Collective pensions are the backbone of the Dutch pension system, regarded by most as one of the very best in the world.
Collective pensions are the backbone of the Dutch pension system, regarded by most as one of the very best in the world
Yesterday, in her speech to parliament, the Queen announced legislation that could be the cornerstone to better pensions in Britain.
The measure is a simple one: that Britons will be allowed to invest collectively for their retirement, just as the Dutch and the Danes are able to do. Its effect, over time will be huge, because research shows that, after twenty five years of saving, a collective pension will give a 30 per cent higher income than a pension saved individually.
That is why collective pensions are supported both by the government and the opposition. They are supported by the TUC, and by the CBI. The Association of Member Nominated Pension Trustees and the National Association of Pension Funds are also backing the measure. So are think tanks such as the RSA and the IPPR.
And of course they enjoy broad political support throughout the political parties, employers and employee groups in Holland.
It is not rocket science as to why collective pensions are better. As everyone who has bought an insurance policy knows, the best way to address life’s risks is to share them. So, if you save for a pension on your own, you don’t know how long you will live for so you can’t tell how much you need to set aside; you don’t know what return you will get, or how much your pension pot will be worth on the day you retire.
That is why, until the budget, everyone saving for a pension had to buy an annuity which ensured they had an income for life. But annuities are very expensive. And if you don’t buy an annuity you can’t guarantee you will have an income until you die.
The better way is to save together. And from the pot of money which has been saved, to pay affordable pensions. That avoids the cost of annuities. It avoids the need to cash all your pension pot in on a single day, or to save very conservatively in the last years before retirement, so you know what the size of the pot will be. That is why studies show that, in the UK, collective pensions give 30 per cent better outcomes than individual ones.
But we must also beware that collective savings are not some holy grail. They need to be properly managed if they are to work properly. So, for example, if returns head south, it may be necessary to cut pensions in payment. In Holland, in response to the financial crisis, pensions in payment were cut, on average, by 2 per cent. But given that they would have started 30 per cent higher than the equivalent British pension, that is surely a price worth paying.
And collective pensions must be run by trustee bodies, whose only interest is the beneficiaries. Otherwise the temptation to misuse funds is all too great. It was that which proved the downfall of the ‘with-profits’ funds offered by insurance companies.
But for seventy years, collective pensions have been the backbone of the Dutch pension system, regarded by most as one of the very best in the world. In twenty five years time, when Britons retire, they too can be part of a pension system of which we can be proud.
David Pitt-Watson is director of the RSA’s Tomorrow’s Investor Project and founder of Hermes Equity Ownership Service
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