Why British pensions should go Dutch

It’s just that the Dutch have an efficient architecture for their savings. We do not. That is one of the reasons that the Dutch have the lowest level of pensioner poverty in the world.
So what are we doing wrong? To answer that, let’s have a look at the recent history of pensions in Britain. Twenty years ago Britain had a system of occupational pension provision which was dominated by large, collective pensions. Each pension fund received a contribution from the employer, and from the employee, the employer guaranteed that this would provide a certain level of pension. These were known as defined-benefit pension schemes, because the pensioner knew the benefit they would receive.
However, bit by bit, defined- benefit schemes have been dismantled. Employers felt that they could not afford to pay pensions for people who were living longer and longer, especially when the returns from pension investment were so unpredictable. They wanted the employee to take that risk.
Today our pensions, particularly those in the private sector, are provided in individual accounts, with no employer guarantee. Again, the employer and employee both contribute to the scheme, but the benefit is unknown. So they are known as defined contribution schemes.
However, here is the key point. The focus on the employer guarantee, however understandable, has meant that we have tended to overlook other aspects of the change in pension provision, from the large collective schemes which characterised defined-benefit pensions, to small individual pots which characterise defined-contribution pensions.
This change is incredibly important, firstly, because large schemes have much lower costs and, second, because collective schemes allow us to “insure” one another, and sustain an investment philosophy which can weather short-term poor performance, and can therefore generate higher returns in the long term. This has a huge effect on the level of pensions which are ultimately paid.
Let me give an example of why costs are so important. Imagine a wise young person who decides, at the age of 25, that he will save money so that he can retire at 65 and enjoy a pension for the next 20 years. He sets aside £1,000 a year, and raises that sum to cover inflation, which is 3 per cent. He receives a 6 per cent return on his money. That means that, by they age of 65, he will have a pension pot of £248,170. This in turn will create an inflation-protected pension of £16,080 for the next 20 years.
Now imagine that this person has to pay a fee of 1.5 per cent a year on his savings. Guess how much that will reduce the pension that will be earned? The answer is that it will be reduced to £9,900. In other words, someone who pays no fees gets a 60 per cent higher pension than someone who pays 1.5 per cent, because £16,080 is about 60 per cent more than £9,900.
So costs really matter. It can cost 83 per cent more to provide a decent retirement income using an individual defined- contribution scheme, than using a collective scheme.
So what is the lesson here? We spend about £80 billion, about 5 per cent of the GDP, every year saving for private pensions. Some of that goes to low-cost collective schemes. But an increasing amount goes to high-cost private savings. Huge sums are being wasted on an inefficient system.
If we could get the government and the employers and the trade unions around the table, if we could import the lesson from Holland and from other countries with successful pension systems, the prize would be huge – less cost, better pensions, safe savings and sensible investment.
David Pitt-Watson is the founder and former chief executive of Hermes Fund Managers, for which he is now a senior adviser
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Marx’s theory on labour still has capital

By Edmund Conway

Published: 10:42PM BST 06 Sep 2009

A few years ago the British Broadcasting Corporation asked its radio listeners
to vote for their favourite philosopher. As the votes poured in there were
some obvious favourites from the start – Plato, Socrates, Aristotle, Hume
and Nietzsche among them – but as the counting started it soon transpired
that there was a clear winner for the title of Britain’s favourite
philosopher: Karl Marx.

Marx’s key point was that societies are in the midst of a process of evolution
from less sophisticated, less fair economic systems towards an ideal final
destination. Having started off in feudal states and moved on through
mercantilism to the modern system of capitalism, human society would
naturally soon graduate to a fairer, more utopian system. That system, he
argued, was communism.

In a communist society, property and the means of production (factories,
tools, raw materials, etc.) would be owned not by private individuals or
companies, but by everyone. Initially the state would own and control all
companies and institutions, running them from the top down and ensuring
companies did not oppress their workers. Eventually, however, the state
would ‘wither away’.

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