Private Pension OptionsA Quick Comparison

• PENSION

– An income from retirement until the death of the recipient. (plus add-ons for dependents)

• SOLUTION

– Save and draw down during retirement– Save, and then buy an annuity– Save collectively and “pool” the longevity risk

The Pension Problem

Solution 1: Save a lot and draw down

• Advantages: Works well for those with lots of assets (who don’t need a pension per se)

• Disadvantages: – You don’t know how long you will live. Either you need to save a

lot, or you might run out of money.• If you want to be 95% sure you will have enough you need to

save 83% more [Almeida and Fornia]• 25% of those retiring early in Australia have run out of private

pension savings by the time they are 70

Solution 2; Buy an Annuity

• Advantages: Annuity gives a dependable pension

• Disadvantages: – They are costly. Government statistics suggest

indexed annuities cost 20-25pence in the pound. – Promised annuities need to be invested in bonds; the

wrong investment? – Variable annuities difficult to regulate – Create timing risk.

Solution 3: Diversify, or collectivise the longevity risk (CDC)

• Advantages: Higher and more predictable pensions.

• >30% higher than annuity;

• 83% higher than drawdown (though inheritors lose out)

• Disadvantages:

– How can you be sure the plan will be

• Managed on your behalf

• Remain solvent

• Be fair

…Add Ons

• To any solution, and outsider can add on

– Defined Benefit: Guarantees pension– Defined Contribution: Guarantee what saving is worth;

but not the pension itself – Defined Ambition: ???

Who might benefit from CDC?

• Savers in a DC plan

• Savers whose DB plan is about to be closed

• Anyone who needs a reliable retirement income, and knows annuities are too expensive– “decumulation CDC”

Who could provide CDC

• Any large DB pension plan

• But wouldn’t a large industry or national supplier be better? – Larger, so lower costs, greater expertise

• And what role might Trade Unions play?

Some Caveats

• CDC is not as good as DB

• Governance arrangements are critical

• Actuarial oversight essential. But perfectly possible

• Communication, Communication, Communication

A Gamechanging Opportunity

• Enormous economic benefit. Cost of pensions. Investment in economy.

• Broad support

• Spectators of Players?