Some lessons from abroad

What is it that puts Denmark, the Netherlands and Australia top of the class in pension provision? Pádraig Floyd asks leading experts from these top-ranked countries to comment on the remaining challenges for their pension systems and implications for the UK

The UK once had a pensions system that was the envy of the world, but is no longer leading the field, according to the Melbourne Mercer Global Pension Index 2013. The index assesses pension systems across developed and developing nations, scoring them upon three key criteria: adequacy, sustainability and integrity.

Despite a long association with pension provision, the UK only managed a “B” grade this year. This is an improvement upon 2012, the result of reforms currently underway, such as improvements to the basic state pension, extension of the retirement age and auto-enrolment. However, these are not yet enough to challenge the best in the world, says David Knox, a senior partner at Mercer and the author of the index.

“The better countries have most of the working population covered in a private pension plan and people are putting money aside now for the future,” he says.

Those countries – Denmark, the Netherlands and Australia – all apply labour-market arrangements and large-scale industrywide schemes with mandatory membership to their workers.

Denmark, the only country awarded an “A” rating, covers 95 per cent of the working population. Michael Moth-Greve, director of business development for the Nordic region at Affiliated Managers Group, says the country’s success is founded on a unique relationship between employer and employee.

“Pensions are separate from the corporate for the sake of the corporation, but also for the individual savers because their pension is not contingent on the survival of that corporation,” he says.

This takes the running of pensions out of the hands of the corporates, allowing them to focus on running their businesses, and places it with professional organisations.

Dutch provider APG runs schemes for 30,000 employers across multiple industries, managing €337 billion for 4.5 million participants – more than 30 per cent of all collective pensions saving in the Netherlands.

The better countries have most of the working population covered in a private pension plan and people are putting money aside now for the future

Despite this obvious strength, Alwin Oerlemans, director of institutional business development at APG, says his system faces two major challenges. “The first is to take advantage of investments and share risks to provide an income when the markets are volatile,” he says. “We also need to adjust the contract to produce a pension system that is able to deal with longevity.”

Though common to all nations with ageing populations, even the best of the rest – the Netherlands and Australia – have work to do, according to Mr Knox. He sees the exclusion of entrepreneurs from the mandatory system as a “weakness” in both systems. Not every business will succeed, says Mr Knox, and so he wants the self-employed included in the move towards universal coverage.

Denmark has this taped, where self-employed groups have organised as an industry to create their own large schemes.

Australia is similar to the UK in having to deal with trust issues in recent years and government reforms have sought to redress the balance of power in favour of the individual saver.

Fiona Reynolds, managing director at the United Nations Principles for Responsible Investment and an expert on the Australian system, says the UK can learn from this: “You need a well regulated system that works in the members’ interest. There is a lot of vested interest [in the UK], so members have to come first.”

Peter Nielsen, head of continental European business at BlackRock, says the lessons for the UK to learn from Denmark’s success are clear and will rely on large autonomous providers taking control of the many thousands of the small schemes currently being operated. “You need organisation of the market, fewer players, more transparency and less use of agents, such as asset managers and administrators, in the whole structure,” he says.

This will take time, but it’s early days. Australia’s model has, after all, been running since the 1980s, whereas the Dutch and Danish models hark back to the 1950s. They’ve already had time to learn from their mistakes.