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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13 Responses to “Why collective pensions will mean better pensions”
LB
Correct. It’s a valid question. Then we take the biggest loss off the fund, and see how that compares to the state pension.
So after taking the stock market loss if the amount in the fund is greater than the value of the state pension, then you would conclude the state pension is crap. We also need to take account of any debts.
On your second point, the money doesn’t have to be invested entirely in the UK. Just like the Norwegian fund isn’t all invested in Norway
So two questions what are your answers. I’ve the numbers when you are ready.
LB
So here is how I would evaluate the risk side.
1. For the state pension.
What’s share of the states debts, pensions included, as a negative.
Value of the state pension as a positive.
Both as a present value
The net result is the value of the current set up.
2. For the investment approach.
Value of the fund.
On the debt side, a share of the state’s borrowing as a negative.
You compare 1 and 2.
3. The risk
Next, the risk. What you can do is look at the biggest percentage drop over the last 40 years. Assume that history does repeat itself. You then apply that to the fund value in 2 above. A worse case scenario.
Now you compare 1 and 3. If 3 is bigger than 1, then the state has screwed people over.
A reasonable approach, or if not, why not.
Even on 3, there is one error to avoid. In practice after crashes, the markets recover. You are still OK. The error people make, and the BBC did it this morning, is still assume that you lose permanently if you retire the day of the crash, because you have locked in the income by buying an annuity. That’s gone. It’s now draw down.
LittleOddsandPieces
Saving helps. A collective pension from your work wages might help if done correctly.
But this is nothing to do with the state pension.
The ring fenced National Insurance Fund is full, not needing a top up from tax for decades, despite all the hype about people living longer, which has had no one effect on the viability of the state pension.
The NI Fund has not beem emptied to pay off national debt, because the NI Fund is not a tax and cannot be used for general expenditure by government. This wrong belief is even said by the Pensioners Convention, who even in most recent conference ignored the total loss of state pension by the Flat Rate Pension.
https://you.38degrees.org.uk/petitions/state-pension-at-60-now
People need a works pension and the state pension, to give them protection from food and fuel poverty.
SERPS and the State Second Pension and Pension Credit are abolished by the Flat Rate Pension from 2016, so the additional pension will have no guaranteed annual rise for current claimants either.
A lot of women have nil works pension, insurance/private pension and by the changes in pension rules not enough NI credits. From 2016 need 35 years rise from 30 years NI credits. No state pension with less than 10 years NI credit.
From 2016 the housewife’s 60 per cent state pension is gone for new claimants. Widows will not longer be able to inherit their husband’s state pension.
The state pension is being withered away by the Flat Rate Pension, and women are hit the most.
Please share my petition on your social media to inform women what is to befall them. Thank you:
https://you.38degrees.org.uk/petitions/state-pension-at-60-now