Cabinet approves auto-enrolment scheme

[Duke of Marmalade]

I have a simple question for sarenco and others. Do they think 100% cash is the correct target at retirement? For that looks like the chosen default strategy preferred by the department.

 

[Colm Fagan]

You don't have a theoretical model for why equities do better,

The only part where it's reasonable to hold a different opinion is the assumption that equities will earn 4% more than cash, on average. Some people think it should be more than 4%, some less than 4%, but all are agreed that it must be greater than zero. Otherwise, what's the sense in taking a risk? Better to just leave everything on deposit or in "safe" bonds.

 

[Sarenco]

I have a simple question for sarenco and others. Do they think 100% cash is the correct target at retirement?

No.

Or at least not if the pot is to remain invested post-retirement, with a pre-determined drawdown rate.

It might be appropriate if the default is to use the final pot to purchase an annuity. I'm not saying that would be the right choice but I don't think it would be an absolutely terrible default position.

For that looks like the chosen default strategy preferred by the department.

Not sure where you're seeing that - could you point me to something to that effect?

 

[Duke of Marmalade]

Not sure where you're seeing that - could you point me to something to that effect?

Looked again. I presumed that the specific reference to lifestyle funds meant this was their direction of travel for the default fund. But you are right it doesn’t specifically say so.
I suppose I wouldn’t ban lifestyle but it should not be the default, I sense you agree with that.
As I said, a mixture of lifestyle and sensible defaults would mean the 99% who are thrown on the carousel will face a huge gamble, way beyond whether it is provider A or B who administers (and invests) their pot.

 

[Sarenco]

I sense you agree with that.

Perhaps we are talking at cross purposes but I think a series of age appropriate target date funds would be the appropriate default. So, no, I don't share your aversion to life styling.

But you could certainly make a good argument for a default fund with a fixed asset allocation for life.

 

[KCRMoney]

So they are forcing people to contribute 6% of their salaries. They are forcing employers to match this, so future salary increases will be reduced by this amount.

So in effect, people will be contributing 12% of their income.

This will make it much more difficult for people to buy a home.

Brendan

Brendan,

I think this is a excellent idea. In Australia people are forced to contribute 9% of the salary. They still afford to buy houses and live out there. Its a problem we need to tackle now before it becomes a crisis. Fair play to the government for being forward thinking.

 

[lledlledlled]

Is this development good news or bad news (or neutral) for those already paying into occupational pension schemes?

There seems to be little or nothing about this in the mainstream media. Probably a reflection of the general public not really caring about pensions.

 

[elacsaplau]

I was away during the week so just catching up on my reading during the match - the result of which both surprised me a little and pleased me more.

In relation to the investment aspects of AE, it's good that the unfair criticism of proposals that have not even been proposed has been acknowledged.

Also, in my opinion, there certainly is a place for well designed lifestyle type asset allocation as a default fund.

One other niggle, personally, I don't believe that there is a "free lunch" when it comes to investment - albeit I recognise the merit in much of what Marko had to say in this regard.

 

[Duke of Marmalade]

Sarenco I think it is fair to suggest that there is a real danger that the department/politicians will lean towards the UK NEST approach. Politically extremely safe. NEST is a “target cash at retirement” paradigm. “Lifestyle” and “default” are almost synonymous terms in PRSA land so it is more than fair to be concerned that the pointed reference by Woodenman to lifestyling suggests the direction of travel is towards the NEST.

 

[Sarenco]

Wasn't there a requirement to purchase an annuity with retired pensions in the UK until recently?

Most target date funds never go to 100% cash because there is no automatic assumption that an annuity will be purchased at retirement. In other words, the monies stay invested, albeit with a reducing level of risk assets.

 

[cremeegg]

Tell me which part of my post doesn't stand up. The only part where it's reasonable to hold a different opinion is the assumption that equities will earn 4% more than cash, on average. Some people think it should be more than 4%, some less than 4%, but all are agreed that it must be greater than zero. Otherwise, what's the sense in taking a risk?

Why do investors take a risk; to get greater returns.Why do they get greater returns; because they take a risk.

Sorry Colm but that is a circular argument.

 

[NoRegretsCoyote]

The only part where it's reasonable to hold a different opinion is the assumption that equities will earn 4% more than cash, on average......... Otherwise, what's the sense in taking a risk? Better to just leave everything on deposit or in "safe" bonds.

Equities have outperformed other assets classes indeed for a long time. But much of this premium dates from a time when people actually did hold single or small portfolios of stocks, hence the risk!

Now we are told to simply 'buy the equity market' which will reduce volatility and risk.

So this is where the flaw in your argument is. I don't think that large discrepancies in returns can exist permanently in financial markets like this. If the relative returns to a basket of equities are so great, why aren't they arbitraged away?

 

[cremeegg]

If the relative returns to a basket of equities are so great, why aren't they arbitraged away?

Colm has previously addressed this point.

He says, and I think this is the standard academic explanation, that the volatility of equities makes them less attractive to many investors. This in turn makes them less expensive to those who are willing to accept the volatility. Volatility being another word for risk.
That however is a long way from saying that taking on risk axiomatically brings higher returns, even if we say on average.

Personally I don’t believe we can foretell the future. The success of equities over the last 60 years tells us only that the economic circumstances of the last 60 years were supportive of equities.

The economics of the next few generations will be different. Maybe more supportive of equities maybe less.

 

[Colm Fagan]

I honestly don't know why people are taking issue with my assertion that the expected return (in the mathematical sense) from equities and other "risk" assets must be higher than on so-called "safe" assets, for the simple reason that, if it wasn't, there wouldn't be sufficient demand for risk assets. It should be absolutely self-evident.
For another perspective, I refer you to a report by one of the Big 4, claiming that the gap as at end June 2019 was 5.75%, which is much higher than the cautious estimate in my submission to the DEASP. The report is [broken link removed]

 

[elacsaplau]

I think this thread is overly focussed on the investment aspects of AE when we don't even know what is being proposed in this regard.

That said, personally I agree, in broad terms, with the concept of an ERP - so long as it is acknowledged that in order to get this premium, one is
taking risk.

As Investopedia correctly states...…."Some economists argue that, although certain markets in certain time periods may display a considerable equity risk premium, it is not, in fact, a generalizable concept. They argue that too much focus on specific cases — e.g., the U.S. stock market in the last century — has made a statistical peculiarity seem like an economic law. Several stock exchanges have gone bust over the years, for example, so a focus on the historically exceptional U.S. market may distort the picture. This focus is known as survivorship bias."

Of course, markets don't even need to collapse for the ERP to fail - markets can tank and remain in the doldrums for years. Just think of the world's largest equity market a generation ago.

 

[cremeegg]

I honestly don't know why people are taking issue with my assertion that the expected return (in the mathematical sense) from equities and other "risk" assets must be higher than on so-called "safe" assets, for the simple reason that, if it wasn't, there wouldn't be sufficient demand for risk assets. It should be absolutely self-evident.

I really think that you are blinding yourself to the circularity of this argument.

If investors think equities will provide a higher return than other assets, then they will pay more for them. So far so straight forward.

But perhaps investors are mistaken, perhaps equities will not outperform other assets, the mere fact that investors are willing to pay more for equities does not in itself mean equities will out perform.

Or perhaps I have misunderstood the argument you have given.

Now I got up early this morning to study for an exam I have during the week, so stop distracting me

 

[Colm Fagan]

I think I've finally worked out why I'm finding it difficult to get my point across. I'm probably one of the few on this site who gets my hands dirty evaluating real businesses and their prospects. A simplified example illustrates my point. My biggest holding is Phoenix Group. At the current share price, I'm getting a dividend of 6.6% a year. If I were to put my money in an Irish government bond, I would get 0.06% a year (so I'm told : I don't have any). I'm confident that the Phoenix dividend is safe for many years to come. In fact, it's much more likely to increase than decrease (IMO). I'm also confident that I'll get at least my money back if I want to cash it (say) 10 years from now. So why am I getting over 6% a year more from Phoenix than from an Irish government bond? (Let's say it's 5% more after allowing for the cost of hedging my sterling exposure). It's that much higher because neither the dividend nor the capital sum I'll get 10 years from now are guaranteed.
As an aside on survivorship bias, if I had put my money in the Shanghai stock exchange in 1949 or the Russian stock exchange in 1917, I could have kissed goodbye to it, but do you think I would have done any better if I had put it in a bank or a government bond in the same countries?

 

[Brendan Burgess]

Hi Colm

I agree with your plan

But your last post does not enhance your argument at all.

You believe that you can pick winners consistently and that you can beat the market.

Most other contributors would not believe that you can do this.

That is a completely separate argument to the main argument here.

Brendan

 

[Colm Fagan]

Brendan, I'm mis-communicating on all cylinders these days!
No, I'm definitely NOT trying to say that I can pick winners. I just took Phoenix as an example. I could have taken a myriad of others. My starting assumption with all shares (including Phoenix) is that the current price is right. Other stocks will show similar expected future returns, i.e. an expected return of more than 5% a year over bonds. KPMG, in the report I referenced earlier, effectively did the same calculation for the entire market.
The purpose of the example was to show how someone trying to decide whether to invest in a particular share assesses whether they will get a sufficient margin over bonds to justify the risk.

 

[elacsaplau]

My starting assumption with all shares (including Phoenix) is that the current price is right. Other stocks will show similar expected future returns, i.e. an expected return of more than 5% a year over bonds.

If you genuinely believed that other/many/all stocks had the same expected return:

1. What's the purpose, at all, of the Diary of the Private Investor - which is essentially about stock-picking?

2. Why such a concentrated portfolio? I take it, but am genuinely unsure, of whether you are aware of Marko's thesis in this regard?