Posts Tagged ‘pensions’

More Brexit planning assumptions

December 21, 2018
gauke

Man looks at unicorn and remains unconvinced

We have been asked for some further planning assumptions to go with the original set.  These are given below.

Asset prices

The optimistic assumption would be that Brexit does not happen or happens in a way that is not harmful so some of the correction is recovered from what had been priced in on that account.  So say a loss of 10%.  And the middle option would be 20%.

Investment performance

The most optimistic figure that has been canvassed is 3.5%, but this is surely too optimistic in the circumstances.  Say 3%, with a middle figure of 2%.

Cash

The question here is really what the difference between inflation and interest rates will be.  The BoE forecasts suggest a real interest rate of around -2%, as at present.  To be more scientific, real interest rates are currently something like -1.75% (0.75% Bank Rate – 2.5% inflation).  The BoE forecasts tend to imply a real interest rate of about -2%, but it would depend on how the rate was adjusted to counter inflation.  Say -2.5%/-2%/-1.5% for pessimistic/middle/optimistic.

As for inflation itself, the optimistic forecast would be that MPC manages to hold inflation to say 2.5% over the period, giving overall inflation of 13%.  So we take 22% as the middle point.

CS Pension

There seems to be no room for variation here.

State Pension

If one assumes 2.5 % inflation then the only room for growth even under the ‘triple lock’ would be if earnings rose faster than inflation.  The latest ONS figures show essentially no real growth in earnings over the period from 2005 (!), so one cannot expect any real increase there either.

Tax rates and allowances

Hard to see any room for giveaways here!

> 60 concessions

Too make things easy for ourselves, we assume that in the optimistic case these survive for the next 5 years, while in the middle case half of them do.

plantable21

Table of assumptions (unless otherwise stated in real terms and for period 2019-20 to 2024-25)

Discussion

The pessimistic scenario reflects a coherent view of unmediated Brexit plus asset price correction while the optimistic scenario also reflects a coherent (but unlikely) outcome where Brexit is rendered harmless.  It is hard to give such a definite interpretation to the middle scenario and as such it should be treated with caution.

The treatment of tax and pension changes  as proxied by >60 concessions is very likely insufficient–at the very least, one could consider allowances as being constant in nominal terms, thus reducing in real terms.

The present treatment also implicitly assumes that things remain as they are for the remainder of 2018-19, which is certainly open to challenge.

Planning assumptions for Brexit and after

December 17, 2018

plantable1

Having grown tired of insomnia, our client has now fled the Civil Service and hopes to avoid starvation by a combination of his investments in bonds and equities, a Civil Service Pension (soon) and a State Pension (not so soon).

He writes:

Meanwhile, I need to make some concrete plans without knowing exactly what is going to happen around Brexit and indeed asset price correction generally. I would like some planning assumptions–the idea is to give a solid basis for planning on the basis that things should not realistically be worse than this.

Our advice is as set out above.  We draw on on the Bank of England forecasts.  These have been criticised on the grounds that:

i)  they take no account of any policy response;

ii)  they are phenomenological, based on observed correlations more than causal modelling.

The point about a policy response is that it can spread the effect out to different times or different people but cannot in general create value from nothing.  So this is really a question of distributional effects–who gets how much of the pain and when–rather than the quantum.

As for correlations, there are times when you need to produce numbers and don’t have time to model the economic universe in detail.  The effect size claimed is similar to that of the credit crunch of 2007/08, which is the nearest–if hardly most similar–comparator.

In summary, our advice would be to look not so much towards the destruction of value (something between significant and staggering) to be expected over the next year but at the effect changed circumstances might have on the revaluation of pensions.

Taking a rather more short-term view focused on the immediate future, our client says:

Applying this set of assumptions to my circumstances, I come to the conclusion that I would lose money that I can afford to lose, which is irritating but no worse than that.

There’s nothing like a satisfied client!  But we can hardly say we have always been in the Brexit loop.  On our first encounter, we took three days to work out what it was, and a further two to decide it could hardly happen.

This analysis has now been extended here.

Should you take voluntary redundancy?

February 13, 2016

I recently found myself called on to give advice on this topic, and I didn’t find anything very convincing on the Internet, so here is my attempt.

What is the alternative?

Clearly this is the main question, and it comes in two parts.

If you leave, what are you going to do?  If it’s another job, how long will it take to find and what will the pay, conditions, location, work be like compared to the present job?

If you stay, what will happen? Might you end up in compulsory redundancy, with probably less compensation but with extra earnings in the interim? How long can you drag it out for by way of appeals and legal challenges?  Might the management plan work and you end up with your job being better paid and more interesting?

Some special cases

If you really like your job or you really need the pay and you don’t think you would get the same elsewhere, then hanging on looks like the right answer.

If you are sure that you are marketable–would get the same or better elsewhere–then there’s no point in refusing free money and the chance of an extended holiday.

If it’s making you ill, you should go.

If you’ve started relatively recently, then while you won’t get much money there is an argument that the organisation may not have a great future and if they are offering you money to escape you should take it.

If you are nearing retirement, it may just be a case of doing the same thing a year or two early and it may not matter that much one way or the other.

If there’s something else you’ve been dreaming of doing, then that should be your lead option–look whether you can do it now (after VR) and if you can’t, then see how you can make it possible.

The main case

The main case would be where you’ve been there some time, you can’t afford not to work, you could reasonably expect to find another job and you feel some dissatisfaction in your current job.

OK.  The first thing to say is that there are probably things about the present job that are good but that you won’t notice until they’ve gone. The second is that other things being equal if you find another job that is broadly the same then the total reward (pay, pension etc) is likely to be less because they aren’t going to pay one-for-one for experience and skills gained in another setting; they’re simply not as valuable.

So we may be left with a decision tree something like the following.

vrdecision

A decision tree

In principle, you need to estimate the probabilities and utilities of the different outcomes and make a decision that way.  But the main use of such a diagram is often in forcing you to think explicitly about the alternatives and outcomes.

You can for instance think of the worst outcomes and whether you can live with them:

If I don’t take it and they make me redundant later anyway…

If I do take it and I don’t find a suitable alternative [for a long time]…

Or it may be useful to try to find a question that will settle it:

Can I turn down the offer of money to escape from this place?

Can I voluntarily give up a guaranteed income?

If you are lucky, you will be able to come up with a question that is more convincing than the others.

Some pieces of advice

Make sure you take some advice!

The tax treatment of redundancy payments and added pension is not easy to understand–best to get someone (Trade Union, IFA, accountant…) to work it through for you…

Be wary of a permanent solution to a temporary problem

If you feel you have reached the end of the line, try writing down what would make you stay and presenting it to the management–if there’s nothing you can think of that you can share with the outside world, it may be that the problem is not with the job/management but…somewhere else…

The choice is not between ‘the present situation’ and ‘change’ but between ‘the present situation’ and ‘your best guess of the alternative’.  You need a concrete alternative for comparison, otherwise you will end up trying to compare the present with some mush made out of ‘all the good/bad [according to temperament] things that could happen’–and even the minority that are not mutually exclusive are not all going to happen.

In the same way, it’s a bad idea to get hung up over whether your compensation payment reflects your hurt feelings, is larger/smaller than somebody else’s, and so on.  The question is about choosing between alternative futures.

It’s a good idea to think about this kind of thing in the abstract, before it happens–that way your priorities are clearer and you don’t get confused by things like the size of the offered payout.

Remember that while pay is visible enough, conditions may not be–in particular, pension schemes have worsened over the years and may not be what you expect in a new job.