Why are UK private pensions so bad and what can be done?

Piggy bank pensions

A report published yesterday shows that UK pensions offer some of the worst returns in the developed world

LAST UPDATED AT 15:09 ON Tue 12 Jun 2012

OVER THE past ten years savers in Britain have suffered bigger losses from their workplace pensions than those in every country in the developed world apart from Spain and the US, The Daily Telegraph reports.

A new paper just published by the Organisation for Economic Co-operation and Development (OECD) shows that in the UK, money invested by pensions companies on behalf of savers fell every year between 2001 and 2010.

Why have British pensions performed so poorly?

UK FAVOURS STOCKS AND SHARES
A problem for British pension funds has been their tendency to invest savers’ money in stocks and shares. Besides the US and Spain, every other developed country surveyed saw an increase in the size of people’s pension pots – even in places like Portugal, Chile and South Korea. In these countries, companies invested more of their money in safer government bonds. The credit crunch, the eurozone crisis and the continuing fall in stock markets around the world has massively depleted pension funds investing in shares.  

WILL THIS HAVE AN IMPACT ON FUTURE PENSIONS?
The OECD thinks so. With returns falling every year for the past decade they are concerned that British retirees will be left with a shortfall. “Such disappointing performance puts at risk the ability of private pension arrangements to deliver adequate pensions,” the OECD says in the report. Falling value in private pensions could also mean increased pressure on the state, which would mean more stress on the state pension pot.  

WHAT CAN BE DONE TO MAKE PENSIONS SAFER?
Pension plans and investment have to change, and some suggest the whole UK pension industry is flawed. Lord McFall of Alcluith, the former chairman of the Treasury Select Committee, said that the OECD's findings "beg the fundamental question" about whether the UK industry is structured correctly. Darren Philip, policy director at the National Association of Pension Funds said that moving final salary schemes out of equities would “reduce exposure to risk”.  

HOW CAN RETIREES PROSPECTS BE IMPROVED?
The OECD suggests compelling people to save for their old age with mandatory private pensions – presumably with companies that are not investing in stocks and shares with their investment. Auto-enrolment pension plans like the one due to roll out in the UK that allow employees to ‘opt-out’ are seen as the next best option.  

DO MANDATORY PRIVATE PENSIONS OFFER THE BEST RETURNS?
People starting work today can expect a net state pension of about half their net earnings; in the 13 countries where private pensions are mandatory, those benefits would average 60 per cent of earnings, the OECD estimates. In countries with relatively low state pensions and voluntary private pensions, including Germany, Ireland, Korea, Japan and the United States, “large segments of the population can expect major falls in income upon retirement,” the report noted.

[Piggybank image via Shutterstock] · 

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