The end of the road

Colm Fagan said:
It was with a deep sense of sadness I learned this morning that Ireland's auto-enrolment Bill was passed into law last night. So all my efforts to show that there's a far better way to do AE than to treat it as a collection of individual DC pension arrangements have been in vain.
I gave it my best shot. It wasn't enough.
To all who've supported me for the last six years, I'm sorry. I'm thinking particularly of Brian Woods, who has been my intellectual rock for the last 50 years. Brian had his doubts initially, but I think I finally managed to convince him!
Click to expand...
@Colm Fagan
Not sure if relevant, but dail voting on Oireachtas TV now on criminal law, courts and 'Superannuation'. amendments 3 of 3.
 
Hi @ACER10 Only saw your post now. I suspect it had no relevance to AE, but thanks anyway.
For what it's worth, there is still a long way to go. For example, there's been no indication of what the charge against member accounts will be. The NEST charge equates to just over 0.5% of assets under management (it's a combination of a percent of AUM and a percent of contributions, which works out at more than 0.5% of AUM in the early years and less in later years). DSP indicated a few years ago that the charge would be 0.5% of AUM. That was the figure used to calculate the 14% required contribution for an "adequate" pension.
I suspect that, when DPER (Paschal Donohoe's Department) do the sums, they'll tell DSP that 0.5% is not nearly enough (I suspect they've told them already, but no-one is saying anything), and that a much higher charge - probably close to 1% a year - will be required. Whether they will increase the 14% is another question.
When doing their calculations, DPER will likely look at the NEST experience. In 2023, after the scheme was 12 years in existence, NEST had a cumulative deficit of over €1 billion. They project to clear the deficit by 2038. The Irish scheme will have less than one-tenth of NEST's membership but costs will be far more than a tenth of NEST's. That does not bode well for the scheme ever being able to wash its face. Ergo, the charge has to be increased.
All the above has yet to play out in public.
 
Forgive me please. There’s a lot of jargon on the posts of this thread which I don’t understand. Is there a readable summary anywhere of what this is all about?
 
Hi @Leper
I don't know whether you want to learn about auto-enrolment in general, or my proposal (and its sad fate) or the cost of administering the scheme (which I discussed above). Let me know which, so that you can be pointed in the right direction.
Your question caused me to think about the higher level issues with AE.
I don't think that anyone has yet taken a helicopter view of the scheme. That's incredible, given the projected long-term cost, expected to be around €4.5 billion a year - every year. (The calculation is as follows: government expects 800,000 workers to join the scheme. Let's say average earnings of €40k a year. The total projected contribution rate when the scheme is mature is 14% (6% employee and employer, 2% state. Therefore, total cost = 800k*€40k*14% = €4.48 billion a year. And that's before allowing for the cost of administering the scheme in excess of deductions from members' accounts, discussed above).
Why hasn't government asked ESRI for a cost-benefit analysis?
 
Thanks Colm, I hadn’t understood nearly anything on this thread. Thanks for treating my post seriously and thanks also to @Freelance for the Like. I was beginning to question whether I should be shuffling around in my slippers. I’m waiting for @Purple to sharpen his knife as I write.

I am not aware of Auto Enrolment or your proposal. The jargon along the way on the thread is confusing too. Dare I say it, but when one speaks of anything like this the essence is to be understood.

I can see that there’s much support for your proposal, but somewhere it seems it got lost in translation along the way. No offence from me is intended.

I don’t want you to give all the details, but even if you can point me in the right direction would do.
 
@Leper
Continuing….
The focus of my proposal was on how contributions would be invested.
The scheme per the Bill treats auto-enrolment (AE) as a normal DC (defined contribution) pension scheme. There is a a "default" investment strategy (over 90% are expected to opt for the default strategy because they don't have a view on the stock market). The default investment strategy is to invest in high-risk unit-linked funds to age 51 (high-risk are expected to earn higher returns on average), then to shift to medium-risk funds until age 61, then to low-risk funds in the five years to retirement at 66. The idea is to protect members from the risk a sharp fall in the value of their pension pots close to retirement. At retirement, there is a lump sum entitlement, which members can use to buy individual post-retirement products.
My proposal views AE very differently. This article for the UK's "Actuary" magazine describes it in general terms, not specifically for Ireland; this presentation contrasts it with the scheme proposed by government (some of the detail differs slightly in the final version).
The Minister (advised by the Pensions Council) rejected my proposal. Sin scéal eile, as my daughter, an Irish (and Spanish) teacher might say.
 
Raskolnikov said:
What's unforgivable is that there seems to have been no one in the chamber to debate this. Auto-enrolment is incredibly important to the long-term strategic future of planning for our retirement. What are the busy-bodies in Leinster House doing that's more important than this?
Click to expand...
Well to be fair there has been an awful lot of cooking in this piece of legislative pie. About two years ago the Draft Heads of a Bill were published. We then had about 3 months of a public Joint Oireachtas Committee review of these Heads. We then had the Minister ask for an independent review of Colm's proposal. Finally we had the Bill which went through 3 stages in the Dail then 3 stages in the Seanad and finally the formality of the Dail passing the Bill into law.
Through all this process the fear of doing something new and different from the Brits was the 2 stone handicap overweight carried by Colm's proposal.
 
Colm Fagan said:
@Leper
Continuing….
The focus of my proposal was on how contributions would be invested.
The scheme per the Bill treats auto-enrolment (AE) as a normal DC (defined contribution) pension scheme. There is a a "default" investment strategy (over 90% are expected to opt for the default strategy because they don't have a view on the stock market). The default investment strategy is to invest in high-risk unit-linked funds to age 51 (high-risk are expected to earn higher returns on average), then to shift to medium-risk funds until age 61, then to low-risk funds in the five years to retirement at 66. The idea is to protect members from the risk a sharp fall in the value of their pension pots close to retirement. At retirement, there is a lump sum entitlement, which members can use to buy individual post-retirement products.
My proposal views AE very differently. This article for the UK's "Actuary" magazine describes it in general terms, not specifically for Ireland; this presentation contrasts it with the scheme proposed by government (some of the detail differs slightly in the final version).
The Minister (advised by the Pensions Council) rejected my proposal. Sin scéal eile, as my daughter, an Irish (and Spanish) teacher might say.
Click to expand...
Thank you Colm. I am more wise today than I was yesterday after reading your summaries. I enjoyed reading them (in fact I kept rereading them and will continue to) But, selling the concept would not be easy whether greater rewards would not or would accumulate down the line. I can see where the likes of me would balk. That is not to say I disagree with you, but older Irish people would prefer to see what is in the hand rather than what might be there even though potentially greater.
 
Thanks, @Leper. I can understand your reservations, because it's very different to anything out there and is more complicated than appears at first sight. It's still puzzling that government rejected it on the grounds that there are no precedents, and decided not to ask the ESRI or a similar body to evaluate it, given its claim to be worth over €2 billion a year to the nation.
As an aside, I'm surprised that you say that older people might like it less. One of my critics' main objections is that it favours older people, that it has a Ponzi element. I disagree, of course!
 
Leper said:
Thank you Colm. I am more wise today than I was yesterday after reading your summaries. I enjoyed reading them (in fact I kept rereading them and will continue to) But, selling the concept would not be easy whether greater rewards would not or would accumulate down the line. I can see where the likes of me would balk. That is not to say I disagree with you, but older Irish people would prefer to see what is in the hand rather than what might be there even though potentially greater.
Click to expand...
Which is ironic, as there's nothing in the hand.
 
Thanks, @Fortune I misread @Leper 's post initially.
You're right. It will take years yet to get the scheme as proposed up and running. They could easily ask ESRI to investigate my proposal, without delaying plans to collect contributions, etc. If, by some fluke, they were ready to go before the review was completed (most unlikely), they could simply keep contributions on deposit pending its completion. My proposal will be so much easier to implement and administer. The money simply goes into one big account, which pays the same interest rate to everyone. One could make the case that my proposal could be introduced quicker than the complicated unit-linked proposal that's on the table.
 
Colm Fagan said:
Thanks, @Fortune I misread @Leper 's post initially.
You're right. It will take years yet to get the scheme as proposed up and running. They could easily ask ESRI to investigate my proposal, without delaying plans to collect contributions, etc. If, by some fluke, they were ready to go before the review was completed (most unlikely), they could simply keep contributions on deposit pending its completion. My proposal will be so much easier to implement and administer. The money simply goes into one big account, which pays the same interest rate to everyone. One could make the case that my proposal could be introduced quicker than the complicated unit-linked proposal that's on the table.
Click to expand...
I'm vaguely recalling something about the Swiss pension system having legal minimum investment returns or some such. That doesn't sound too far away from your idea of returns smoothed by applying an interest rate. Another to add to the list of precedents that the government have ignored.
 
Thanks @TheJackal
It was a good article, and he nearly got me right. He was dead right though about the Pensions Council rejecting my proposal despite an independent reviewer concluding that it would deliver much higher benefits (more than double the pension, to be precise). The main reason they rejected my proposal was because it was novel: they couldn't find anything like it anywhere else in the world, so it must be faulty, despite it winning the top prize from the Institute and Faculty of Actuaries (if you detect an element of sarcasm in what I've written, you'd be right!!)
For what it's worth, here's what Jon Ihle wrote about my proposal in the Sunday Times:
Humphreys was offered a way out of this conundrum by Colm Fagan, a prize-winning actuary and former president of the Society of Actuaries in Ireland, who proposed an alternative structure of a pooled investment, with no menu of investment strategies for employees.​
Instead, the state would operate it like a sovereign wealth fund, aiming for the risk-free rate of return plus 4 per cent. It would achieve net positive cashflow after several decades, allowing benefit payments to be smoothed for everyone, unlike the current plan, in which each saver is subject to the ups and downs of the market.​
“My proposal could be administered like a regular savings account,” he said. “The government is doing it like a company pension scheme, leading small savers into gambling with their money. They’re putting people into separate dinghies and telling them to reef the sails as they approach retirement. I’m offering a ferry.”​
The Pensions Council rejected Fagan’s proposal in April despite an independent reviewer concluding that it would deliver much higher benefits for savers than the government’s plan.​
I would have slightly changed the wording of a few sentence:
  • I would have replaced "the risk-free rate of return plus 4 percent" with "the risk-free rate of return plus the equity risk premium (ERP), which Fagan assumed would average 4% a year. A recent survey of over 1,500 US economists came up with an expected ERP of 5.5% a year in future."
  • Instead of "It would achieve positive cash flows after several decades" I would have written "The scheme will enjoy positive cash flows (contribution income less benefit outgo) for several decades to come. Fagan estimated that cash flows would be positive for the scheme's first three decades."
He could have expanded the reference to "leading small savers to gamble with their money" by explaining that the default option under the Act (which anyone unfamiliar with investing is likely to go for) puts 100% of workers' contributions and accumulated funds into high-risk unit-linked funds (risk level 5, 6, or 7) until age 51. Then, on their 51st birthday, the entire shebang is transferred into a medium risk fund, irrespective of market conditions at the time, even if it means cashing the lot at low prices if the market crashed the previous day and they were unlucky in not being born two days earlier. This ridiculous investment strategy got under the wire, undetected by anyone.
 
You must log in or register to reply here.
Back
Top