James Daley

By James Daley

Is there nothing that can stop Steve Webb? The Lib Dem Pensions Minister has been on an unstoppable run over the past few months, introducing reform after reform to the British retirement savings market - slaying insurance company share prices, and splitting opinions in his wake.

In today's Queen's speech, yet another significant change was unveiled - this time, a plan to introduce Dutch-style pensions to the UK. Mr Webb's ambition is admirable. Where he sees a problem, he looks to solve it - and he wastes no time about it.

In this case, the problem is that once upon a time, most people ended up with cosy final salary pension schemes - where the payout was guaranteed, and all the risk of investment returns and increasing life expectancy lay with the employers who offered them. Over time, as people went on living longer and longer, fewer companies felt able to continue offering these schemes - and as a result, most young employees now have a different type of pension, known in the industry as defined contribution.

These newer type of pensions leave employers with none of the risk, and leave savers with all of it. If their investment doesn't perform, they end up with less money than they hoped in retirement. And if they live till they're 120, it's their responsibility to keep themselves solvent for the 50 years or so that they spend in retirement.

A fair share of the risk

What Webb wants to offer is more stability to savers - so they can have the confidence that if they do their part and put some money away every month, they will end up with a decent income in retirement.

This is a problem that the Dutch got to grips with many years ago. In the Netherlands, millions of people - no matter who they work for - save into national pension schemes, which invest their money for them, and promise them a half decent pension in retirement. You might see these referred to as "collective defined contribution schemes" - which is a bit of a nonsense, as just about all pension schemes are collective to some degree or other. I prefer the term "Defined Ambition" that gets bandied around in the industry, and by Webb himself.

The great positive of these schemes is that they take the longevity risk away from the individual. So if you live to be 120, you'll still get a pension, rather than running out of money somewhere before you die. It should be said that this is the same job that annuities have been doing effectively for British savers over the past few decades. But what defined ambition schemes have over annuities is that they remove some of the costs (i.e. insurance company profits) from the equation. In fact, they should save people money both on investment costs while they're putting their money in, and on the costs of an annuity when they're taking the money out.

Let the intergenerational war commence

One interesting side effect is that in Holland, they have also created intergenerational warfare.

As investment returns stumbled in the wake of the financial crisis, the Dutch schemes were forced to consider cutting payouts for retirees. But a cut today penalises the elderly, while benefitting the younger generation. The other option - and the route that the Dutch schemes eventually went down - is to maintain payouts today and let the schemes remain underfunded, in the hope that investment returns will restore the fund back to full solvency in time. Of course, if that doesn't happen, it's the younger generations who will end up sustaining the cut in their income.

While there's been a rush of criticism from the pensions industry about the idea of defined ambition schemes (because they represent yet another threat to their bottom line, at least in today's world) - they have the potential to provide fairer outcomes for many more people in retirement.

But there's no avoiding the intergenerational warfare that will ensue.

Of course, there's no need for young and old Brits to wait for the introduction of defined ambition schemes to begin fighting. Today's retiring baby boomers have benefited from an unprecedented rise in property prices - which has largely been untaxed, and is unlikely to ever be repeated. So when defined ambition schemes reach our shores in a couple of years time, the retiring generation will have to earn their right to complainif things don't go their way. Today's retirees are likely to be wealthier than any in the next century.

As for tomorrow's retirees, the other inescapable element of the Dutch schemes is that people save a lot more into their pensions than we do over here if they want to end up with decent incomes in retirement. Saving 20% of your income into your pension will need to become common practice. Given that most people in the UK don't even stash 10% away, there's a long way to go.