Thursday, 23 January 2014

More Pension Reform Ideas from the UK

The UK think tank Policy Exchange has just released the Help to Save report proposing pension system improvements. It contains some interesting ideas, primarily private-sector oriented measures. Here is what they propose [my comments in brackets]:
1. Replace auto-enrolment with compulsory membership of a pension schemes
for all those earning more than the tax free personal allowance.
[They want the State to be on the hook as little as possible. Auto-enrolment, which is already in place in the UK for large employers, gets most people in, but the other 10% who opt out are still a problem.  People could only opt out if they had enough savings]
2. Increase the minimum contribution rate to 12% from 8% phased in over 5 
years. [This is over and above the deductions for CPP-equivalent State pension. If you live and are retired a long time, you need to save plenty]
3. Make the annuity market more competitive by issuing government annuity 
bonds. Individuals could buy their initial interest rate exposure from the 
government with insurers providing annuity insurance only for when this 
expired. [Instead of the traditional bond that pays interest coupons and re-pays the principal at maturity, the bond would pay back both interest and principal throughout and nothing at the end. These bonds, which would not have mortality credits that insurance company annuities do, would provide a lower bound on annuity prices, thus forcing better private sector annuity pricing. They could be inflation-linked too.]
4. Allow up to 50% of the minimum income requirement to be funded through 
non annuity products such as income drawdown. The drawdown should be 
limited to the yield on the relevant fund to limit the risk of fund exhaustion. [Their example is to extract dividend yield, which is relatively stable and grows over time - e.g. some ETFs in Canada, from a market equity fund]
5. Encourage a greater focus on asset allocation through the promotion of 
outcome oriented investment funds. [Simple target date funds didn't do well through the 2001 Tech meltdown and the 2008 financial crisis]
6. Encourage the development of Super Trusts, which would be large enough to 
generate economies of scale, have a better diversification of assets and greater 
use of asset allocation. [Super Trusts would invest kinda like the CPP, infrastructure, alternative assets etc, except be private sector]
7. Cap fees at 1% not 0.75% in order to keep a wide choice of funds available 
to pension fund investors [hah! Canadian RRSP mutual fund investors can only dream of 1% fees]
So pension reform in Canada might not need to be CPP expansion, just something that has many of its key features - mandatory participation, employer and employee contributions, full funding by the individual who benefits, good governance, lower controlled fees, large scale management with wider investment scope, sustainable managed retirement phase decumulation income.

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