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Important Changes To Pensions & No Changes From Active Managers! Blog #190

informed decisions blog

Important Changes To Pensions & No Changes From Active Managers! Blog #190

29th November 2021

Paddy Delaney


This week we share a few nuggets that I hope will offer clarity and assurance on a few key aspects of our investment and pensions planning;

-Important changes to pensions in Ireland coming into force

-An update on Active Manager performances

-The link between balance and longevity!

An update on Active Manager performances

Active managers have been getting a hard time of it. Perhaps some of that criticism is deserved, perhaps some of it is not. If you think about it, it is unlikely that the majority of active fund managers actually set out to under-perform their benchmarks, and deliver sub-optional returns to their investors. It is unlikely that the majority of them focus purely on generating fees at the expense of investors that trusted them to mind and grow their money. Despite these assumptions, so many of them do underperform. Is that to say none should try, that Active management is inherently unethical or corrupt or fool-hardy? I don’t think so. There are some Active Fund managers that out-perform consistently over long periods of time, and deliver value in the process.

Guy Spier manages the AquaMarine Fund in the USA. He is the author of ‘The Education of A Value Investor‘ (cracking book!) and he joined us for our 100th Podcast episode several years ago. According to their 2020 update as at the end of 2019;

The Aquamarine Fund had delivered 9.5% annual average returns since launch in 1997 (21 full years)

The S&P 500 (the benchmark it uses) had delivered 7.7% average annual returns in that same period

Aquamarine total return from inception was 653% vs 418% for the S&P 500 (after all fees/costs/expenses)

So some have beaten the market in the past, but knowing which one will do it in the future is the bit that is less knowable! People should be free to choose their preferred route, provided they know what they are doing! I believe, at the very least there should be clear communication to potential investors in Active Funds that shows them the % of Active Funds that beat the Index/benchmark as a whole. This would help people know what they are getting into in general terms.

The reason I am saying all of this is two-fold:

  • While I am an advocate for Passive Investing, I’m keen to not to create an echo-chamber here where we throw the proverbial cabbages at Active managers. I’m not anti-Active. I’m ruthlessly independent. I’m absolutely pro-effective and pro-proven and pro-value for investors. The evidence points, in the majority of cases, to Passive Investing as the optimal approach
  • The latest SPIVA report is out and shows us what % of Active Managers are beating their benchmarks, more in a second

In September 2020 we shared Blog 153 titled ‘Managed Funds fail to beat the market, most of the time’. In it we detailed what the SPIVA report is and how it tracks and analyses Active Funds and compares their performance to passive index approaches in those regions.

As of December 2019 – over the previous 5 years the market returns of the Index in each of the following regions out-performed Actively Managed funds (who exist to try and beat the market) in the following percentage of cases:

  • Europe: 77%
  • US: 80%
  • Canada: 96%
  • South Africa: 61%
  • India: 82%
  • Japan: 69%

Per the latest SPIVA report, as of June 2021, over the past 10 years, the market returns of the Index in each of the following regions out-performed Actively Managed funds (who do exist to try and beat the market) in the following percentage of cases:

  • Europe: 84%
  • US: 82%
  • Canada: 83%
  • South Africa: 54% (5 year data)
  • India: 82% (5 year data)
  • Japan: 79%

With the exception of S.Africa, in approximately 8 out of 10 cases, Actively Managed funds have under-performed the Index in that region. As a whole, little has changed in the world of Active Management performance and returns for their investors. Sadly.


Important changes to pensions in Ireland

Onto our second topic of the day, pension changes!

The 2021 Finance Bill, sets out some key changes and provided it does pass through the Oireachtas by 31st December, it’ll be signed into law from 2022 onwards! So while it is published in 2021 and is referred to as Finance Bill 2021, it relates to Budget 2022. If that makes sense! I believe that the Bill implements some of the recommendations which stemmed from the Interdepartmental Pensions Reform and Taxation Group report in 2020. Here if you are stuck for things to read!

And the proposed pension changes are really positive steps forward for the simplification and ‘common-sensification’ of retirement schemes in Ireland, so yippee! Here I share what I believe are the most significantly relevant for people that I work with, and by extension for you, dear reader:

Significant & Relevant Change to Pensions #1:

The Current Problem: We have spoken about the death in service issue many times, most recently in Blog 168 in March of 2021. Essentially, a current quirk of pensions rules means that if you have an Occupational Pension scheme valued at more than 4 times your salary, and you die before retiring, any amount above that 4-times-salary would have to be used by your survivor to buy a pesky annuity.

The Good News: The Bill proposes that the option to move funds to an ARF instead of having to be used to buy an Annuity will be available. So if you are in the unfortunate position of dying soon and face this issue, try your darndest to survive until January please….for your survivor’s sake.

Significant & Relevant Change to Pensions #2:

The Current Problem: If you retire a pension and opt to invest in an ARF, and you don’t have guaranteed pension income of €12,700 per year (State Pension or Defined Benefit/Annuity), you were forced to firstly lock the first €63.5k into an Approved Minimum retirement Fund (which you couldn’t access more than 4% per year from until 75), and then you were allowed put any surplus into the ARF, which you could technically access any amount of per year, subject to tax, from the point of retirement onwards. Go waaaaay back to Blog 15 in January 2017 for more on that whole palaver!

The Good News: The Bill proposes that the AMRF will be extinct! If you are retiring from Jan onwards you should be able to go straight to ARF without having to set up an AMRF. If you already have an AMRF, it is as yet not totally clear exactly what will happen the AMRF, but seems to be the case that it will be combined into your ARF. Either way, we should be seeing the last of the AMRFs from Jan 2022 🙂

Significant & Relevant Change to Pensions #3:

The Problem: If you have more than 15 years’ service with the company, you are not allowed to move your scheme to a PRSA ever. This made it ineffective from a death-in-service perspective as well as from an efficiency of draw-down perspective. The flip of that is if you have less than 15 years’ service, you can wind-up your scheme and move your value to a PRSA, or several PRSAs for example. Once in a PRSA, if you die before retiring, the value of any PRSA is paid in full to your estate, thus avoiding issue #1 above (which is due to become a non-issue of course). But the bigger aspect to that move was that you can draw-down each individual PRSA separately in future, giving massive flexibility and potentially very tax efficient income draw-down over time.

The Good News: The Bill proposes doing-away with that 15 year clause if you have left the scheme or if the scheme is winding-up. If you have more than 15 years’ service and it makes tangible sense to you to do so, you can explore the merits of a transfer to another pension structure. Be careful of ‘advisors’ now being very proactive in suggesting that you do move your scheme if their rationale is flaky though – but there are some instances where this can and will be a very prudent strategy to take, and we’ll be implementing it where it stacks-up.

So overall, some great moves being made, which do make a lot of sense for people planning their retirements, and managing their funds prudently over the coming years. We can take positive action with these new changes and open up opportunities that are within our control to influence and capitalise on.

Some Nasty State Pension Changes In The Pipeline??

It’s not all roses and lollipops though. The Pension Commission released a report recently which recommended a number of nasty measures to try fund the growing cost of providing the current State pensions into the future:

  • Increase State pension age gradually to age 68 – raising to 67 in 2031, and it would increase by three months every two years from 2033
  • Increase the rate of PRSI on self-employed contributors from 4% to 11%
  • Remove the current exemption from PRSI for over 65 year-olds

I believe that these and other recommendations from the Pension Commission report are being reviewed by the Tax and Welfare Commission (who I assume none of the changes will apply to!) and they are due to report back with their verdicts in March next year. These changes are certainly outside of our control – so I don’t believe we ought to focus too much time on it.

Balance = Longevity!?

Having good balance is important, we all know! Balance in relation to what though!? Balance of portfolio? No! Balance of your pension fund? Nope! Balance of work and leisure? Nope! Physical Balance!

An apparently well-known study in the British Medical Journal (I can’t find the study anywhere, can you!?) apparently tested the ability of three thousand men and women in their 50’s to balance on one leg with their eyes closed! Thirteen years later, they apparently found that those with the lowest score on the test were 5-times more likely to die within the 13-year study period than those with the highest scores in the balance test. One can only assume that those with the lowest scores didn’t fall over to their deaths!? It’s an interesting study though right? If you try it you’ll likely be surprised at how challenging it actually is!

While I won’t be betting my longevity purely on my ability to balance on 1-leg with my eyes closed, it definitely points to the importance of one’s overall physical awareness and strength for our future selves. And I guess that too is something that we can certainly impart some level of influence over, so what are you waiting for!


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