A pro-pension fund article in the Torygraph, yes the Torygraph, advocates the establishment of the Dutch pension system or something similar for the UK and urges the government, trade unions and employers to meet and discuss the key points of the recommedations. The article is penned by David Pitt Watson, a friend of UNISON, who once addressed a fringe meeting at national delegate conference in 2007. http://www.telegraph.co.uk/finance/personalfinance/pensions/7921778/Why-British-pensions-should-go-Dutch.html
The article highlights the high costs of fund management for most of the pension schemes that have replaced the final salary system in the private sector. But it is has key lessons for us as members of the LGPS. Shockingly it reveals that if a typical British and a typical Dutch person save the same amount of money for their pension, the Dutch person will end up receiving at least 50 per cent more income in their retirement than the Briton.
There is no trick here - no special tax considerations or clever investment strategies.
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.
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.
And there is a real danager that the LGPS and other public sector schemes will follow if we do not pose a viable alternative to the Public Sector Pension Commission.
In the article Pitt-Watson gives an example of why costs are so important.
"The rush to reduce costs for employers 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".
And with some clarity he observes...
"Imagine a wise young person who decides, at the age of 25, that they will save money so that he can retire at 65 and enjoy a pension for the next 20 years. They set aside £1,000 a year, and raises that sum to cover inflation, which is 3 per cent. They receive 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".
UNISON research has highlighted the soaring costs of fund managment in the LGPS and the dramatic rises in income that could be achieved by merging the scheme's funds. This is the same principle that Pitt-Watson highlights above.
Pension fund members money, UNISON members money is rewarding fund managers for market failure. We are paying the fund managers to effectively destroy our retirement income while they walk away with millions if not billions in bonuses.
Only a coherent message, effective proposals for reform and strong union membership backing can stop them.
