The Danes look at the UK and see one of the only countries in the developed world that has had a negative return on pensions. By contrast, their fund has average 10.3% a year
It won’t be as thrilling as The Killing or Borgen, but we probably don’t want too much drama from the latest smash-hit import from Denmark. It’s their pension plan, and if we’ve got any sense it should get millions of viewers.
The Danes have for years been compulsorily enrolled into a private scheme (the Brits have chosen “auto-enrolment” starting in October, but you can opt out) and it has been a stellar success. Over the past decade the return on the fund has averaged 10.3% a year; last year it made 26%.
The Danes look across the North Sea and see a country which, despite (or more likely because of) the fact that London is the heart of the global financial system, gives its citizens the worst deal in the world on pensions.
“Britain is one of the only countries in the developed world which has had a negative return on pensions for the past five and 10 years,” says Morten Nilsson from Denmark’s ATP, which, thankfully, is setting up in the UK using the brand name Now: Pensions.
As we report this week, even our low-cost “stakeholder” pensions launched a decade ago have been miserable. Savers who put in £100 a month from April 2001, paying in a total of £13,300, now have a fund worth just £14,600 11 years later. The worst cash Isa would have done better.
Now the government, via its new auto-enrolment regime, wants to throw the 10 million UK workers without pensions into private savings schemes. The old adage of throwing good money after bad comes to mind.
It is unforgiveable that low-paid workers, clobbered by rising bills, should be expected to pay into a scheme with no assurances about the outcome. In Denmark there are guarantees. Its citizens at least know their money will grow and provide something decent in retirement. But British workers? We will have to rely on all those brilliant guys in the City to manage the money properly…
At one time the top-up to the state pension was the “state earnings-related pension scheme”, which the government stood behind. But we’ve progressively junked that in favour of private providers and transferring the risk to the individual. Pensions minister Steve Webb is examining ways in which guarantees can be offered to those paying into the new auto-enrolment schemes. But the pensions industry is already harping on about it being unsustainable. It has form in this area, having successfully kippered the new “Nest” scheme because it dared to charge half the price of the private providers.
Why are British private pensions so peculiarly bad? Nilsson thinks it may have something to do with “misaligned” incentives. In Britain fund managers earn bonuses for short-term performance, so they will happily agree to sell Cadbury to Kraft to boost fund returns that year, ignoring whether it would have been better to hold it for 10 or 20 years for pension investors. In Denmark managers at ATP take a 40-year perspective. ATP also runs much of Denmark’s annuity system, unlike in Britain, where they are sold by private profit-seeking companies.
Auto-enrolment is the biggest thing in pensions for decades. But unless Webb does something about guarantees, it’s going to be the biggest and most expensive flop as well.
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