UK pension industry costing savers half of funds – RSA report

Charges and poorer fund management are costing UK pension investors half their retirement income, according to a new report by RSA.

Management charges are swallowing 40 per cent of the value of pension funds, while returns could be improved further by adopting collective DC models currently used in Holland and Denmark, says the RSA think tank, which stands forRoyal Society for the encouragement of Arts, Manufactures and Commerce.

Its report, Building the Consensus for a People’s Pension in Britain, says 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. It argues even minor changes to our regulatory framework could boost pension returns by 39 per cent.

Written by David Pitt Watson, pension fund manager and chair of Hermes Focus Asset Management, the report says Britain should aim for a low cost system of occupational pensions, based on auto-enrolment and a limited number of large suppliers whose benefits of scale allow them to offer lower costs. Pensions should be provided collectively so there is no need to administer and report individual performance, cutting cost.

It says the Pension Schemes Act 1993 should be clarified to enable collective DC pensions to become available. Providers from Holland and Denmark have announced they are interested in operating in the UK. Danish pension fund ATP is about to open an office in the UK and Dutch fund APG says it will establish a fund if there was sufficient demand.

In an open letter to Pensions Minister Steve Webb and other industry stakeholders, the RSA has called for the creation of a limited number of private sector providers to be “approved default providers” like Nest. The RSA also wants trustworthy providers to be allowed to offer collective DC pensions.

David Pitt Watson says: “By common consent, the UK private pensions system is not fit for purpose. It is hugely inefficient. The government has taken steps to address the problem but it remains in real danger of spoiling the ship for a ha’porth of tar.

“The government is introducing auto enrolment, but doing little to ensure providers offer good, low cost products. It has established Nest, and loaned it hundreds of millions of taxpayer money, but has then prevented it from competing by restricting the size of contribution it can take. The danger is that we are creating a weakened monopoly rather than healthy competition.

“Regulations in the UK should be changed to enable the establishment by trustworthy providers of low cost collective pensions similar to those enjoyed in Holland and Denmark.
What we are suggesting is not some new structure. It is based on tried and tested systems in other parts of the world, and recommended by pensions experts globally. What we need now is consensus, and the will to change.”