors lose out) • Disadvantages: – How can you be sure the plan will be • Managed on your behalf • Remain solvent • Be fair

…Add Ons • To any solution, and outsider can add on – Defined Benefit: Guarantees pension – Defined Contribution: Guarantee what saving is worth; but not the pension itself – Defined Ambition: ? ? ?

Who might benefit from CDC? • Savers in a DC plan • Savers whose DB plan is about to be closed • Anyone who needs a reliable retirement income, and knows annuities are too expensive – “decumulation CDC”

Who could provide CDC • Any large DB pension plan • But wouldn’t a large industry or national supplier be better? – Larger, so lower costs, greater expertise • And what role might Trade Unions play?

Some Caveats • CDC is not as good as DB • Governance arrangements are critical • Actuarial oversight essential. But perfectly possible • Communication, Communication

A Gamechanging Opportunity • Enormous economic benefit. Cost of pensions. Investment in economy. • Broad support • Spectators of Players?