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Isn’t this absolutely fascinating?

Richard Murphy says:
January 17 2023 at 10:49 am
I think the Dutch clearly have this right

So, the Dutch pensions system is just spot on then. At which point:

The key element of a pension is that the scheme is tax deferred, meaning premiums paid into the scheme are tax deductible (if paid by the employee) and are not taxed as salary (if paid by the employer).

And:

The system in which pension funds continue to take investment risk on a collective basis in the second pillar both before the retirement date and while the pension is in payment provides good final pensions for the participants.

That sounds to me like the pension funds continue to be in equities as the pension is being paid, rather than the British insistence that they switch over to bonds.

So, the Dutch have pensions right. Dutch pensions funds invest in second hand equities. Pensions contributions are tax free, pensions are taxable.

Ritchie insists that to get the pension system right we’ve got to stop investment in second hand equities and tax pensions contributions.

Oh, right.

13 thoughts on “Isn’t this absolutely fascinating?”

  1. If you have a large pool of retirees, the average life expectancy could be 10-15 years (some just retired at 62, some are now 75, etc., back of an envelope bit here). You can definitely manage an investment portfolio with roughly 50-60% equities for this group, which is what defined benefit plans in the U.S. generally do (although the retirees are mixed in with the employees).

    There will be some ups and downs but the greater long-term return from the equities blows away a fixed income only approach.

  2. Does Spud offer any insight as to the differences between the Dutch and UK systems, given that this summary makes them seem practically identical?

  3. Does Spud offer any insight as to the differences between the Dutch and UK systems, given that this summary makes them seem practically identical?

  4. Longevity swaps are popular with (the dwindling number of) DB schemes:

    There is no upfront payment required, and so the scheme can retain more assets either to provide additional asset returns in the future or to support an interest rate and inflation hedging strategy. A longevity swap generally works as follows:

    The swap provider and the scheme estimate the expected payments that will become due to the scheme’s members, and how long these payments will be payable for.
    The scheme then makes fixed payments, which reflect these expected payments, to the swap provider for the duration of the agreement.
    The provider of the longevity swap, in return, pays the trustees variable amounts which are payable for as long as each member survives. In practice, if a member lives only as long as expected, these two payments will cancel.

    The main benefit for the scheme of a longevity swap, is certainty. If the actual payments due to the scheme members who are covered by the swap turn out to be higher than expected because those members live longer, the shortfall has to be met by the swap provider.

  5. The main benefit for the scheme of a longevity swap, is certainty. If the actual payments due to the scheme members who are covered by the swap turn out to be higher than expected because those members live longer, the shortfall has to be met by the swap provider.

    What’s the benefit for the swap provider? Are they just betting that their actuaries are better than the scheme’s actuaries?

  6. Bloody heck:

    “Tax exemption
    It is also worth knowing that money “saved” through a pension scheme is not subject to Box 3 tax on the income tax form, where assets such as savings, stocks, bonds and property are taxed annually at a rate of 1,2 per cent.”

    The Dutch government steals 1.2% of my savings, stocks etc every year?????

  7. Oh. Something I know a lot about. As Chris M says, a lot of estimation goes on, some of which is even as good as an educated guess.

    UK Pension scheme – takes out insurance policy with -> UK insurer -> takes out reinsurance with -> overseas REinsurer -> who writes insurance for -> US insurer -> who writes life cover for old people

    So basically US people dying early costs someone money, so they take out cover with someone who hedges it with cover for someone (else) dying later.

    Reinsurers don’t want to deal with pension schemes as the benefits pensioners get are horribly complex. So UK insurer keeps the risk of those, which is stuff like inflation (!), spousal definition, contingent children or spouse and a bunch more too esoteric to mention.

  8. The UK excess monthly death rate still seems to be humming along nicely. But I see no articles in the papers by actuaries warning of the consequences. How come?

  9. “The UK excess monthly death rate still seems to be humming along nicely. But I see no articles in the papers by actuaries warning of the consequences. How come?”

    Would it be true to say that if the outcome of the whole covid vaccination episode is as some people (including me) suggest, namely a lot of people are going to suffer early deaths, that outcome would positively impact pension providers and negatively impact life insurers? In that the former will have had people pay in for many years but take little or nothing out, and the latter with have had less years of premiums before having to pay out?

    If so, which is the best way to invest to profit from these outcomes?

  10. The main benefit of the longevity swap is most likely different regulators. The person getting rid of the longevity risk will see a huge capital benefit, the person writing the swap will be under a different regime and have a small capital cost.

    at least that is what I have seen on all other risk swaps in insurance

  11. @Jim. I couldn’t possibly comment but go long annuity writers. L&G is the most liquid and largest. Phoenix has a business line in this but is contaminated with other businesses which won’t benefit. The purest listed is a bottom of FTSE 250 minnow called Just Group, not to be confused with Just Eat by accident, but Just‘s share price is quite volatile . Other than that you’ve got 2 unlisted companies (PIC and Rothesay) and a few from overseas like Canada Life.

    Pension Companies make money from charging fees on assets under management. When people die that money tends to get taken out. Quilter is the play there, and perhaps ABDRN or maybe even M&G at a stretch.

    @ISP001 – there might just be a bit of that but perhaps the PRA thinks reserves and capital should be as large as possible, not as large as needed? There is real diversification in these transactions. Real risk transfer to those better able to bear the risk. That’s a win. Usually. Until they can’t …

  12. From John Ralfe, pension gadfly.

    “The Teachers Pension Scheme accounts show that from 2010 to 2022 the annual cost to taxpayers of pensions, after teachers’ own contributions, shot up from 15.5pc to 67pc of salary – two thirds of salary – largely because of lower real interest rates.

    Adding pensions to salary to get total pay paints a very different picture – rather than a 23pc fall in real terms, teachers’ total pay and pensions has gone up by 10pc.”

    https://www.telegraph.co.uk/pensions-retirement/news/striking-teachers-need-harsh-lesson-true-value-pay-packets/

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