“What’s expensive for a pension these days?”

A reasonable question to ask and one asked by the very reasonable John Lawson of Aviva in a response to my blog “Give a straight red to active member discounts“. I quote John’s response in full as he articulates a view which most UK pension people could agree with.

“0.9% is expensive for a pension? Really? For transient workers? 0.9% is expensive compared to the retail price of a pension? Really? If you walked into a pension retailer, what would you pay for a pension? Why should leavers be subsidised by the employer? Are leavers hard done by? I don’t think so! Fundamentally disagree with this rant Henry. This is the second piece of nonsense that you have uttered this week, the first being your support for Pit-Watson’s Dutch fiction – you clearly haven’t bothered to look into Dutch schemes. Less PR and more substance please. Serious pension people want serious debate,

High time that First Actuarial started offering pensions for 0.3%, or 0.48% or even 0.9%. What’s stopping you Henry?

Why I’m sympathetic to John’s view is that it used to be mine too!

Adrian Boulding, who does a similar job to John’s at Legal & General tells the story of finding himself  in a room in the seat in front of me. The then pensions minister John Denham  asked whether the insurance industry could operate a stakeholder pension at 1%pa.  Adrian jumped up and blurted out

 “oh yes minister, we at Legal & General consider our factory gate price to be 0.5%”.

He sat down and was catapulted forward , so hard did I kick him in the backside.

As it turned out, Adrian was right and I was wrong.  I claimed I had Eagle Star‘s profit margin to protect and Adrian took it in good heart – we’ve  had a laugh about it since.

That was 2000, this is 2013 and the boot is on John’s rather than my foot!

I suppose I had better respond to John’s public challenge!

Taking the last para first , as he knows, my firm is not a manufacturer, we do not “offer” pensions, First Actuarial point people to where and how they can buy good workplace pension schemes for their staff.

The rates quoted are available and if anyone wants them they should get in touch with me at henry.h.tapper@firstactuarial.co.uk . You will have to be acting for your company and be ready to pay a  qualifying contribution ( a minimum of 1+1% of the AE band of earnings).

The 0.3% pa rate is what a deferred member of NEST would pay for their pension. There is an extra loading from the 1.8% charge but spread over 10 or 20 let alone 30 or 40 years this is minimal.

The 0.48% rate is for the default fund of a leading provider’s GPP. This rate is guaranteed for the transient workers of retailers.

You won’t get those rates by walking into a pensions retailer but you can get them online as I hope to show to John and his colleagues in the next couple of weeks.

Is this Apples v Apples? Well we could argue deep into the night about “bells and whistles” but if I was a transient worker, I’d be more interested in a solid pension than “co-branded communications” and on-going workplace presentations. After all, I’m not planning to stay around.

0.30% and 0.48% are no longer “factory gate” prices , in the intervening 13 years they have become workplace prices (or at least prices that are freely available to any of the 1.2m employers staging workplace pensions over the next five years). We are in “collective pension land” now.

Which moves me on nicely to my second “piece of nonsense”, my support of “David Pit (sic)- Watson’s Dutch fiction”.

David Pitt-Watson is a fan of collectivism – and that’s what they do in Holland; they don’t much do company pension plans, it’s “industry-wide” with them – like another thriving pension system in Australia.

One of David’s contentions is that we in the UK pay too much for our pension funds , relative to the Dutch (the Swedish system is even more effective but let that be). He argues as a super-collectivist.

For those not familiar with Pitt-Watson’s arguments here is a summary, taken from Building the consensus for a People’s Pension in Britain

• A huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.

• If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.

• That minor changes to our regulatory framework could boost pension returns by 39 percent.

I’ll have to see a counter-argument from John about why this shouldn’t be the case but would stand by any comments I have made in support of these assertions.

Certainly, for those transient employees, even a relative reduction in the annual charge on their money “boosts pension reserves” by  up to 20% . Well it could be more than 20% for the youngsters but let that be.

Term of deferment	If AMC is 0.48% rather than 0.9%,   fund is bigger by …	If AMC is 0.3% rather than 0.9%,   fund is bigger by …
10 years	4.3%	6.2%
20 years	8.8%	12.8%
30 years	13.5%	19.9%

David Pitt-Watson‘s point is the British system of pension provision is less efficient and more expensive than the Dutch, many of the savings he imputes to the Dutch are achieved by collective decumulation (outside the scope of this argument but important ) but the core savings as people accumulate a pot with which to get an income are directly relevent.

As John should know if has read my many blogs on the Dutch system and on Pitt-Watson’s pioneering work, the big difference between Dutch and British DC  comes down to social attitudes. The Dutch take pension outcomes very seriously and providers are scrutinised intensely by the public fiduciaries – advisers, trustees, employers and regulators all play a part.

There is a collective social conscience to keep public confidence in pensions and despite falls in pension outcomes in the past year, there is no rioting on the streets of Amsterdam. People are still getting 50% more from their DC pensions than we are getting from ours.

I am sure that any Dutch fiduciary or adviser who was accused of lacking substance and concentrating on PR for promoting lower fees for transient staff would find this extremely amusing (as I do).

John has kicked my backside. I didn’t quite fall off my chair but like Adrian Boulding, I turn round to him now, with eyebrows raised!

I’ve published the numbers, I’ve confirmed that an 0.48% guarantee on a GPP’s default  is available and that NEST will offer 0.30% in deferment using its default. I’ve shown the boost that could be given to transient workers pensions by using these rates.

This is not PR – this is substance.

Is 0.9% expensive for a pension these days?

Most UK pension people may still agree with you and see 0.9% as cheap but not me. It might have been cheap in 2000 and it certainly isn’t today!

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