Ripples in the pool

Brits could spend less building up pensions if only they were not so culturally opposed to pooling, says OECD pensions expert Dr Pablo Antolin. John Greenwood reports

Pablo Antolin

Expensive, risky and discriminatory towards women. Dr Pablo Antolin, principal economist at the Organisation for Economic Cooperation and Development’s private pensions unit would probably not be quite so blunt about the UK’s pension system to your face. But the Paris-based Spaniard certainly describes our Anglo-Saxon system as costing our population more because of its individualistic nature.

His perspective is a timely one, given the recent media coverage of the issue of charges on pensions.

The Panorama pensions documentary, accurate or infamous depending on your perspective, has been followed by a stream of national newspaper headlines about charges inherent in the UK’s private sector pensions system. And Antolin agrees with the assessment that by trending towards individual DC pots we are not moving towards a cheap solution. “Yes, they are very expensive, although not only the UK is expensive. The more you disaggregate the market into small pots, the more expensive it is,” says Antolin.

He is careful, however, not to say any system is better than others. Rather, that the different structures states adopt reflect their different cultural attributes.

Rightly or wrongly, it is Britons’ dislike of pooling that is costing them more to save for their pension, he argues.

“People talk about the Dutch offering lower charges through collective DC schemes. They offer lower charges because they pool everybody together.

The Dutch have made a choice that the British would probably never want to make, which is pooling the risks together. That has consequences and benefits.

And one of the benefits is the costs are much lower. “But if people feel that they don’t want to pay for somebody else and subsidise somebody else, then that is where the British system works,” he says.

Much of Antolin’s current work is on annuities, and his visit to London is to speak at an event on annuities hosted by provider Partnership.

He thinks EU director-general Juliane Kokott’s recent opinion, which will possibly become law in March, that the UK should stop underwriting on grounds of gender, demonstrates a cultural difference between the UK and some of its continental partners, where gender underwriting is outlawed. But again, our individualistic approach to pensions is ending up costing us more in the long run, he argues.

“One way is to have a system in which saving for retirement and personal pension plans is mandatory and then you make buying an annuity mandatory.

Then discriminating becomes to a certain degree irrelevant because you are making a societal decision to pool risk together. But that is not the case in the UK now,” he says.

“In the UK you have more of a voluntary system. In order to make attractive buying an annuity you might need to separate different groups. But then it becomes more expensive. So whatever direction you choose you have to take into account that there are pros and cons. If you pool everyone together and only use one unisex table, the cost of annuities is going to be cheaper than when you segregate. That is the secret of financial economics. You pool risk so the cost of addressing that risk or hedging that risk becomes lower.”

People talk about the Dutch offering lower charges through collective DC schemes. They offer lower charges because they pool everybody together. The Dutch have made a choice that the British would probably never want to make, which is pooling the risks together.

But he is careful not to take a political view on this issue. “In all of these issues there is not a right or wrong way. The role of the OECD is not to say this is what you should or shouldn’t do. Our role is to say whatever you choose as a society or a regulator or policymaker, be very clear and aware what are the benefits and the consequences,” he says.

But the UK is not all bad when it comes to making efficiencies through pooling, he argues, praising Nest, and suggesting it could offer better annuities than those available through commercial providers because of the economies of scale it will have and the life expectancy of the target market.

“It will be interesting to see how they deal with the payout from Nest, whether they provide annuities to everybody or whether there will be a centralised annuity provider, like Singapore has decided to introduce. Nest could act as a channel to buy in bulk annuities for everybody. To do it more cheaply.

Nest will be able to bulk buy annuities at better rates because the socioeconomic group will be people with shorter life expectancies and they may be able to offer better terms than private sector providers because of the bulk and the lack of advice costs,” he adds.

He is generally supportive of the Nest/auto-enrolment project in the UK and believes opt-outs will not be high.

“Unless there is a strong incentive for people to opt out, behavioural finance tells us that they will not opt out. I do not think that spending the money down the pub is a strong enough and attraction for people to opt out,” says Antolin.

Based in Paris as he is, what does he make of the UK population’s relaxed approach to the way the state pension is being increased when compared to protests in France and Greece? It appears that, like the straight EU banana, things across the Channel are not quite as the UK media always portray them.

“It is not just the UK, but Germany and the US have been laid back about this. But France has been more vocal. Internationally everybody thinks ‘why are the French complaining if they retire at 60 and that is increasing to 62?’ But when you understand the discussion, you realise that no that is not correct.

Only people who have contributed for 40 years can retire at 60. Otherwise you have to retire at 65. So everybody outside France think that the French retire at 60,” he says.

“The issue here is how many years you contribute into the system to finance your retirement. France has already 40 years and it is increasing to 42 years.

That is hardly a great thing if somebody starts working at 16,” he adds. In fact, while the UK system penalises lower income groups when it increases state pension to age 68 because in some British postcodes few people will reach that age, the French system could claim to be fairer to all.

“For somebody who starts working at 30, a high earning individual, it is not fair for them to retire at 60 as well, in the same way it is not fair to ask someone who starts work at 16 to work until they are 67.

“Obviously the French public pension system has many problems that will affect its sustainability in the long term. But I don’t think that is related to the retirement age, even though everything has been related to that issue.”

One of Antolin’s current aims is spreading the message about the benefits of annuities across the world in areas where countries are moving towards DC systems. Speaking in the UK, he is aware he is in a sense preaching to the converted, given the maturity of the UK annuity market.

But he has interesting perspectives on the way our annuity market could be liberalised. He believes the point of annuities is to insure against running out of money. Therefore, he argues, regulators should require people to use a proportion of their pot on retirement to secure an income from, say, average life expectancy. With longevity risk covered, the rest can then be used more flexibly over the intervening period, he argues.

“Buying a life annuity, it is illiquid. It is not flexible to face contingencies like healthcare expenditure you might have. Nor can you pay down all of your debts or your mortgage, which for many people would make more sense,” he says.

“What we recommend at the OECD is what we call a combined arrangement. People should buy a deferred annuity at the time of their retirement that will start paying them at age 85, for example, so they are covering their tail risk, and during the intervening period they can have a drawdown product in which they have flexibility, liquidity, can leave bequests and also they can have their assets accumulating and invested in a portfolio with equities and other risky assets and bonds,” he says.

“That way you achieve both things, the protection from longevity risk that is given by the deferred life annuity, that will not also much because it is not covering you until you are 85, and then the rest of your accumulated assets during the intervening years is used as a fund that you can use to withdraw, which will give you the flexibility and the liquidity, bequests and also access to investment portfolio gains,” he says.

Antolin believes around 20 to 25 per cent of a retirees fund would be needed to cover that tail end risk. It is an interesting perspective, but one he is not expecting UK policymakers to take on board just yet, which is not surprising given we are already used to annuities. In fact he is acutely aware of the problem of trying to apply principles to something as complex as a nation’s pension system.

“Every country is different and has got to where it is because of what has gone on before,” says Antolin.

All about Pablo Antolin

Current role

Principal economist at the private pension unit of the OECD Financial Affairs Division. Currently working on four projects: annuities and the payout phase; the impact of longevity risk and other risks, the design of investment strategies for default funds in defined contribution pension plans and a joint project with the World Bank on comparing the financial performance of private pension funds across countries.

Previous roles

Worked at the IMF and at the OECD Economic Department. Has published journal articles on ageing issues as well as labour market issues. 


PhD in economics from the University of Oxford and a degree in economics from the University of Alicante, Spain