Could Britain learn valuable lessons from Sweden?by Robert Ellison / September 17, 2014 / Leave a comment
The destruction of the UK’s private pension system over the last 20 years will strike historians and policymakers in years to come as deeply puzzling. Like most developed countries, we have an ageing population, though not quite on a level with Japan. Like some other countries we have a below-replacement birthrate, at around 1.7 per woman of child-bearing age, although not as low as Russia. But unlike most other countries, until relatively recently we had a decently-funded and adequate workplace pension system. Sadly, the UK private or occupational pension system is now in a state of distress.
Other countries have also been examining their provision for older people. Almost all countries are extending their working ages, and therefore the pension ages, edging up to 70 in most cases (apart of course from France). And almost all countries are trying to encourage individuals to take out risk insurance against living too long in the form of annuities (apart, of course, from the UK).
In July 2014 the Australian government published a discussion paper suggesting that pension fund money should be compulsorily used to buy an annuity; this is after decades of allowing the grey community to use their retirement money to have the equivalent of a gap year, spending it on travel. The cultural change this implies will be profound and the chances of the change are high. Similar moves are being explored in the United States, but being fought desperately by asset managers, who would lose funds under management to the insurance companies.
Other developing countries, including most of Anglophone Africa, and China in particular, are intent on encouraging pension provision, using a combination of defined contribution arrangements and the defined benefit (final salary) system that is now being dismantled in the UK. Few African countries are ageing yet, and pension systems could work well, once the financial infrastructure builds up (at the moment there’s not much to invest in). The move to urbanisation means that the old forms of elder support (working in the fields in exchange for food and shelter) no longer work, and pensions are crucial. And while Arab countries are starting to age gently, sharia law does not make pension provision easy; prohibitions against interest and annuities—taking a gamble on human lives—mean that scholars are still working on what kind of pension system could operate.
The UK is considering learning from reforms in other countries; the Swedes, for example, are scaling their retirement age to national longevity statistics, so that as a population no one is entitled to more than say 15 or 20 years of pension. The Danes are changing their tax structure so that while contributions are not tax deductible, the annuities are.
And not all things are changing for the better elsewhere. You would not enjoy the Afghan private pension system. There isn’t one. The Hungarians, the Poles and the Irish have dismantled the assets of their private pension systems in the last few years (the Russians did the same earlier this year).
Nonetheless other countries do it better in a large variety of ways. Most Scandinavian countries provide decent top-up pensions. The New Zealanders, the Australians and the Canadians use a menu of very different systems, none perfect, but which offer simpler, higher-level arrangements for millions of members; the Canadians have introduced a collective defined contribution scheme in some provinces which offers, like some Dutch arrangements, probably 40 per cent better pensions for the same contribution rates, by allowing collective rather than individual investing. And the Germans, because their financial infrastructure was destroyed after the second world war, were forced to devise an unfunded system, the book reserve scheme, which has been, again with some reservations, the saviour of German industry, reducing its reliance on banks. At one stage they wanted to copy the UK model, but have very sensibly now changed their mind so that many employers now just make a provision in their balance sheets for pension liabilities, pay pensions out of payroll, and insure themselves against going bust, avoiding the heavy frictional costs of asset managers, lawyers, accountants, actuaries and covenant advisers. They also sidestep the attentions of regulators, whose rules according to Allianz, the German insurer, cost members a reduction in investment yield of 2.3 per cent a year.
So while not that long ago UK company pensions were the envy of the world, other countries now show us how we might do it better. The good news is that while none of the politicians (with the honourable exception of Steve Webb, the Pensions Minister) have any joined up thinking on pensions policy, UK employers may be about to re-introduce a successful variant of the Swedish book-reserve system to the UK. This would consign most of the regulations and regulators to the bin, and could see a fresh flowering of workplace pensions. We just need to live long enough to see it.