End of UK State Pension Prediction

Published / Last Updated on 03/06/2014

End of UK State Pension Prediction. (published 03/06/14)

Dutch Style Pension Could Mean End For UK State Pension System.

As part of the Queen’s Speech tomorrow, the Queen looks set to announce government plans to launch a Dutch style pension scheme in the UK.

This new style pension is thought initially to be on top of existing state pension provision and private pension provision.

The principal of collective investment is already well established both in the UK and the rest of the World where collectively we all invest in pensions, savings, unit trusts, investments and ISAs. By collectively investing in funds, management charges are reduced and we have access to investment markets that we would not normally have access to at low cost. How many of us would know how to invest in the Japanese stock market directly but via our collective funds we can choose a Japanese fund quite easily.

Dutch Collective Defined Contribution Scheme

The plan, in the Queen’s speech, for a new style collective investments for pensions is thought to be based upon the 2nd "pillar" of Dutch style pensions (on top of basic state pension). These are a mix between financial salary type schemes and investment linked company pensions.  This system is based upon depending upon the number of years you pay in, e.g. you may get a credit for each year paid in of say 2% of the maximum pension. So, if you pay in for 50 years you receive 100% of the maximum pension income (set by government or the scheme). Your fund is invested collectively will all other investors, in what we would call a ‘super-tanker’ fund. Investment risk is spread amongst all investors, quite literally most of the population, and a guaranteed income can be taken from the from. You do not buy an annuity, the whole “national fund” stays invested and when you reach retirement age, you can draw on the fund.

The current maximum pension is €1,099.37pm for a single person and €759.03 each per couple from age 65. This can vary up or down and is set each year.  How much does the CDC cost? The minimum contribution from 01/01/14 is € 2,407pa. For younger ages, under 22 to age 16 it is between € 1,890 (age 22) and € 149 (age 16).

How is this different to the UK?

The UK State pension system is unfunded i.e. money paid in tax and social security today, is paid out in 4-6 weeks to people who have a state pension in payment. Then we have the combination of company pensions, workplace pensions and private pension schemes to make up our income, of which private pensions and work place pensions have no guarantees.

What do we think?

This looks remarkably like the “Graduated Scheme” of the 1960’s in the UK. The Graduated Scheme was the fore runner to second tier State Pensions (SERPS in 1978 and then replaced by S2P and now defunct). The graduated scheme of the 60’s offered the following benefits:

Graduated Scheme Benefit Example: For every £7.50 of National Insurance contributed to the graduated scheme by a man and £9.00 for a woman bought One Graduated Retirement Benefit Pension Unit Originally each pension unit bought you a pension of 2.5p per week. The graduated retirement benefit unit amount was frozen at £0.025 per week until 1978 (when SERPS started) and then started to be adjusted with inflation each year from 1978. For example, a man has paid in via National Insurance to the Graduated Scheme £187.50 between 1961 and 1975 (remember this was the 60’s), he will have accrued 25 units. This pension will then be paid at 25 units X the current graduated retirement benefit unit price. The graduated retirement benefit for 2013/14 was £0.1279 per week pension. In this example, a pension entitlement 25X £0.1279 = £3.19 per week for last year.

The Future of UK State Pensions

We believe this is part of a much bigger Government driven agenda move. UK State Pensions are unfunded and a growing liability on the State as the population ages, which we can ill afford. By offering such a “funded” scheme similar to Dutch CDC with a ‘super-tanker’ collective savings fund, the liability gradually moves away from Government and within two generations there is no pension liability on the State.

Has the Dutch Scheme Worked? It is not inexpensive starting at minimum contributions of €2,407 per year to buy 1 year’s credit i.e. 2% of the maximum pension. But it is not a burden on the Dutch State. It encourages all people to make significant contributions each month to pension saving. Yet the Dutch government are now looking at additional provision of UK style private pensions to encourage people to save more.

A combination of a Dutch CDC style pension and a Private Pension is a good thing. We actually think longer term, the guaranteed UK State Pension could disappear for our children as they are yet to start paying National Insurance Contributions, and may be this is a longer term plan to a 50+ years lead out from the UK’s State Pension burden.

Explore our Site

About
Advice
Money MOT
T and C