Irish Times opinion piece by Colm Fagan: "Auto-enrolment plan seriously flawed"

I think this is a very interesting idea.

I would look at recreating it separately using derivatives on your smoothed index for a comparison.

Instead of the scheme, individual investors could buy and sell 'insurance' as options on the smoothed index with expiry of their specific retirement dates.

You buy a put option on the index being below the smoothed value on your retirement and sell a call option on it being above to help fund the put premium, it's a bit tricky because we don't know the smoothed value in advance, and as the market drops the smoothed value drops so e.g. the value of the put option drops. You'd need to price by simulation with an appropriate time series model on the market index.

If the options had fixed strikes, the puts are worth more than the calls on the same strike because the market in aggregate is risk averse so by providing the downside insurance by giving up the upside of future investors your scheme would seem to be a synergy. i.e. implementing the same outcome with options would cost money but you get it for free, and it has the benefit of simplifying management and lowering fees.

Simulations including the impact of smoothing on the strikes and the difference in the put and call option values (as a scheme premium) would put a figure on the value of replicating it in options and show how much you are saving investors on this insurance. I think that is a benefit separate to the 100% equity approach and reducing fees, although it is enabling it.
 
Of course it assumes that they want a smoothed index to begin with, you could justify that assumption by looking historically at smoothed versus unsmoothed returns for a range of utility functions, and run a tonne of simulations for robustness etc.

It's definitely a very complicated proposal and the benefits are interwined, the smoothed index, the free options/insurance on the market index replicated by diversifying over time and multiple investors, the fact that then enables pure equity investment and reduces fees.

It is a lot to sell in one step.
 
Towger said:
There are other issues in the thread, such as PRSAs having PRSI relief. The only pension type with any type of PRSI relief on contributions are ASCs. I will probably get attacked for calling ASC a pension.
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I stand ejected Did that change? I seem to remember getting PRSI relief on a PRSA. I have corrected the earlier post.
 
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I attach a similar suggestion from a professor in Australia.
 

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NoRegretsCoyote said:
I think your arguments would be much more acceptable (and indeed less complex) if you ditched all this stuff about smoothing and just said that people should be much more reliant on equities over fixed income products.
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Yes, it may (probably will) come to that. The smoothing will be just too radical and novel for policymakers to risk. But the the other glaring sins of omission and commission that are in the Bill and which Colm has flagged must be addressed.
 
I suspect people are programmed with an evolutionary bias that drives demand for active management and high fees.
Everyone getting 5% is a worse result than the individual getting 4% while the average is 3%!
 
Duke of Marmalade said:
Boss that is an unbelievably gratuitous swipe at Colm.
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Hi Duke

I am one of the most vocal supporters of his proposals so I am not making any gratuitous swipes at him or at the scheme.

He has a radical proposal which strikes many people as too good to be true. That worries them.

Not everyone will read everything written about this. Not everyone who reads it will understand it.

I sense that any questioning of the scheme irritates Colm. And this turns off people from even considering it.

In particular, he needs to stop discouraging those of us who support the scheme from discussing it in case we get attacked.

He needs to welcome all criticisms with the political " Good question - let me deal with that..." Privately he might be rolling his eyes to heaven, and that is fine.

I just checked my summary of his scheme and there was a good respectful discussion of it - in the first page at least. I assume it continued.

My proposal for one fund with a smoothed return

I nearly wept this morning, hearing Regina Doherty on RTE with Rachel English, going over old ground of people having to decide whether they want to be low, medium or high risk; what happens if markets tumble on the day people retire; the carousel (probably one of the most ridiculous concepts...
www.askaboutmoney.com

But he has failed to persuade the civil servants. I don't think he has got the Pensions Council (?) on board. I am frustrated by that as I am frustrated by civil servants and politicians to see the merits of my proposals which are blindingly obvious to me. The problem is that there is no urgency on my proposals. they will be adopted eventually. Colm faces a deadline and if he misses it, it will be very hard to ever implement it

So, I think that Colm needs to sit back and ask himself - what is stopping people seeing the light and how can I help them see the light?

Brendan
 
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Is there anything in Colm’s proposals that would stop somebody only contributing when units are at a discount (ie when smoothed values are below market values) and stopping contributions when units are at a premium (ie when smoothed values are above market values)?

Similarly, is there anything to stop somebody limiting their drawdowns to those times when units are at a premium?
 
Brendan Burgess said:
But he has failed to persuade the civil servants
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In addition, he has been unable to get the backing of the Society of Actuaries. I asked earlier about this but am still in the dark as to the real reason for this. Surely, the thought-leading pensions' actuaries must be well known and know more about the implications of all this far, far better than most? Do these folks agree with the concept or is it simply in their interest to let the proposals quietly run aground?

Also, Brendan, just for clarification, when you referred to "emergency measures", were you referring to (a) the NPRF or (b) the pensions' levy? Colm seems to think you were referring to (a) but my guess is (b)?
 
That's what we call "anti-selective" behaviour. Colm recognises that his scheme would not work in a conventional setting as people would game it as you describe.
So it has to be subject to a set of rules. AE itself has a lot of these rules hard baked like fixed statutory contribution percentages. Colm indicates what some of these rules would be such as you must take a 25% lump sum at retirement, no transfer values etc.. The sort of gaming you describe would probably require restrictions on exit and re-entry for say 5 years. Think VHI. This is very much based on community pooling underpinned by rules against gaming the system.
The biggest threat of anti-selection is in fact mass defection when smoothed values are higher than market values - "throwing good money after bad". Colm has devoted a lot of analysis to show that in any reasonably foreseen such situation the financial incentive is still to continue contributions to the smoothed AE rather than join a conventional alternative with its high charges and of course either high volatility or lifestyling.
 
I toned down the original comment.
 
Duke of Marmalade said:
The sort of gaming you describe would probably require restrictions on exit and re-entry for say 5 years.
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Fair enough but I would have thought that restrictions of that nature would undermine the primary objective of what AE is trying to achieve.

What happens to folk that have breaks in service? Maternity leave, etc.?

I really don’t buy the cost argument. The default fund could be a balanced index fund, with a fixed lifetime allocation, with an OCF as low as 0.15%.

Calculating and publishing the smoothed values, administering the additional restrictions, etc. all comes at an additional cost.

I must confess that I remain deeply sceptical about the utility of Colm’s proposals.
 
Sarenco said:
Fair enough but I would have thought that restrictions of that nature would undermine the primary objective of what AE is trying to achieve.

What happens to folk that have breaks in service? Maternity leave, etc.?
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The reason for the rules is to prevent financial anti-selection. The situations you describe are clearly not motivated by financial anti-selection and would be exempted. I know, it could get complicated. Group behaviour is one of the aspects which would need to be considered and I think Colm would admit that this would be above his pay grade, that is why he is asking for a review by a multi disciplined body like the ESRI
Sarenco said:
I really don’t buy the cost argument. The default fund could be a balanced index fund, with a fixed lifetime allocation, with an OCF as low as 0.15%.
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Well I cited my recent experience with my relative retiring at 60 with an ARF of c. €1m and a target pension of €40k. His opening offer from a (the) leading ARF provider was 1.25% or €12.5k p.a. or over 30% of his target pension. I think he got them down to .75% or €7.5k p.a. or c.20% of his target pension. The dumping of AE folk at retirement into this market is really not acceptable and not necessary.
Sarenco said:
Calculating and publishing the smoothed values, administering the additional restrictions, etc. all comes at an additional cost.

I must confess that I remain deeply sceptical about the utility of Colm’s proposals.
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Fair enough.
 
JimmyB99 said:
Also, Brendan, just for clarification, when you referred to "emergency measures", were you referring to (a) the NPRF or (b) the pensions' levy? Colm seems to think you were referring to (a) but my guess is (b)?
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Hi Jimmy

Either. The government can take wide powers onto itself in the case of an emergency. I forget the details now, but didn't the response to the banks' bail out required emergency legislation to be passed?

Brendan
 
Hi Brendan

Indeed - If only some other public measures got dealt with in the same sense of urgency as the Financial Support Act!

I suppose my point is that the Irish government has form in taking money directly from people's pension funds. Lets not get caught up in semantics. I've seen the levy classified as theft on the one hand to taxation on the other. I'm not really to concerned about the label. The key point is that the Government was short of mullah and said to itself we'll take some money from the people's pensions at an individual level via a "levy".

In simple terms, the government actually did, what Colm's CS mate said that they'd never do. And can we please not get tied up in semantics.

Colm Fagan said:
A senior Civil Servant who was closely involved with the NPRF told me once that the government would never have dared taking the money if it had been allocated to individuals. Then it would be clear that it was theft.
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For context, please remember the following. My understanding of what's been said is that this "political interference/Talk to Joe" threat is particularly acute when there is (would be) a surplus in Colm's AE fund. The point being that this wasn't even the case with the levy. For example, the levy was applied to DB funds also which were almost universally in serious deficit at that time. For completion, whilst DB assets are pooled, many schemes were compelled to transfer the levy onto members directly via an equivalent reduction in their individual benefits.
 
I've read the latest comments by @Brendan Burgess , @nest egg , @NoRegretsCoyote , @RonnieShinbal88 , @Sarenco , @JimmyB99 , et al.
I think I have reasonable answers to all or nearly all of them, but I'm slow on the keyboard and have a lot of other demands on my time. It's not the best use of that time to be answering questions on AAM, particularly when many of the criticisms are based on what people think I wrote than what I actually wrote. I would really love to hear disagreements with what I actually wrote in my papers, particularly in my most recent one
It occurs to me that one possible way to overcome the problem would be to organise a webinar, at which I would try to answer the questions, and where others would have the opportunity to come back to me with disagreements on what I've said, or with follow-up comments.
I'm not sufficiently technically minded to organise something of this nature, but would be happy to participate if someone else could organise it. I imaginer that it would be possible for people to retain their anonymity, if they wished.
Any takers?
PS: Despite what I've written, I'll try to get back on this thread with answers to some of the questions. It could take a while!
 
The word “surplus” is bandied about in the context of this red herring of “emergency measures”. My understanding is that in the accounts of Colm’s proposal the liability to members is always the market value of their pension fund. The smoothed value is the device for the timing of interactions with the fund.
Of course a future government may levy the fund but I think there is actual constitutional protection that it cannot be discriminated against in the application of that levy, and indeed if the fund was in “deficit” that would not protect it from a repeat of the pension levy.
As I say a red herring. Open up a new topic: Are pension levies tax or theft?
 
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Red herring from the man who brought in the tax treatment. Hmmm.

This is a great way to have an online debate alright. Attack any inconvenient comments as red herrings and take it off-line. Hmmm.

And one wonders why there's a lack of buy-in?!
 
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