Yesterday , I published a critique of David Pitt-Watson’s work for the RSA, the Dutch collective pension system and my support for both. The critique was produced by John Lawson of Aviva and it received some support on Twitter and the comments pages surrounding the blog.
It was also read by Per Andelius http://www.andelius.com a Swedish pensions expert who passed it for comment to Con Keating – well know to readers of this blog being an adviser among other bodies to the Bank of England.
Here is Con’s response to his friend Per, published with his permission, in its entirety,
He is not correct in a number or regards.
The best source for Dutch data is the DNB and that report by Jacob Bikker is unimpeachable. Contrary to what he says LCP have in conjunction with every other consultant every incentive to exaggerate the costs of Dutch schemes.
I for one do not believe they are anywhere near 20% of contributions – that would make them over 50% above the levels I see here in the UK and I believe them to be more efficient.
He seems to feel that Collective DC is not superior to Individual DC – in this he is wrong. The GAD say 20-25% but in simulation 39%. I have looked at this myself and it depends upon the level of diversifiable risks – it was never less than 20% in my own simulations and often in the range 30-40%
The schemes (66 of them of of 482) in Holland which have had to cut benefits at the insistence of the regulator (for being below 105% funded) have all been of the traditional DB form, not CDC – no CDC arrangement has been required to reduce benefits.
The advantage of CDC does come in part from their ability to maintain higher equity holdings for longer periods of time. There is no need to de-risk in an inter-generational structure.
There are no facts about how long people will live – no matter what assumptions are necessary.
It is clear that the individual structure is inferior to the collective, for all but a very few gifted people.
Perhaps he has included in his cost figures the costs of CDC but the majority of dutch CDC schemes have taken out insurance policies which guarantee minimum returns for certain periods (usually the next five or seven years).
The £25 cost figure he cites for individual schemes in the UK is nonsensical as a mere glance at the costs of NEST or NOW would reveal immediately.
The €356 figure comes from the LCP “study” which I have never seen. I have seen smaller figures but the point needs to be made that the quality of service matters – and in Holland that is high, remarkably so in many cases.
The piece by Andy Cheseldine is another of the LCP articles – it confuses the schemes which do have to cut with those which are CDC. When I look at the Bikker study, I see cost results which are materially better than are achieved ib the UK – but that is mutual DB in Holland being compared with sponsor guaranteed DB in the UK and in theory at least, the latter should be more efficient.
As for the RSA being political – it was formerly formally a qualifications awarding body – albeit many were of a vocational nature. It is headed by Vicky Heywood, who also sits on the Council at Warwick and is involved in another vocational qualification board: City and Guilds.
It sees its role now as being to promote debate – it has obviously succeeded. It has a statement of objectives on its website, I think. (It must have to meet Charity Commission requirements).
If you look o the trustees there are none who are overtly political (or as far as I know, surreptitiously so.) David Pitt-Watson who authored the RSA reports is a staunch Labour man – he almost became the Labour Party Treasurer. He is also a good friend of mine, and would not stoop to deliberate misrepresentation. That would run counter to everything he has done in corporate responsibility and sustainable investment.
He was alone for much of the time with his work for Hermes and the BT pension scheme on that work.
There is a general mood in Britain today of frustration with our funded pension system, especially the DC element. People don’t trust it.
When the collective system put in place by Barbara Castle in the late 70s was reined back and eroded by cuts and appropriate personal pensions, those who talked of collectivism and inter-generational transfers were silenced.
For 25 years it has been the individual personal pension that has been promoted. When the Government had the chance between 1997 and 2001 when they conducted the stakeholder review, they missed the chance to return to a more efficient system. Frank Field was sacked and stakeholder pensions emerged a pale shadow of what they could have been.
There are still people, like John and PJ Zoulias who live the Thatcherite dream that sees every man their own CIO and releases us from obligations to and from others. This vision of self-reliance is based on financial empowerment and a trust in our private financial institutions to do the right thing.
At the very least, this model needs to be challenged.
The real challenge laid down by the Dutch is not to get charges down, it is to establish a system of social governance that ensures that power is in the hands of the fiduciaries who act for the members. This will not only keep charges down but will ensure that there is more risk diversification (Con’s phrase – most people refer to this as risk-sharing).
Necessarily this will mean a transfer of power from insurance companies and pension consultants and into the hands of governance bodies who act for the member rather than the shareholder (or partnership).
This is the great battle waiting to be fought out over workplace pensions. It can only be engaged when we know the terms of the debate and that is what David Pitt-Watson and the RSA have been assisting us to understand.
Dullards like me, follow behind and start getting it because of pioneers like David and his colleague Harry Mann. They are, to me, part of the Force for Good which will be promoted in the months and years to come by http://www.pensionplaypen.com.
All the people who are mentioned in this blog are involved in that debate and without John and PJ and Saq Hussain on one side, there would be no dynamic for David and Con and Per to argue their case,
I sit and watch; – like 1.2m other employers, I just want to see the money I pay into a workplace pension generate the best outcomes it can.
- Those Dutch pension cuts in full! (henrytapper.com)
- “Stick or twist” for the lifecos. (henrytapper.com)
- Those Dutch Pensions – a Civil Servant writes (henrytapper.com)
- “What’s expensive for a pension these days?” (henrytapper.com)
- Whatever we do, let’s do it together (henrytapper.com)