Who took my pension? - Let the RSA tell you how to get it back.

This summer saw the debate for a fair deal on pensions hit the headlines. Various national newspapers led with the statement that Britons are retiring with a pension worth half as much as their European counterparts even though they have invested the same amount. Last night the BBC’s Panorama programme joined the debate, with David Pitt Watson from the RSA putting forward the case for a reduction in pension charges.

This summer saw the debate for a fair deal on pensions hit the headlines. Various national newspapers led with the statement that Britons are retiring with a pension worth half as much as their European counterparts even though they have invested the same amount. Last night the BBC’s Panorama programme joined the debate, with David Pitt Watson from the RSA putting forward the case for a reduction in pension charges.

The programme supported what the RSA has been saying since it began this project. That pension fund charges are in some cases double the fees they were from ten years ago but the net return has reduced. Just as the Citizen investor was consulted at the beginning of the RSA project, BBC’s panorama drew on a variety of people’s personal situations to see how charges are taking large chunks out of pensions. These are the pensions of those who have worked and saved hard to see upto 40% of their savings taken in charges for poorly performing pension funds.

For the RSA Tomorrow’s investor project, the challenge has been to find a way in which we can resolve this situation and restore the balance to ensure less are retiring into poverty after a lifetime of saving.

Our findings have shown that most employers in the private sector could increase the retirement income received by members of their “Defined contribution” DC schemes from a lifetime of savings by 50% or more. This can be done without costing their members or the employers who pay into the pension a penny more than it does today.

This is good news for the industry, employers and also for investors who are struggling to find confidence in a market where their returns are so low. There is a huge opportunity to improve the employee’s standard of income in retirement to a level that will ensure they do not fall into poverty unnecessarily as a result of retirement.

So how can our pensions be so enormously improved? Twenty years ago Britain had a system of occupational pension provision which was dominated by large, collective pensions. Each pension fund received a contribution from the employer, and from the employee, and, over time, the employer guaranteed that this would provide a certain level of pension. These were known as “defined benefit” or DB pension schemes, because the pensioner knew the benefit they would receive.

However, the past decades has seen DB schemes dismantled piece by piece. Today our pensions, particularly those in the private sector are provided in smaller, individual accounts, with no employer guarantee.  Again, the employer and employee both contribute to the scheme, but the benefit is unknown.  So they are known as “defined contribution” or DC schemes. Many employee organisations have opposed this change.  However, the reality is that it is difficult for any employer to accept the open ended liability to which DB plans expose them to.

To secure proper benefits for their members, pension plan sponsors should campaign for the creation of large collective investment pots, with low costs, and able to extract higher returns. This will be the one of the central themes in the RSA report in the Autumn setting out the blueprint for a new pensions architecture.

This may require some lobbying.  But it would be perfectly possible to change the law.  If we did, we could create in the UK a pensions framework which might look like that in Holland; a country generally acknowledged to have the best occupational pensions in the world. 

After that, it seems likely that employees would welcome the new regime.  It would require that they trusted those who were put in charge of their savings to behave fairly.  But it would allow them to have much better benefits, and cost them not a penny more.

The prize is huge.  It could easily lead, at no cost, to a 50% or greater uplift in pensions for members at no extra cost. So that’s the challenge. What’s stopping us?