For the past few days I have been at the conference of the Society of Actuaries of New Zealand in Blenheim. In this blog I share with you some of the comments and observations that caught my attention. These are a collection of unrelated items.
* Advancing the age of entitlement for the Age Pension has a double jeopardy for some groups of workers. Those in low paid jobs that tend to physically wear out a person, are less able to accommodate the advance in entitlement age. Then to add insult to injury, they are likely to receive the pension benefit for a shorter period. While age is a convenient classification, it is an imperfect proxy for need.
* Retirees tend to polarise towards spending all their retirement assets or trying to spend none of the capital unless forced by the pension rules. As governments focus on affordability of Social Security pensions, we are likely to see greater emphasis on strengthened requirements for some benefits to be taken in an income drawdown format. The current allowed 100% maximum drawdown would need to change.
* The disadvantages of the defined contribution design from the perspective of an individual are well known. This includes the transfer of investment risk to the individual and the fact that a uniform contribution rate favours younger employees with a long period to enjoy compound interest. What is less discussed is that there is a disadvantage for employers because the smaller benefit for older employees discourages retirement should health or motivation factors make this desirable.
* When consumers are hurt by focusing too heavily on the upside of the risk/return trade off, governments feel electorally bound to be seen to be taking action. This tends to take the form of increased statutory regulation of professions. It is sound business practice to pay more attention to election manifestos and ministerial speeches than is currently evident, to facilitate the strategic decisions needed in business.
* There is a lot of work and research needed to make SMSF investment strategies commence with an evaluation of the liabilities. Matching assets and liabilities needs are critical and the use of an economic generator simulation will assist in determining genuine risk tolerance capability. The long planning horizon and modest liquidity needs of pension portfolios are probably not used to the extent possible to obtain a superior long term yield gain.
* With home long equity release loans the need to project house price inflation is a major challenge.