Pensions storm in a Dutch teacup

Just before Christmas the think-tank the Institute for Public Policy Research produced a 52-page report concluding that the Dutch model of “collective” pensions would out-perform a “conventional” defined-contribution pension by up to 39%. So if a “conventional” pension produced a pension of £15,000 a year, the “collective” pension would produce a pension of £20,850 a year.

But are we comparing apples with apples? The “conventional” defined-contribution pension is, and always has been, a “collective” investment. It may be, for example, invested in a Scottish Widows Balanced Managed fund. This means that your pension contributions, and your employer’s, are paid into a £200 million fund invested in equities and fixed-interest securities and divided into millions of units, of which you have a tiny, tiny number. If that is not “collective”, I don’t know what is.

Where the Dutch model differs from ours is that when you retire, your pension is paid out of the collective fund. The amount of the pension is not guaranteed, but because your pension is such a tiny proportion of the overall fund, it should not fluctuate too much. In the UK, until very recently, when you retired, your units would be cashed in and a guaranteed annuity from an insurance company would provide you with a pension for life. The problem was that the annuities offered a very low pension, mainly because (believe it or not) people are more healthy and are living longer. Hence the 39% difference.

Somebody (I have no idea who) went into print saying that the Dutch-style “collective” pension was illegal in this country. It certainly isn’t. The Danish company NOW: Pensions is offering a “collective” pension fund for UK employers to auto-enrol their staff. And any individual can set up a self-invested personal pension before he retires, invest it in investment trusts (that is, a “collective” investment) and draw down a pension. Just as an experiment, I set up a dummy portfolio on 28th August with ten investment trusts. As of 28th January the fund was up 11.2%, and if this continues it would give an annual return of over 26%. Compare that to a conventional annuity giving an annual return of just 6% . . .

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