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Retirement defaults would strengthen UK system, experts say

12 Apr 2018, 12:29 ... xperts-say

UK pension commentators often point to the Netherlands as an example of a country with a good pensions system, but the UK’s introduction of freedom and choice has also attracted interest from Dutch pension experts.

With its large collective funds, the Dutch system’s transparency in costs and scale in defined contribution pension provision are frequently mentioned by UK experts.

David Pitt-Watson, London Business School wrote:In Britain, we leapt into 101 choices without understanding that that would have an effect on the entire pensions system

The Netherlands introduced collective defined contribution plans as part of a gradual shift from defined benefit to DC.

In the UK, Royal Mail and the Communication Workers Union are now working to get government to introduce CDC, and have agreed to implement a CDC scheme when possible, with a DB cash balance plan alongside it.

In March, pensions and financial inclusion minister Guy Opperman said the government was “tempted” by Royal Mail’s CDC proposals.

At an event organised by Cass Business School, held in London on Monday, experts from the Netherlands and the UK discussed their respective pension systems, and what they could learn from each other.

Michael Visser, a pensions specialist at Tilburg University in the Netherlands, described the Dutch system’s “balanced multi-pillar approach” as good but said it needs change.

One of the best aspects of the pensions system of the Netherlands, according to Alwin Oerlemans, chief strategy officer at Dutch pension provider APG, is that it shares not just longevity risk but also investment risk.

“That’s really helped us to build strong portfolios,” with good diversification, he said.

However, he agreed that the system could be improved, singling out an area the UK is currently struggling with as well. “The weakest point of the Dutch pension system is the pension provision for [the] self-employed,” he said.

Learning from the UK’s pension freedoms
While many have welcomed the introduction of pension freedoms in the UK in 2015, concerns have been raised over people's poor decision-making at retirement.

As part of an inquiry, the Work and Pensions Committee recently asked the government to clarify the aims of freedom and choice and monitor progress.

Maiyuresh Rajah, senior DC investment strategist at State Street Global Advisors, supported the UK's pension freedoms, but was in favour of a stronger support framework.

“From a member perspective, giving them choice so they can align how they take their retirement assets with their lifestyle choices and needs… is very important,” he said.

He added that “the problem in the UK is [that] we may have gone a bit too far, by giving them complete freedom in what they’re going to do and not giving them enough help in how they’re going to make those decisions”.

He said others would be well advised to learn from this mistake.

"Countries looking to go in that same direction, which could potentially be the Netherlands… may want to think about introducing more safeguards,” to prevent members from making significantly bad decisions leading to poor outcomes.

Rajah said post-retirement default solutions, as recently recommended by the WPC, would help solve some of these problems.

Choice should go hand-in-hand with good defaults
David Pitt-Watson, executive fellow at London Business School, said “there’s a reason that Holland is always voted the first or second best pensions system in the world”.

He said Holland thinks “about the purpose of a pension as the fundamental policy driver, which is, how is it that someone can have a predictable income by the time they retire to the time they die?”.

For DC plan members in the UK, apart from buying an annuity – which is expensive – “there’s no way that you can share longevity risk”, he said.

In terms of what the Dutch could learn from the UK, Pitt-Watson said that he also believes in choice, but advised caution. “In Britain, we leapt into 101 choices without understanding that that would have an effect on the entire pensions system.”

He agreed with Rajah that defaults are necessary where people are offered choice.

“Be careful how you introduce that choice; and wherever it is that you are introducing choice, make sure that you’re also introducing [a] good default,” he said.

Not making a choice should also be an option for people coming up to retirement, said Nicholas Barr, professor of public economics at the London School of Economics.

“People who want to make choices should be free to do so, but the pension system should work well for people who make no choices, and making no choices should be an entirely socially okay thing to do,” Barr said.

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