In both countries, occupational pension coverage is at 90+%, contribution rates can be more than 20% and replacement rates often reach 100% for lower earners but can be around 70-85% for average earners.

I recently gave a talk at the PMI’s Northern Conference in Leeds where I spoke about adequacy and what, if anything, we could learn from the Danish and the Dutch. On the face of it, this all seemed quite timely as we all expected the Pension Adequacy Review to be launched as part of the Mansion House speech. No such luck but if announced separately we expect it to focus on auto enrolment contribution rates, role of the state pension and the self-employed. The self-employed is a challenge, and certainly an issue that hasn’t been solved in the Netherlands (where they are called ZZP’ers).

So, what can we as industry do about adequacy? Is it about tweaking at the edges or does it require more of an upheaval? Is just about 12%? Is there a bigger definition of adequacy that pensions policy needs to support?

In learning about the Danish and Dutch systems, it’s important to sound the bold statement klaxon! This is because I think it will be a challenge for the UK to replicate certain aspects of these systems, but certain fundamental elements are most certainly within reach.

Let’s start with the ‘tough to replicate’ part of this. I say tough because this is about the fabric of the nation and being social market economies. This in turn drives policies that include high labour market protections and benefits. Most people who save into a workplace pension in Denmark and the Netherlands do so because of a collective agreement. Typically, such agreements include pension scheme design and excellent pension contribution rates often split 2:1 between the employer and employee. In the Netherlands, the pillar 2 system is quasi-mandatory meaning that the pension is enshrined in law which then makes it mandatory for all employers to abide by. I guess it’s unlikely that the UK will become a social market economy overnight and adopt the egalitarian collectivism model. And it is too grand a topic to include in the adequacy review! However, could we take some aspects of this here in the UK and create the regulatory framework to make this happen?

For example, could a sector, even non-unionised, benefit from the Dutch model? Perhaps a sector who has struggled with talent attraction or retention. If this ‘enshrining’ legislation was in place, a sector could lock in and essentially mandate higher pension contributions as part of redefining the attractiveness of the sector. There are also employer agreements in Denmark which are for employers not covered by collective agreements. This all could be something to investigate as part of the review.

Perhaps a smaller fish to fry concerns income. Denmark and the Netherlands score higher than the UK in the Mercer Index in part because of income. The Danish government at the time of moving from DB to DC did so on the basis that the system remained focused on income. When you save into a DC pension in Denmark it is not, from a psychological perspective to build up a pot, but generate an income. Decisions are made from the outset as to what income looks like through life or term annuities (that are reaching 25+ years). You are not locked in and can change your decisions near retirement (whatever that means). Even though you build your own pension capital in an account, it is slightly peculiar in Denmark to think about it as a pot rather than an income. Perhaps innovation in the retirement income space, as we are seeing with Standard Life and Fidelity or the DC default retirement income regulations, is starting to move the dial here. But one outcome of the review would be to focus on income, income, income! I admit this could feel a little pre-2015 but the AE journey we are on has reached a point where income needs to be front and centre.

To finish, I think there is scope to consider the broader scope of adequacy. I think we are talking about a dignified retirement phase for hardworking British citizens. And in part, this isn’t about pensions. In Denmark, if you are in receipt of the State Pension (called Folkepension), the digitally administered economy automatically applies for housing benefit. Yes, there is a cost implication (note the social market point) but it would be excellent if a joined up, digitally administered public sector could help people see and understand what they are entitled to and ensure access is automated to support the delivery of a dignified retirement.

Dan McLaughlin – UK Country Head, Festina Finance