FT letter on pension drawdown
The FT today published the following letter to the Editor from Stuart.
Robin Ellison (Letters December 10) suggests that Lord Hutton, [in his article ‘A simpler way to make pensions safer’] (December 3), reached the wrong conclusion about the ability of collective defined contribution (CDC) pension schemes to deliver better pension outcomes. In support he quoted a recent paper by AON Hewitt in which the results were modelled of a scheme with the feature that Lord Hutton criticised of inter-generational (between-member) transfers aimed at smoothing pension outcomes for retirees.
It is easy to jump to the conclusion that the 40% increase in expected median pension outcomes that Mr Ellison quoted from the report derives from these risk transfers and so is exclusive to CDCs. Not so. This results from extending risk taking into retirement and it can be replicated in any DC scheme that supports pension-income drawdown.
The eye-catching 40% figure also reflects the improvement in outcomes of continued risk taking relative to the very high resource cost of an index-linked (inflation-proofed) annuity. This is fair because both options deal in their own way with the inflation risk that hides behind an annuity fixed in money terms.
In pension drawdown models, sensitivity of the pension income to market volatility is reduced by averaging the market conditions arising at multiple points of encashment over a long period, in the same way as when accumulating; expected outcomes are increased by exposure to risk assets for longer, without either subsidising or being subsidised by others. Draw rates can be modelled to be sustainable in real terms but with a time profile (unlike annuities and scheme pensions) that suits spending preferences through time: smooth, but better.
The debate about pensions is missing the point if it does not address the manner in which benefits are taken. That means talking about the unaffordable cost of avoiding economic risks at (let alone before) the point of retirement. Then the debate can move on to the structures that can support robust drawdown plans for the mass market, which might include some role for collectivisation.
Director, Fowler Drew