The 4% Rule – A Castle in the Air

[xmj]

Be my guest to look at the balance sheets of various life insurers in mid-Q1/23.

Again, the plans are fine. You can buy them - that's what life insurance companies *do*.

What you might not like is the *cost* of those plans, both up-front (including premiums for the salesmen) and while paying up the policy.

Is it cheaper to offload the various risks (market, interest rates, operational, etc) to the policy holder, if you can get away with it? OF COURSE IT IS, and that's why everyone does it.

EDIT: Via Bloomberg, LDI Derivative Losses May Total £150 Billion, JPMorgan Says

Pension funds likely saw an even bigger drop in the value of their liabilities as rates climbed, the JPMorgan analysts wrote, easing concerns about their overall soundness.

[steveo73]

@xmj - I still think you've gotten it wrong because the market has basically proven these defined benefit funds are too risky. They are phasing them out.

A good way to look at it is that they are a fantastic product and if you can get you should stay in it but herein lies the problem.

I'm actually going to try and find some facts. I can't read that link. It's behind a paywall. I've just watched a YT video stating that the pension funds are typically in a deficit so I'm skeptical that we are event talking the same point when you state to look at life insurance balance sheets.

It's defined benefit pension funds which are the issue. They are being phased out. They've proven great for policy holders but terrible for the pension funds.

If you or anyone gets some good data to prove differently I'm up for it but it'd be really funny because it's hard to get around the market phasing out these products. It's really hard to argue against this point.

Edit:-

https://institute.global/policy/pension ... redibility

Why were pension funds the source of potentially systemic problems?

As interest rates fell over the past two decades, defined benefit schemes in the UK found that the accounting value of their liabilities (the amount pensions owe people both now and in the future) started to rise: when interest rates on government bonds fall, funds’ future obligations are discounted at a lower rate, thus raising the present value of those longer-term obligations. The Pensions Regulator estimates that every 0.1 percentage point fall in interest rates on government bonds increases the obligations of UK pensions funds by at least £23bn.

While rising interest should have made pension funds’ long-term obligations more affordable, they also had a side effect that not only limited this upside but also created significant cash flow problems for pension funds.

These are types of things that just aren't predicted well in your mathematical models and why you have to view this as a business problem rather than a technical problem.

It's a bad business model and the market has basically proven that. Theoretical technical arguments haven't worked and that is in reality.

Maybe a better way to phrase this is can you show instead of these funds being phased out and being considered extremely risky can you show that these funds are being offered more now and the companies offering these funds are doing well. You can't do that right ?

I suppose the truth is that the BOE had to jump in. The government did stuff the whole thing up but that is another issue.

https://www.cnbc.com/2022/09/29/pension ... ntion.html

A couple of other points:-

1. If you think the market is wrong you could bet against it. You could start you own firm offering these products.
2. It's interesting the way people think and this is not meaning to be offensive. I think you see technical solutions to a problem whereas I see a mess. I managed projects and we'd often get people that come up with technical solutions. My biggest failure as a project manager was when I and others came up with technical solutions to too tough problems. I had some smart guys working for me and we came up with plans to work around shitty business models. There were always unintended consequences. Once we loaded a bunch of data and produced reports for this system. It would have cost a couple of million dollars and the whole thing was redone and I bet it'll be redone again. The backend system is just not the right solution for the business problem they are trying to solve.

[xmj]

@xmj - I still think you've gotten it wrong because the market has basically proven these defined benefit funds are too risky. They are phasing them out.

A good way to look at it is that they are a fantastic product and if you can get you should stay in it but herein lies the problem.

I'm actually going to try and find some facts. I can't read that link. It's behind a paywall. I've just watched a YT video stating that the pension funds are typically in a deficit so I'm skeptical that we are event talking the same point when you state to look at life insurance balance sheets.

Just use https://archive.ph and see if someone archived it. For Bloomberg that's almost always the case (same for FT, WSJ, etc).

1. If you think the market is wrong you could bet against it. You could start you own firm offering these products.
2. It's interesting the way people think and this is not meaning to be offensive. I think you see technical solutions to a problem whereas I see a mess. I managed projects and we'd often get people that come up with technical solutions. My biggest failure as a project manager was when I and others came up with technical solutions to too tough problems. I had some smart guys working for me and we came up with plans to work around shitty business models. There were always unintended consequences. Once we loaded a bunch of data and produced reports for this system. It would have cost a couple of million dollars and the whole thing was redone and I bet it'll be redone again. The backend system is just not the right solution for the business problem they are trying to solve.

I'm not saying solve it on the backend. That's you imputing words. I'm saying *price that risk accordingly*. Which leads to higher premiums (be that upfront or over time) - as risk gets modeled as volatility and will lead to lower payout ratios per capital accumulated. A related argument to the one I made a couple of pages back regarding Safe Withdrawal Rates and Permanent Capital...

And for what it's worth, in periods of rising interest rates (very much the opposite to what we've seen for the last 40 years) it'll be a great deal to take a lot of capital upfront in exchange for a low pay-out ratio.

[steveo73]

Just use https://archive.ph and see if someone archived it. For Bloomberg that's almost always the case (same for FT, WSJ, etc).

I don't think you need too. Read those articles I posted. They've already caused significant problems. Plus the market is phasing them out. It's pretty obvious they are an issue.

I'm not saying solve it on the backend. That's you imputing words. I'm saying *price that risk accordingly*. Which leads to higher premiums (be that upfront or over time) - as risk gets modeled as volatility and will lead to lower payout ratios per capital accumulated. A related argument to the one I made a couple of pages back regarding Safe Withdrawal Rates and Permanent Capital...

I get what you are stating. The issue is the bolded point. I'm not trying to impute your words but that is in essence the issue. That is what I'm trying to state. You are stating just fix it technically. Well for whatever reason it's easy to state that but it's failed in the market place. You can't go and solve it on the backend because it's already failed. This is what I'm stating about technical solutions. You may be right theoretically but in reality the verdict is in and it's proven that this is dud business model.

[And for what it's worth, in periods of rising interest rates (very much the opposite to what we've seen for the last 40 years) it'll be a great deal to take a lot of capital upfront in exchange for a low pay-out ratio.

Maybe but I'm skeptical about the business model anyway. Video stores had their place. Defined benefits sounded great at some point for providers. They got it wrong. Why do you think you'd get it right now ? What makes you special ? I'm not trying to have a go at you. I'm stating my assumption is that really smart people figured this out previously and they got it wrong. You need to make better decisions and the technical tools we have developed to manage these situations have already failed. I should add I'm mr average or even better below average. Aim low and you succeed. Don't aim high because you aren't that clever or lucky.

You can put your money where your mouth is though. If you could solve this issue I bet you'd do well.

[xmj]

Periods of high nominal growth (high inflation, too) are a boon to any DB plan provider whose benefits are defined in nominal terms.

Come now, this isn't hard

[steveo73]

Periods of high nominal growth (high inflation, too) are a boon to any DB plan provider whose benefits are defined in nominal terms.

They aren't defined in nominal terms.

Come now, this isn't hard

If you honestly believe this set up your own firm to do this. The market - human society - have failed at this. You might think it's not hard but it's proven to be basically impossible for society.