The UK pension landscape is set for a major overhaul next year with the arrival of auto-enrolment and the introduction of NEST, its new national pension scheme. But what does mainland Europe make of it all? Pension Funds Insider recently asked some non-UK pension professionals their views on reform in the UK and where they feel it could improve provision.

"The UK is a leader in financial services but I must admit that I don't see the pensions industry here as being a leader," says Morten Nilsson, head of international operations at Danish pension provider ATP.

"The governance around many pension funds in the UK is not very strong, costs are another issue and some of the performance and investment strategies really can't be considered as leading."

Nilsson is not alone in holding a negative view of the UK's position. Stephan Schüller, an associate director at Dutch pension provider APG, believes there is much room for improvement. He points out that the options available to savers can be bewildering.

"Businesses have choices, individuals have choices, the government offers various options and top-ups – nothing is simple." says Schüller. "It's a very unclear market for the consumer."

Schüller describes the UK as a market where "a whole lot of history is being dragged along". What he means is that when legislation is being altered, what already exists lives on as before. Defined benefit (DB) schemes which are closed to new members but still open for future accrual is one example he mentions.

In the Netherlands, Schüller explains, when changes are made to the pension environment, the existing rules regarding existing members are also changed. "So everybody knows what he (or she) can expect."

Timo Löyttyniemi, managing director of Valtion Eläkerahasto, the Finnish State pension fund, describes the UK market as "scattered". "There are loads of different players, and corporations, basically run the pensions industry - instead of the government or collective bodies."

Joined up thinking

He also points out that there are many different funds, which puts savers and trustees in a disadvantaged position. When funds start working as collectives, then other service providers and the general financial services market becomes much easier to deal with. This he claims, can be seen in the experience found in the Netherlands and the Nordics.

Added to those tow areas, Löyttyniemi mentions Canada and Australia, countries he says have the pensions 'x factor'. The ingredients for success are collective defined benefit (DB) schemes; a mandatory contribution regime; state pensions that are partially funded, if not fully funded. The result is significantly smaller income gaps and intergenerational risks than found in the UK.

Some European pension figures are surprised that the UK's financial expertise has not translated into the country having one of the most efficient pension systems.

"In Denmark most of the major pension funds are based around member interest and are centred around making sure members are being served by aligning investment strategies to those interests," says Nilsson.

"We also have the execution power that allows management to take quick investment decisions based on very clear delegation but a lot of schemes in the UK are set up without the necessary procedures and internal management to execute quickly."

Instead, says Nilsson, schemes in the UK rely on external advice or quarterly trustee meetings, which he says drives execution time up and raises questions as to who makes important management decisions. Which is, of course, one of the reasons why fiduciary management and better-aligned consultancy models have become more popular in the UK.

Not that Nilsson sees more reliance on investment managers and advisers as the necessarily the best way forward. "External advisers of course have their own interests, so it's not the most effective governance structure in my view. You get conflicts of interest," he says.

The way governance works in the UK also tends to lead to greater expense, in Nilsson's view. He says that this is an area which is very different in the UK than it is in Denmark. According to him it drives up investment and administration costs in the former country.

The UK needs to find out what being member-centric really means, he says. "The Danish system is not about marketing, it's about letting member needs permeate our products and processes.

He claims that funds in Denmark are not interested in educating their members. Many members don't understand investment decisions, but the more important point is that they don't want to try and understand them.

"For us, having member needs in mind is about taking responsibility for the members and not about presenting them with a range of choices and pushing liability away from the pension fund," says Nilsson. "It's about saying, we are the professionals in this and we know what's good for our members. The Danish way is not about marketing, it's about letting member needs permeate our products and processes."

Reform

When talking about the upcoming changes in the UK pension landscape, APG's Schüller is slightly hesitant in his enthusiasm: "I find it hard to get the full picture of the consequences. I read Turner's report a couple of years ago and followed Hutton closely, but the overall message seemed to be; 'pension provision in the UK is just not very well organised'".

Nevertheless, they both agree that NEST is a very good development. Schüller says: "You go back to a basic option that is very cheap to run and I think that is were a solution should be sought."

"It is a uniform mandatory collective instrument, just what Britain needs," says Löyttyniemi, who calls auto-enrolment "simple and protective" and says no one can deny it is in the best interest of the individual.

With low-income earners having been ignored for far too long, NEST finally provides them with an opportunity to save in a scheme, and actually targets them. Other schemes such as the stakeholder DC scheme have suffered in the UK because the low profit margins that insurance companies could make did not incentivise them to market them properly.

Nilsson calls the changes "an opportunity for the UK to reconstruct a strong pensions system" and says he hopes to see that the changes trigger the right response from the industry.

"It is a unique and very interesting challenge for employers. Both in the public sector and the private sector a lot of consideration is going into how the UK can again enjoy a really good pension system," he says.

Still, some criticism is always to be expected when changes occur and this time it is Schüller who airs it first. He says the contributions cap that NEST has set is a sign of holding on to "the old, disintegrated market".

"You suddenly see this cap, it is a sign that they are not willing to go far enough, they are still afraid and holding on to an old system where you need more than one source for your retirement provision. A real shame and they should reconsider this or else they might need to make a new set of changes in the near future again."

Though Schüller says that there is much room for improvements, Löyttyniemi also sees some positives for the UK: "You have a tradition of DB, with corporate funds being partially funded and there is some money out there where people have been trying to save for pensions – all in all that is a better situation then in some other countries where everything is based on a pay-as-you-go system."

Many managers will agree with him when he goes on explaining that the UK benefits from having such a large financial centre. "You have people who understand the effects and importance of pensions in the long term."

"It's a great start for the UK."

First published 17.05.2011

azeevalkink@wilmington.co.uk

dbillingham@wilmington.co.uk