Proposed Pension Changes by Jeremy Hunt to invest in UK Start Ups

DoublePolaroid

Prism said:

DoublePolaroid said:

Amusingly the Government's own (presumably rose-tinted) modelling predicts that a typical punter paying the higher end of their assumption for fees will be worse off after 30 years if it's incorporated into a typical 60/40 split portfolio. They helpfully include figures for a 65/35 split that produces a 1% increase in pot size for the median case scenario.

It seems hard to imagine that very many savvy, rational and purely self-interested individuals would choose to do invest this way of their own accord.

I like to think I count as one of those investors and invest in private equity - mostly for the returns.

I’m going to hazard a guess that you’re not paying fees of 2% plus 20% of returns >8% though. 

OldScientist

DoublePolaroid said:

Amusingly the Government's own (presumably rose-tinted) modelling predicts that a typical punter paying the higher end of their assumption for fees will be worse off after 30 years if it's incorporated into a typical 60/40 split portfolio. They helpfully include figures for a 65/35 split that produces a 1% increase in pot size for the median case scenario.

It seems hard to imagine that very many savvy, rational and purely self-interested individuals would choose to do invest this way of their own accord.

Thanks for finding that reference. As you say, not a great outcome. The change from a 60/40 to 60/35/5 (stocks/bonds/private equity) has quietly increased risk (volatility) by a smidgen, but they have neglected to include a 65/35/0 portfolio as a comparison. Like all pension saving, the outcome is highly dependent on the fee structure, so the attractiveness for savers will be in the detail and what can be negotiated at scale.

As someone who already invests in private equity either by choice (SMT) or by default (as part of USS DB scheme - Thames Water!), the concept is probably OK, but the presentation of the idea has been a bit cack-handed.

More interesting (to me at least) is the modelling of the effect of collective DC (CDC) pensions on retirement income since, I suspect, these will eventually replace most DB schemes (both public and private) and (possibly) the state pension.

GazzaBloom

zagfles said:

booneruk said:

GazzaBloom said:

"From my cold dead hands"

From what I understand it will be 5% of the pension houses default funds and It's not a good deal, the private equity fees will erode any benefits, start-ups are high risk and some money will be lost in ventures that don't pan out. A short sighted, ill conceived idiotic idea from this lame government.

I am not not in a default fund in my pension so he can jog on.

Just my opinion, of course.

As far as I understand it, Labour are touting similar ideas

https://www.pensions-expert.com/Investment/Labour-backs-50-billion-DC-incubator-growth-fund-concept?ct=true

Quelle surprise. And don't expect them to stop at workplace pension default funds, even SIPPs may not be off the table.

So how do you imagine that working if, for example, your pension was invested in say a 100% US equity index fund for example? How do they carve 5% out of that? and 5% of what?

I can't see any way that can work, the main pension houses multi-asset default funds yes, but not index trackers.

Malthusian

Albermarle said:

For as long as I can remember the City has been accused of short termism, to the apparent detriment of supporting the UK economy/industry ( opinions may vary).
Whilst at the same time some other European countries, notably Germany, have been praised for the much bigger involvement their finance sectors have had in supporting their economies.
Maybe this is a kind of small step towards promoting a more 'patriotic' support from the City in support of the wider economy?

I have never seen a more suitable occasion for the saying "Patriotism is the last refuge of the scoundrel."
Germany has a mostly state-based pension savings system. In the absence of any evidence that Germans get market-beating returns by investing their money purchase pensions in vanity projects run by friends of politicians, "Germany has been praised [by whom?] for the much bigger involvement their finance sectors have in supporting their economies [to the benefit of whom?]" sounds like standard grass-is-greenering.

Malthusian

GazzaBloom said:

So how do you imagine that working if, for example, your pension was invested in say a 100% US equity index fund for example? How do they carve 5% out of that? and 5% of what?

I can't see any way that can work, the main pension houses multi-asset default funds yes, but not index trackers.

If you can have a rule within living memory that says that everyone has to buy an annuity with their pension at age 75, you can have a rule that says, e.g. that everyone must invest at least 50% of their pension fund in a "balanced" portfolio via an approved multi-asset fund, all of which must include a 10% allocation to private equity to gain that government stamp.
SIPP owners still get to play the stockmarket with half their pension or invest it in their business premises, but are protected from losing all of their money (along with the taxpayer's) and falling on the state. Who could argue with that?
A half-SIPP that can only invest 50% of the money freely and must invest 50% in a balanced portfolio still gives the holder more control than an annuity, therefore if it can be politically acceptable to make people buy the latter with their pension fund (as it was until 2015), it must be poltiically acceptable to make people buy the former. It just needs the pendulum to swing back.
I don't actually think this will happen in my lifetime, I'm just querying the idea that it "can't work". "They can't do that" is a dangerous thing to believe. This is the 2020s, comrades.
It still makes more sense than "collective defined contribution" which everyone in politics and the pension industry agrees is a marvellously good idea.

(Note: yes, I am aware you were not literally forced to buy an annuity for many years up until 2015 as you could continue in drawdown after 75 under "Alternatively Secured Income". However, the 82% tax on death benefits meant it was almost insane to do so, because an annuity with a 10 year guarantee period at post-75 rates would almost certainly leave you and your family better off.)

OldScientist

Malthusian said:

GazzaBloom said:

So how do you imagine that working if, for example, your pension was invested in say a 100% US equity index fund for example? How do they carve 5% out of that? and 5% of what?

I can't see any way that can work, the main pension houses multi-asset default funds yes, but not index trackers.

It still makes more sense than "collective defined contribution" which everyone in politics and the pension industry agrees is a marvellously good idea.

My understanding of these is that they enable members to accumulate and decumulate at something close to mean real returns by incorporating both mortality credits (in the same way an annuity does) and cross cohort credits. For example, while the SWR varies with start year (as per the black line in the following diagram)



a CDC pension is able to smooth this out (blue line is a 20 year smoothing) because it has retirees across multiple start years and hence allow a higher 'withdrawal rate' (in the example above, the MSWR is 2.4% for non-smoothed and 3.1% for smoothed). Of course, given mortality credits, the effective duration will be lower than the 40 years given above, so the CDC would be even better (e.g., for a 20 year duration - i.e., close to the life expectancy at 65 - the unsmoothed MSWR is 3.8%). 

The implementation problems arise from:
1) What if future return rates are persistently lower than assumed when setting up the CDC?
2) When CDCs are in surplus, there will be huge pressure to declare employer payment holidays (just like Db pensions in the 90s) and they will a potential target of any chancellor short of cash.
3) Retirees in 'good' retirements will be subsidising retirees in 'bad' retirements, although this will not be known until close to the end of any retirement.
4) What if life expectancy increases dramatically (this also affects state pension, DB pension, annuities, and drawdown from DC pensions)?

What other problems might there be?