However, if they had undertaken this journey shortly after the chancellor’s announcement in March 2014, Mr Fogg - as a gentleman with an interest in finance – may well have asked a few questions.
The first – and most important would be – has anyone got it perfectly right? Is there a country that boasts a pension system that would act as a panacea for what ails the UK market? Sadly, while some countries have systems that provide excellent outcomes for the majority of their citizens, no one nation has the answer.
So what can we learn from other countries’ success and mistakes? Let us start with Switzerland, which boasts a system that actually works in a similar way to the UK. Indeed, there are three pillars of pension saving:
| Pillar one | Pillar two | Pillar three |
| State Pension (determined by average salary and years worked). | Similar structure to Defined Contribution Schemes whereby the fund can be taken as a lump sum or as an annuity with a state prescribed rate (6.8% in 2014). | Similar structure to Defined Contribution Scheme whereby the fund can be taken as a lump sum five years before or one year after retirement. |
Interestingly, pillar 2 is the biggest, with £400bn invested and 80 per cent of maturities are annuitised each year. The majority of these products are index-linked and joint-life, with deferred annuities, fixed-term annuities and drawdown not available to savers in the mandatory savings schemes.
These three pillars allow people the flexibility to build up a lump sum to use at or around retirement, but encourage annuitisation through high annuity rates. The generous prescribed rate of 6.8 per cent is roughly similar to that offered to a typical customer of one provider.
If we move on to Denmark, which tops the table of the Melbourne Mercer Global Pension Index, we will find that its system has similarities, but adds another Pillar:
| Pillar one | Pillar two | Pillar three | Pillar four |
| Public Basic Pension Scheme | Means-tested Supplementary Pension Benefit | Fully funded defined contribution scheme | Mandatory Occupational Pension Scheme |
Half of the savings in defined contribution schemes (Pillar 3) are used to purchase an annuity, with 35 per cent being used for fixed-term products and 15 per cent being taken through lump sums.
However, the vast majority of occupational savers save with ATP (Pillar 4), which is a collective defined contribution scheme that launched a subsidiary – Now: Pensions – in the UK. It is interesting to note that Now Pensions recently admitted that “huge differences in cultural attitude to collectivism, trade union membership levels and compulsion in contributions mean a solution that works in Denmark will not necessarily work in the UK”.
Therefore, it appears that not only do we need to take into account the regulatory environment, but also cultural preferences. Moving down-under, while Australia’s superannuation model has been seen as the ‘poster boy’ by some pundits, good intentions do not necessarily mean good outcomes. Currently, all Australians between 17 and 70 who earn more than A$450 (£249) a month, contribute to a defined contribution scheme, which they can take as a lump sum from the age of 55 .
