Gosling: The book looks at the strengths and weaknesses of global pensions systems
The book – Towards a New Pensions Settlement, the international experience (Volume 3) – was authored by Gregg McClymont, Andy Tarrant, and Tim Gosling and looks at the experiences of nine nations across the Americas, Asia and Europe on the development of pensions processes – asking how the rest of the world combines pensions freedom and retirement security.
A webinar formally launching the book will be held on Thursday (25 June) at 9:30am.
Commenting on the formal launch of the book, The People’s Pension head of policy Tim Gosling said: “Volume three of this book, edited by The People’s Pension policy team past and present, carries on where the first two left off and looks at the strengths and weaknesses of global pensions systems, from the perspective of securing good outcomes for those who are not wealthy.
“In this volume, experts from around the world examine the systems of Canada, Chile, Denmark, France, Germany, Greece, Indonesia, Switzerland, and the UK. There is a particular focus on retirement income and how it is delivered.”
The key highlights from the counties profiled in the latest edition include:
Canada has some of the best workplace pensions in the world but not all Canadian workers have access to the best schemes. The best workplace pensions are delivered at scale by not-for-profit sector giants that are highly efficient in delivering retirement income with guarantees. The challenge for Canada is one of expanding high quality second pillar coverage into the private sector economy. Only a third of Canadian workers have access to a giant.
Canadian pension fund model covers approximately four million public sector workers and is built on
- economies of scale
- fiduciary duty and not for profit structure
- large in-house managed investments in infrastructure, real estate and private equity
- Private sector workers often lack access to the giants.
- Defined contribution (DC) workplace system where private sector workers highly represented is under-developed
- Approximately ten million workers ineligible for workplace pensions. Two-thirds of these have amassed pillar three savings.
- Retail pension savings forecast to underperform Canadian second pillar investment returns by c. 2-3% a year.
Over time the free market style pensions system based on DC individual accounts managed by for providers has become much more heavily regulated. The whole of market national annuity broker system (SCOMP) reflects government’s increasing role in levelling playing field between savers and providers to end rip-offs. The size of the informal economy limits pension coverage, with many pensioners relying on the state pension.
- SCOMP delivers highly competitive and transparent annuity market
- Chilean annuities best value globally on some measures
- Flexibility and choice of options offered to retirees is wide
- Smooth digital administration by SCOMP
- Most people don’t reach retirement with a pot large enough to deliver a decent income
- Take up of independent whole of market regulated advice on annuity purchase low
- SCOMP options are complex
French pensioners enjoy one of the highest standards of living in the world but there are questions as to the sustainability of the French system of guaranteed pensions, given its cost. There have been successive waves of reform intended to address this but, these have been strongly politically contested. French pensions spending is set to decline by about 1% of GDP per decade from 2030. The salary replacement rate is forecast to decline from 74% for a middle class private sector worker born in 1940 to 60% for one born in 2000.
- Self-employed and private sector workers included
- Straightforward combination of state pension and workplace pension entitlements
- Avoids gross inefficiencies associated with free market pensions competition
- Government liabilities heavy since system entirely pay-as-you-go
- Pensioners often have higher income than workers
- Discourages longer working lives
The transition from the Bismarckian state pensions system to a genuine multi pillar system slow and halting. Workplace pension funds are small in number and scale with DC workplace provision illegal because guarantees were mandatory until 2019. Previous attempt to build up retail individual pensions for the many ended up with wealthy doing most of the savings
- State pension generous but tied to contributions
- Workplace pensions provided guaranteed retirement income
- ‘Member first’ pension fund governance via employer-trade union partnerships
- Large numbers of private sector workers excluded from workplace pensions
- Complex regulatory environment despite limited workplace pensions coverage
- Guaranteed returns driven down by lower for longer interest rates
Fiscal crisis ruptured the existing pensions model whereby most people’s retirement income delivered by a ‘UK style’ SERPS style two-tier state system. Both tiers now reformed with government liabilities limited by cuts to accrued rights, future accruals and the removal of hard guarantees from the additional state pension rendering the system more sustainable on a ‘Swedish style’ basis. Workplace pensions now being encouraged – can only be delivered by not for profit entities.
- Addition of ‘Swedish style’ flexible guarantees to state pension system
- Promotion of DC workplace pensions for first time
- DC workplace pensions must operate on not for profit basis
- Past accrual was reduced in state pension reform for some
- Basic income pension not generous
- New DC system voluntary rather than mandatory so coverage tiny
Mandatory workplace pensions with CDC style minimum income guarantees are delivered by not for profit multi-employer institutions. Most workers are covered and in combination with the state pension delivers a high salary replacement rate for pensioners. Sustainability is an issue but voters in this direct democracy have rejected in multiple referenda attempts to streamline costs.
- Deliver good incomes via inter-generational longevity and investment risk sharing
- Most workers covered by the system
- Guarantees apply to basic pension income enabling individuals to plan
- Annuities provided in scheme
- High degree of investment costs transparency
- Sustainability questionable in low interest rate environment
- Annuity pricing mechanism politicized
- Direct democracy paralyzing pension reform measures
Indonesia’s system is embryonic, commensurate with the country’s overall level of economic development. It offers low levels of pension entitlement to public and some private officials. Most of the informal economy is outside of formal pension savings, meaning that most Indonesian workers do not accrue pension entitlement. The state pension system has recently added a SERPS style second tier.
In just 30 years Denmark has built a workplace pensions system so successful that Government spending on the state pension spending is now falling in real terms because of the size of the retirement incomes generated by the pension funds
- Pension funds jointly run by trade unions and employers on ‘member first’ basis
- Tax incentives heavily favour retirement income products at expense of lump sum payments
- Retirement income products pool longevity and investment risk CDC style
- State pension and associated pensioner benefits means-testing highly complex
- Workplace pensions system so far untested by period of sustained downturn in investment returns
- Annuity-like products aren’t guaranteed