The value of our pensions could be dramatically improved and pensioner poverty significantly reduced - without incurring any additional costs - according to new research published by the RSA.
In its report Building the consensus for a People's Pension in Britain, the RSA discovered that:
A huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.
If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.
That minor changes to our regulatory framework could boost pension returns by 39 percent.
Following two years of research, Building the consensus for a People’s Pension in Britain describes what a "best practice" pension system would look like. It calls on the coalition government to build a broad cross party consensus in which political parties, employers, unions, and pension funds agree to implement a 'pensions architecture' that brings the UK in line with countries such as Holland and Denmark that enjoy the lowest levels of pensioner poverty in Europe.
Written by David Pitt Watson, a leading pension fund manager and Chair of Hermes Focus Asset Management, the report outlines the comparatively modest steps that need to be taken:
Costs: Britain should aim for a low cost system of occupational pensions, based on a) auto-enrolment – which reduces selling cost and ensures pensioners do not keep switching provider b) a limited number of large suppliers whose benefits of scale allow them to offer lower costs c) collectively provided pensions where there is no need to administer and report individual performance (which therefore incur lower cost).
Returns: Pension savings should be aggregated in a way that will give adequate returns: that suggests collective provision and trustee governance. The benefits of collective DC are huge: on the governments own figures they give up to 39 percent higher pension returns.
Changes to the regulatory structure are modest in size and easily achievable. The Pension Schemes Act 1993 should be clarified to enable collective DC pensions to become available.
Providers: Providers from Holland and Denmark have announced they areinterested in providing the UK with low cost pension funds. Danish pension fund ATP is about to open an office in the UK and Dutch fund APG would also be willing to establish a fund if there was sufficient demand.
Auto enrolment and NEST are both fundamental to the creation of a successful pension system – but NEST should not be restricted to payments of £3600 in any year, which makes it uncompetitive, and raises costs to the taxpayer.
In an open letter to Pensions Minister Steve Webb and other industry stakeholders, the RSA echoes the view of the National Association of Pension Funds in calling for the creation of a limited number of private sector providers to be "approved default providers" like NEST. The RSA also asks that trustworthy providers be allowed to offer Collective Defined Contribution pensions.
In its report, the RSA recommends that a Commission of Inquiry be set up by the coalition government to build on the growing consensus about how to solve Britain’s pension crisis. The Commission would iron out the details and help ensure that employer organisations continue to build on initiatives by the TUC and CBI in order to develop a joint strategy that tackles pensioner poverty in the UK.
Commenting on the report, David Pitt Watson says:
"By common consent, the UK private pensions system is not fit for purpose. It is hugely inefficient. The government has taken steps to address the problem but it remains in real danger of spoiling the ship for a ha'porth of tar.
The government is introducing auto enrolment, but doing little to ensure providers offer good, low cost products. It has established NEST, and loaned it hundreds of millions of taxpayer money, but has then prevented it from competing by restricting the size of contribution it can take. The danger is that we are creating a weakened monopoly rather than healthy competition.
Regulations in the UK should be changed to enable the establishment by trustworthy providers of low cost collective pensions similar to those enjoyed in Holland and Denmark.
What we are suggesting is not some new structure. It is based on tried and tested systems in other parts of the world, and recommended by pensions experts globally. What we need now is consensus, and the will to change."