Three Retirement Abroad Lessons for the UK – PPI Report | New
The latest report from the Pensions Policy Institute (PPI) examines what the UK can learn from other countries to improve value for money for savers. These countries, among others, include Sweden, Australia and the Netherlands.
When Sweden introduced its defined contribution (DC) pension system in the 1990s, it launched a campaign to encourage workers to make an active and thoughtful choice between the six available investment funds.
With remarkable success, since two thirds of workers actually made an active choice in 2000/01, the first years of operation of the new system. But with the campaign’s withdrawal, the share of active choice quickly dropped to 10%. Today, only 1% of new retirement savers make a wise choice for an investment fund.
“This suggests that efforts need to be both concerted and continuous,” concluded the PPI. As this would be expensive and time consuming, it is not sure whether this is a preferable option, the research institute added.
This makes the existence of a good default option all the more important. And the Swedish default option, the AP7 fund, passes the litmus test, according to PPI.
With its strong allocation to equities (65% to global equities, 20% to Swedish equities and 10% to emerging market equities), the fund at first glance looks like an unusually risky option for a default fund, but, PPI noted. , this should be seen in context: contributions to the fund represent just under 14% of an individual’s total fictitious contributions to their national pension.
The remaining 86%, forming their income pension, create a pay-as-you-go pension entitlement, creating a low-risk, bond-like asset.
That said, AP7 also offers excellent value for money compared to comparable investment options, PPI concluded. From its inception in 2000 until the end of 2020, AP7 brought in 292%, compared to an average of 131% for the market, at a cost of only 0.17%.
When the Australian Productivity Commission (APC) investigated the quality of the country’s pension funds, it concluded in its final report at the end of 2018 that while some Australian super funds were achieving consistently high net returns, the overall performance was mixed with a significant number of funds. underperforming.
This was even the case after adjusting for differences in investment strategy. While reported fees had trended downward, there was also a series of high-fee products remaining, mostly in retail funds.
According to APC research, commercial retail funds have underperformed nonprofits by 2% per year, mainly due to high fees.
The APC then recommended that funds should get the “right to stay” in the system using benchmark outcome testing, and members should be allowed to choose their own fund from a list of ” best in show â, established through a competitive and independent process.
The focus on benchmarking against custom benchmark portfolios and median fees with hard penalties on funds falling below a tolerance, as the APC has done, “sends a very strong signal. strong to suppliers and governance as to what is expected by the system â.
This system also carries risks, according to the PPI. âThe stated goal of addressing the ‘long tail’ of underperforming funds may well be achieved, but could also result in a reversion to the median, as providers will likely first seek to minimize the risk of failing the test. performance, rather than offering maximum risk-appropriate weighted returns to their members, âhe said.
In addition, there could “be a risk that too much weight is given to the performance testing game rather than to the optimization of the investment strategy, and thus restrict further improvements in value for money.” .
Consolidation is not a panacea
It is often thought that the consolidation of pension plans leads to significant cost reductions. When UK Pensions Minister Guy Oppermann recently said that “there is no doubt in my mind that there needs to be more consolidation in the defined contribution occupational pension market”, he suggested that “l Scale is the primary driver of value for money for savers and ultimately better retirement. results.
But evidence from the Netherlands suggests otherwise. Earlier this year, two academics affiliated with the pension regulator De Nederlandsche Bank (DNB) concluded that the economies of scale that had led to the consolidation of Dutch pension funds since the 1990s had all but disappeared.
While large funds paid significantly lower investment management fees than smaller funds until 2004, the effects of economies of scale have now become negligible. IPE reported on the regulator’s findings in May.
“Today the scale hardly produces profitability for pension funds,” said Jaap Bikker, retired professor at Utrecht University and visiting researcher at pension regulator DNB, and Jeroen Meringa , business analyst at the regulator.
Bikker and Meringa calculated that if all the small pension funds merged into a size similar to that of the fifth pension fund, the costs of managing investments would drop by 2.4%, or 64 million euros.
âThis represents 0.8% of the total investment management costs. As such, potential cost savings of this magnitude do not have enough weight to justify pension fund consolidation, âthey argued. âWith that, an important reason for further consolidation and scaling is gone. “
You can read the PPI report here.