Minister Humphreys' closing speech in the Second Reading of the AE Bill in the Dáil

[Protocol]

PLEASE SEE SOME ANSWERS BELOW

I think AE is a good idea, that everyone contributes and gets a pension at the end. Of concern

costs

- guaranteed final pensions = there is no guarantee
- fund managers taking too much in commission = a good point, especially in Ireland
- funds taking too much risk
- funds going bust
- nobody being actually accountable
- another quango to manage it = yes, there will be a new State organisation
- state backed guarantees = there is no such thing
- the possibility that if you have AE you won't get the state pension = no, the social insurance pension is based on SI contributions
- being told everything is great and down the line finding out otherwise

I'd also like a simple explanation. Perhaps because it's no longer of concern to us I'm not following this properly. I don't see anything in the newspapers.

 

[Duke of Marmalade]

My husband had a defined benefit pension. His company, which is American but also Irish based tried to move everybody like him into a defined contribution. He got the very slick hard sell. Loads of glossy presentations that would persuade you black was white. I was not allowed to attend. There was no way he was every going to change from a DB to a DC. Nobody in his company, nor the slick marketing people ever said that a DB is better than a DC. I trust no pension company. Generally am untrustworthy.

Just setting out the stall as a lay person.

I think AE is a good idea, that everyone contributes and gets a pension at the end. Of concern

- costs it has been indicated that costs to savers will be no higher than 0.5% p.a. of their accumulated savings which is certainly much less than a commercial provider would require, the taxpayer will pick up the shortfall; punters are however dumped on the market at retirement age
- guaranteed final pensions this should have been defined benefit like the basic state pension, but the zeitgiest is to leave all the risks (except costs) with the punter
- fund managers taking too much in commission investment costs are actually quite low, around 0.15% p.a. financial advice is more expensive (a) intrinsically and (b) unnecessarily as providers compete for the intermediary rather than the punter. Thankfully intermediation costs should not arise in the savings phase
- funds taking too much risk the investment management will be closely overseen by either the NTMA or a similar body and things like diversification will be de rigeur, but see my earlier post on the whole concept of risk/reward in investments

- funds going bust with all risks except costs being laid at the punters, there is no chance of the "funds" going bust. Costs will presumably be underwritten by the taxpayer
- nobody being actually accountable pass
- another quango to manage it pass
- state backed guarantees see above
- the possibility that if you have AE you won't get the state pension now I do believe that is a valid concern. I have always regard PRSI as just another tax and am almost surprised that I receive the full basic pension (albeit subject to tax); if the aging population is not matched by technological productivity gains I see the basic pension becoming totally means tested sometime in the next 40 years. It would be a bit of a kick in the teeth if your AE savings meant you failed the means test
- being told everything is great and down the line finding out otherwise that's life

I'd also like a simple explanation. Perhaps because it's no longer of concern to us I'm not following this properly. I don't see anything in the newspapers. I tried

 

[Bronte]

Hi Bronte
Probably this presentation is the most straightforward explanation. There's lots more on my website colmfagan.ie
The Bill before the Oireachtas treats AE exactly the same as a normal DC pension. There is a "default" approach where members are put into high-risk unit-linked funds at the start, then moved gradually to lower-risk funds as they get older. When they retire, the scheme pays out a lump sum. If they want to use that lump sum to provide a pension for life, they have to buy an ARF or an annuity from an insurance company or other financial services provider.
My proposal looks at the scheme as a whole. Members' individual accounts look like - and are administered like - high interest deposit accounts earning an average interest rate of c4% a year more than bank deposits. During a person's working years, contributions are added to the account, then they gradually draw from it in retirement to provide a pension. There is a special Longevity Protection Fund to protect retired members from running out of money if they live too long.
The Pension Council's own independent expert estimated that pensions under my proposal would be more than double those under the Bill, but the Pensions Council advised the Minister to reject it, a recommendation she accepted. That's what all the fuss is about!!!

So everybody in the AE would put in their contribution monthly, the money would be managed by who at what cost?

What happens if you have a period of high risk funds tanking?

I don't like the fact that on retirement you have to buy an annuity. I'd prefer to cash it in, which is what we did with my husband's DB scheme. Doesn't an annuity mean the pension companies get paid even more, and they have no incentive to offer good ones. There have been periods of terrible annuities.

What guarantees are there on any of this all working.

Clearly if your scheme would result in a bigger pension pot than what is proposed it would be pretty idiotic to do otherwise. Why does the Pensions Council object.

Who is the Pensions Council made up of?

 

[Bronte]

- the possibility that if you have AE you won't get the state pension = no, the social insurance pension is based on SI contributions

Do you seriously not think that a future government will water down the state pension if everybody has an AE pension. Or they will do something to tax the AE.

Perhaps this is a stupid question, not all countries have a state pension like Ireland. Those that are high earners get a higher pension based on a life time of paying more in some countries. Why not go for that instead. Instead of AE, let people put in more in SI, linked to salaries, but also for those that want to contribute more in SI, in order to get a higher pension, and let the state guarantee that instead.

 

[Bronte]

My husband had a defined benefit pension. His company, which is American but also Irish based tried to move everybody like him into a defined contribution. He got the very slick hard sell. Loads of glossy presentations that would persuade you black was white. I was not allowed to attend. There was no way he was every going to change from a DB to a DC. Nobody in his company, nor the slick marketing people ever said that a DB is better than a DC. I trust no pension company. Generally am untrustworthy.

Just setting out the stall as a lay person.

I think AE is a good idea, that everyone contributes and gets a pension at the end. Of concern

- costs it has been indicated that costs to savers will be no higher than 0.5% p.a. of their accumulated savings which is certainly much less than a commercial provider would require, the taxpayer will pick up the shortfall; punters are however dumped on the market at retirement age
- guaranteed final pensions this should have been defined benefit like the basic state pension, but the zeitgiest is to leave all the risks (except costs) with the punter
- fund managers taking too much in commission investment costs are actually quite low, around 0.15% p.a. financial advice is more expensive (a) intrinsically and (b) unnecessarily as providers compete for the intermediary rather than the punter. Thankfully intermediation costs should not arise in the savings phase
- funds taking too much risk the investment management will be closely overseen by either the NTMA or a similar body and things like diversification will be de rigeur, but see my earlier post on the whole concept of risk/reward in investments

- funds going bust with all risks except costs being laid at the punters, there is no chance of the "funds" going bust. Costs will presumably be underwritten by the taxpayer
- nobody being actually accountable pass
- another quango to manage it pass
- state backed guarantees see above
- the possibility that if you have AE you won't get the state pension now I do believe that is a valid concern. I have always regard PRSI as just another tax and am almost surprised that I receive the full basic pension (albeit subject to tax); if the aging population is not matched by technological productivity gains I see the basic pension becoming totally means tested sometime in the next 40 years. It would be a bit of a kick in the teeth if your AE savings meant you failed the means test
- being told everything is great and down the line finding out otherwise that's life

I'd also like a simple explanation. Perhaps because it's no longer of concern to us I'm not following this properly. I don't see anything in the newspapers. I tried

Questions

- I think any organisation getting a .5% guaranteed income for the entire nations pension savings doesn't sound cheap to me. And I don't think it should be compared to commerical providers. Maybe a set fee instead.
- What does that mean the tax payer will pick up the shortfall? Short fall of what?
- As I suspected aged 65 you have what's in the pot, and depending on market have to purchase a crap annuity, with no competition. Why would the companies bother to offer great annuities
- And no guarantees the pension pots will perform well
- I see all risks are with the public. You mean if the funds perform badly?
- Don't understand the intermediary costs. Sounds all complicated slight of hand to get fund managers commission
- Is the NTMA excellent, is their track record fabulous
- great the tax payer will be on the hook if this all go wrong, plus ca change


Is there a tabular format for this. Or an excel. X amount in, over 40 years, annual costs, management costs, % increase for x years, lower % increase on bigger safe pot for last years, lump sum in pot, annuity payout amount ..........

 

[Colm Fagan]

Hi @Bronte Lots of questions! I'll try to answer them as best I can.

So everybody in the AE would put in their contribution monthly, the money would be managed by who at what cost?

I'm just assuming monthly contributions. They're paid out of regular earnings, so they could be weekly. The employer and the state contributions are assumed to be added at the same time.
As to how the fund will be managed, the trustees/ directors or whoever is charged with looking after it must do the very best for the members' long-term interest, remembering that contributions will exceed benefit outgo for the first 30 years at least, possibly longer, so the trustees/ directors should aim to get the best sustainable return over that time horizon.
In relative terms, amounts invested will be quite small in the early years, so to keep costs down, I would advise putting the money in what's called a passive world equity fund for the first few years - but I hasten to add that I'm not an investment expert. Later, the trustees/ directors can look to making direct investment. The aim always will be to get the very best long-term real (inflation-adjusted) return for the members.
The cost will be very small. I think it might be around 0.05% (i.e., 1/20th of 1%) of assets under management a year. However, it's worth noting that the cost of asset management is only a small fraction of the total cost of running a scheme of this nature. The main cost is administering members' accounts, answering queries, etc.

What happens if you have a period of high risk funds tanking?

Contributions will be invested in top companies. At the moment, we're talking about the likes of Microsoft, Apple, Amazon, Berkshire Hathaway (Warren Buffet), etc.; the composition will change over time. Share prices can fall sharply in the short-term, but the businesses will by and large continue. My proposal looks at the long-term. Returns will be smoothed to even out short-term humps and hollows in share prices. Some people have a problem with this, because it means that people may join (and leave) at other than market value. That can only be done in auto-enrolment, where they can't cut and run at the drop of a hat (if the market falls and smoothed value exceeds market value), nor can they suddenly pile in (if the market rises and the smoothed value is less than market value).
Over the very long-term, shares have delivered around 4% a year more than deposits and government bonds. Experts expect the gap to increase in future (A survey of over 1,000 economists expect that shares will deliver 5.5% a year more than "safe" investments in the long-term). By smoothing out the humps and hollows of price fluctuations, members of the scheme are more certain of getting the higher return - and remember that they're in it for the long haul. It could be 70 years from date of joining to getting the last pension payment from the scheme.

I don't like the fact that on retirement you have to buy an annuity. I'd prefer to cash it in, which is what we did with my husband's DB scheme. Doesn't an annuity mean the pension companies get paid even more, and they have no incentive to offer good ones. There have been periods of terrible annuities.

There's no such thing as an annuity under my proposal. Members stay in the scheme post-retirement (after taking 25% as a lump sum gratuity). Think of it as a deposit account, paying an average of 4% a year more than a bank account (I think it will be more than 4% on average). Members add to the account while they're working, then draw from it in retirement, earning interest all the time. I have devised what I call a "Longevity Protection Fund" (LPF) that people can join from age 75. For a small cost (in the form of a reduced interest rate from age 75), they can protect their regular (pension) drawings from the risk of outliving them. They won't be forced to join the LPF. The details are in my paper (section 5). Another important thing about post-retirement is that, if a retired person has a pot of (say) €100,000 and they die, the full €100,000 is payable to their estate or dependants. As you know, the money is gone if you die after buying an annuity (unless you die within the guarantee period of 5 years or whatever).
Must go now. Will try to deal with your other questions later.

 

[Colm Fagan]

Hi @Bronte
Continuing my replies, as promised to your post above (#23)

What guarantees are there on any of this all working.

Your question can be interpreted either as asking if returns are guaranteed or how certain am I that the scheme will work.
There is no guaranteed minimum interest rate; however, I simulated what "interest rate" members would have got each month if the scheme had been introduced in January 1990. The answer was that they would have got a positive interest rate each month for the entire period. That includes all through 2007 to 2009, when stock markets tanked. The average interest rate over the 30-year period would have been over 8% a year. Even if experience had been the same as Japan over the same 30-year period (Japan went through the horrors after 1990) returns would have been positive over every 10-year period. That would have been much better than bank deposits earned in Japan - they had negative interest rates through much of the 1990's.
No-one can be 100% certain that the scheme will work in practice. That's because it's never been done before. It's a world first. Critics claim that there are question marks over it, but no-one has (yet) come up with a sound argument as to why it wouldn't work. On the other hand, I (apparently) was able to persuade the jury for the Institute and Faculty of Actuaries competition that I entered in 2022 that it would work. Otherwise, they wouldn't have given me first place. The jury was chaired by the world-famous economist John Kay.
I'm blue in the face trying to persuade critics to engage and to debate the pros and cons of my proposal, but no-one is prepared to challenge it in public. For example, the IAPF has refused all my requests to present to one of their conferences. The Pensions Council (to be discussed when I get round to answering your last question) has refused categorically to engage with me in any shape or form for the last three years, ever since they decided in 2021 that it wasn't feasible to do a feasibility study of my proposal (not until Minister Humphreys asked them to do one in 2023). Even after Minister Humphreys asked them to evaluate it, they refused to engage with me about it, and they advised the Minister against it despite the independent expert - who they had employed - concluding that pensions under my proposal would be more than double those under the Bill that's currently before the Oireachtas. Needless to say, the letter to the Minister advising against my proposal made no reference to their own expert concluding that pensions would be double what they would be under the scheme proposed in the Bill.
What I want more than anything is for a reputable independent body like the ESRI to take my proposal apart and to challenge everything I've claimed for it, in my papers for the Society of Actuaries in Ireland, for the Institute and Faculty of Actuaries and in other papers (for example, I have updated my thinking on some aspects of my proposal in a note that I put on my website last year. I also have some other relatively minor refinements that I'd be happy to discuss with whichever body eventually looks at it.)

 

[Colm Fagan]

More replies to @Bronte's post #23.

Clearly if your scheme would result in a bigger pension pot than what is proposed it would be pretty idiotic to do otherwise. Why does the Pensions Council object.

It's a very good question, but I don't have an answer. I don't know why the Pensions Council took a negative decision on my proposal. In statements to both Dail and Seanad, Minister Humphreys pretended that the Pensions Council was a paragon of independence and implied to TD's and Senators that she only rejected my proposal because of its advice:
" I arranged for an in-depth consideration of this proposal. My own officials, as well as the independent Pensions Council, looked very closely at it. ..... The Pensions Council is an independent body of experts drawn from the legal and financial world. ..The council has found several shortcomings regarding the technical and practical feasibility of the proposal and a lack of supporting evidence for it. As Minister, I could not foist an untested and unproven theory ... I cannot take risks with people's money ... against the advice of the Pensions Council."
The Pensions Council is not "an independent body of experts from the legal and financial world". It includes officials from Minister Humphreys' own Department and from the Department of Public Expenditure, NDP Delivery and Reform. The Chief Executive of the Pensions Authority (and Pensions Regulator) is a member. He is a long-time opponent of my proposal. Council as a whole has been clear in its opposition to my proposal since 2021 and has refused point-blank to engage with me, even during its so-called independent evaluation of my proposal.
The letter of February 2024 from the chair of the Pensions Authority to Minister Humphreys didn't mention the most obvious question that anyone would ask about my proposal, namely, how members' pensions under it would compare with those under the Bill. Yet the Pensions Council employed an expert to advise it on this question. The conclusion was that pensions under my proposal would be more than double those under the Bill. Yet that comparison didn't get a mention in the letter. Why did they pay someone for an independent opinion and then say nothing about that opinion when writing to the Minister? Was it because it wasn't the conclusion they wanted?
The Pensions Council could say that the Minister didn't ask which approach would produce the higher pension, which is technically correct (why didn't she?), but one would still think that it merited a mention under the catch-all "Other matters" at the end of the letter, especially since the Pensions Council is supposed to discharge a proactive role in advising the Minister on Pensions Policy. It can't just wash its hands, saying "We didn't look at value for money, because the Minister never asked us ".
Its objections are listed under five headings in the February 2024 reply to the Minister's April 2023 letter. I won't comment much on them - people can read for themselves - but there wasn't a single "hard" argument, just a series of subjective, unsubstantiated negative comments, some of which were questionable, to say the least (e.g., doubting if equities can be expected to deliver better returns and claiming that AE members want investment choice).
I'm not saying that my proposal is bulletproof, but it merited a more scientific, measured evaluation than it got from the Pensions Council, given especially that, if my claims for it are justified, it delivers more than twice the value of the proposal in the Bill. It's very disappointing that it didn't get that measured, objective evaluation.

 

[Fortune]

As Minister, I could not foist an untested and unproven theory

A quick Google of "smoothed pension funds" comes up with quite a few results. It seems there are plenty of options in the UK market, and even 2 from New Ireland. And that doesn't even include with profits funds which are also smoothed and have been in operation since before most of us were born

 

[Colm Fagan]

@Fortune
In fairness, my proposal is very different from with-profit or smoothed funds devised by life assurance companies. It only works for auto-enrolment.
The key differences from with-profits are set out towards the end of this article I wrote for The Actuary magazine.

 

[Colm Fagan]

A quick Google of "smoothed pension funds" comes up with quite a few results. It seems there are plenty of options in the UK market, and even 2 from New Ireland. And that doesn't even include with profits funds which are also smoothed and have been in operation since before most of us were born

Sorry. That was accidental but I can’t delete it.