The final report from the UK's Workplace Retirement Income Commission (WRIC) has called for the Government and the Pensions Regulator to develop new structures that would "allow bigger, low-cost pension schemes to operate". In light of the report, Pension Funds Insider spoke to APG, the Dutch pension provider, to find out how sponsors and members could benefit from the adoption of the successful Dutch collective model  

"There is definitely room for improvement in the UK," says Stefan Lundbergh, head of the Innovation Centre at APG Investments. Lundbergh is Swedish and working for the Dutch pension provider thus familiar with not just one but two very sustainable collective models.

There have been many changes in the pension landscapes all over the world, with nations adjusting their system to modern markets and creating a more sustainable model. Lundbergh explains how different approaches can all lead to the same good results but only if it is done in a "sensible way".

"What you could see is that we all know that defined benefit (DB) in the old sense is not sustainable, the WRIC report is clear on that. But the problem that the UK is dealing with is that instead of solving that problem they chose an easy solution; transfer everyone into a defined contribution (DC) scheme."

In the Netherlands they took a different view. Together with the social partners, the industry decided there were some good points incorporated in DB schemes and they worked hard to create a model that adjusted the system to the current situation.

The pensions have now been amended with, for example, conditional indexation and instead of a final wage they provide an average wage. It is adaptive to the future. "The UK on the other hand basically killed the system and went for something that didn't turn out to be all that good – a solid DC," says Lundbergh.

His colleague, Stephan Schüller, associate director for institutional clients at APG, also thinks the UK is ready for a complete overhaul. He says: "In general it is a sensible thing to put all your money in one pot and it is possible, whether it is DC or DB."

He says that while there might currently be some legal barriers it is good that the commission asked Government for these to be taken away. The regulatory changes that would be required to enable collective DC would be modest in size and easily achievable anyway. The Pension Schemes Act 1993 would need to be clarified to enable collective DC pensions to become available.

One thing Schüller does warn for is the pure consolidation of schemes. "The problem is that the UK starts with some really unhealthy schemes and you will not solve the problem by transferring other pensions into them."

The strengths of the Dutch system, which is shown by steady returns, are that the big schemes have lower costs and more bargaining power. "In the UK you see the financial industry against the small individual consumer which brings big mark-ups," explains Schüller. "Here in the Netherlands you have big financial companies against big pension schemes and the latter end up getting a better deal. This has to do with creating a level playing field between pension providers and consumers."

Both also explain that although the UK is already slowly moving to more collective approaches, with the coming of NEST being the best example, there are still too many limitations which prevent the system from really working.

"NEST, backed by the Government, is the collective entity which is trying to negotiate with the industry for a good cost base," says Schüller, "but the model and therefore the industry is protective by capping off the contributions which you can be put into NEST. Why can't an individual choose to put more money into a cheap operating model?"

The comments do not stand alone. At the end of last year the RSA Tomorrow's Investors report also said a similar thing; it concluded that "although the Government's policy of auto-enrolment and personal accounts represents a big opportunity for UK savers, the scheme must be extended to cover pension payments above £3,600 if it's going to have a major impact". The report stated how limiting pension payments would see many savers forced to open private pensions that "often charge exorbitant costs (often up to 40 percent of the value of their pension)". It also said how the UK pension system was simply "not fit for purpose" and mentioned many of the arguments made by APG now.

One solution, all experts agree, is to move more towards a model where the best interest of the members is really represented. In the Dutch model where the social partners are involved, someone, at all times, looks after the best interest of the members, not the service providers. This, they say, is an absolute strength of the collective system as seen in other countries. Get someone at the top who represents the worker so that people can get a better pension.

The system works. In its report Building the consensus for a People's Pension in Britain, the RSA made the argument for a Dutch-style collective system even more graphic by calculating how if a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50% higher income in retirement.

This, the report explained, was mainly due to the fact that a huge proportion of UK pensions disappear in fees – with charges swallowing up to 40% of the value of the pension. It also set out how if minor changes to the UK regulatory framework would be implemented it could boost pension returns by 39%.

The experts of the collective model both say that if you look at a collective versus a market solution, and how they are being applied around the world, that the market solutions are not doing very well. Trying to inform people to make their decisions is very difficult since there is a big asymmetry between the provider and the client.

Lundbergh and Schüller say there are different ways of building a new collective model, for example with the help of the social partners or the government. "But there has to be someone there who is strong and can protect the member's interest," says Lundbergh.

"Ok," concludes Lundbergh, summing up many a sentiment of those who understand the danger the pension market is in: "It might be boring, it might not be sexy, but at the end of the day there are very little cost frictions in a collective scheme and everybody is much better off."

First published 11.08.2011

azeevalkink@wilmington.co.uk