What can the UK learn from the best global pension provisions?Posted on: 21 March 2016 by 50connect editorial
The Melbourne Mercer Global Index has determined which countries have the best pension systems for their residents.
The UK sneaks into the top 10, at ninth place, with Australia, The Netherlands and the world number one – Denmark – way ahead of Britain.
So what could we learn from our global neighbours; what elements of other pension systems could improve life not just for current retirees, but for all British pensioners in the future?
Earlier this year, the pension freedoms were introduced. This gave pensioners flexible access to their pension funds, with products such as income drawdown and trivial commutation; the need to purchase an annuity – the product that provides a regular, guaranteed income in retirement – is no longer a necessity (though is still available).
Due to prior restrictions only the wealthiest pensioners were exempt from purchasing an annuity. But in countries such as Singapore, retirees must take a compulsory minimum annuity income – with the remainder of their fund used how they wish.
This is a great combination, meaning no-one would be left without an income, but those with more savings could still take advantage of their wealth. It’s something that could be easily implemented in the UK with our new pension rules.
Workers are forever encouraged to contribute more into their pension savings, with the auto-enrolment system still being rolled out across the UK’s workforce. Auto-enrolment is a scheme that means all UK workers must be automatically enrolled into a pension scheme, with top-up contributions from employers and the government.
Despite the success of the auto-enrolment system, there are still some that are choosing to opt-out. But compulsory pension contributions are present in many of the top pension systems around the globe, including in Chile, Switzerland and Australia (where it is known as the ‘Super’ and can be topped up beyond its basic level by both savers and employers).
In fact, Switzerland requires its residents to pay more in contributions the older you get, the thinking being that the older you get, the more you earn. Compound interest means that you can get away with smaller contributions earlier in life if they are left to mature for longer.
Sadly, as George Osborne considers cutting the tax relief offered on contributions, people could see compulsory pension payments without these added benefits as a cut to their income, rather than an investment in their futures.
Defined benefit pensions
The defined benefit pension is something that the vast majority of UK workplaces have moved away from in recent years – the most recent being Supermarket giant Tesco.
Defined benefit schemes, which offered retired employees a guaranteed income for life, paid for by the company and based on an average of salary during their working life with the company.
UK workforces moved away from DB schemes due to increased life expectancy causing unmanageable costs. Yet there are many countries around the world that still favour defined benefit over defined contribution schemes.
The Netherlands, that came in at number 3 in the list of best pension systems has defined benefit pensions for many of their working residents, as does Canada.
As it stands, it seems unlikely that private sector workforces in the UK will migrate back to DB schemes, though there are still many prevalent in our public sector.
Earnings related public pensions
State Earnings-Related Pensions or SERPs were introduced by Labour in the 1970s, offering the prospect of greatly improved pensions for UK workers.
As the UK is set to move to a single-tier state pension in 2016, this extra state benefit is being abolished – allegedly for being too confusing.
In many countries – including Sweden, Switzerland and Finland – SERPs are an essential part of their robust pension systems, and part of the reason the country’s pension provisions are rated much higher than Britain’s.
While the UK government likes to see us as a progressive nation, what comparing the different pension systems around the globe shows is that we might actually be regressing?
Many of the provisions held by the countries higher in the list than the UK are elements of our pension system that we’ve had previously and are slowly phasing out (defined benefit pensions) or cutting completely (SERPs), or elements we aren’t willing to adopt.
The UK should start to look to other countries before making drastic choices that heavily impact the future of their residents.
Ryan Smith writes on behalf of My Retirement Options – providing income drawdown and annuity guidance for retirees.
Last edited March 2016
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