How Could Dutch Pension Schemes Benefit Us?
Dutch Pensions, everyone’s talking about them, but what are they and would we in the UK benefit from having them?
Typically in the UK we operate within two pension structures, defined contribution and defined benefit, many functioning under the structure of the former. Defined contribution (DC) is where individuals pay in a determined amount, but don’t necessarily know what they’ll get out in the end due to market variations. Defined benefit (DB) contribution is where money is entered into a scheme that details the amount of money that will be due upon release.
The reason Dutch pensions are so different, is that they take on a collective defined contribution (CDC) model. This is where tens of thousands of employees are together in one single pension plan that crosses many industries. As these schemes are on a larger scale, the cost is generally lower.
When a DC structure is undertaken, large proportions of pensions disappear in fees, using the Dutch model for pensions, employees can save the same amount of money but expect a 50% higher return in some cases. It’s said that with a Dutch pension scheme we could dramatically improve the return we get from pensions in the UK with no additional cost. According to David Pitt Watson, Dutch pensions schemes offer a return of up to 39% higher than DC pensions.
- With a CDC there’s no guarantee workers contributing will receive the projected proportion of their salaries when they retire.
- As of April 2015 employees contributing to a pension under a DC model will be free to access their pension pot as required. It’s not clear if CDC models will allow this freedom.
- A CDC system requires many employers to come together, this means that strategic cooperation is needed from many businesses.
- Some claim that due to cultural differences between the Netherlands and the UK that a collective scheme wouldn’t be feasible here.
Despite a huge call for our pension systems to operate as a CDC, reports have been made suggesting that the Dutch are calling for British style pensions. It’s currently unclear which pension scheme is the best and in this climate, it’s always hard to navigate your way through the financial waters.