Private Pension Options A Quick Comparison

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 The Pension Problem

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 20-25pence 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, Communication

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