Former OECD economist blasts 'defined ambition' pension proposals

UK - A former senior OECD economist has argued against the introduction of 'defined ambition' pensions in the UK, claiming that one had only to look at the rights cuts currently being mooted in the Netherlands to understand the "consequences" of such a policy shift.

Speaking to IPE, Bernard Casey, principal research fellow at Warwick University's Institute for Employment Research, distanced himself from the oft-repeated assertion that the Netherlands boasted the world's best retirement system.

Referencing a number of recent stories of rights cuts - which, according to an assessment by the Dutch social affairs ministry, could be as high as 8% across the system if the current discount rate is maintained - Casey said: "When the going gets tough, then the Dutch system starts getting tough with people."

He also pointed out that even the Netherlands' largest fund, the €261bn ABP, has had to issue a warning on possible benefit cuts, and that the country's approach to conditional benefits has been defined ambition.

"You might or might not think this is a good idea," he said of the proposals, first suggested by UK pensions minister Steve Webb under the moniker 'defined aspiration' in February, "but we ought to be clear the system can not just produce 0% increases and real cuts, but it can also produce nominal cuts as well."

Casey, also a visiting research fellow at the London School of Economics, said the Dutch system was often viewed through rose-tinted glasses.

"It's much more problematic than people from the outside talk about," he said.

The academic also questioned who would be allowed to define the terms of the discretionary benefit within the proposed new UK system, described as a 'third-way' approach by the Department for Work and Pensions.

"How is this discretion exercised - to the benefit of whom and to the [detriment] of whom else?"

National Association of Pension Funds head of policy Darren Philp has previously suggested to IPE that one possible approach to defined ambition would see companies set the defined aspect of the pension guarantee on an annual basis as part of the firm's remuneration agreement.

He suggested that pension funds could, for example, opt to protect members against certain risks only - such as inflation or longevity - or potentially set a minimum level of return.

Philp, however, shared Casey's concerns with the Dutch system, saying the previously considered collective DC model, mirroring the risk-sharing approach employed in the Netherlands, could quickly lose critical scale if trust in it were undermined.

"I wouldn't say collective DC is totally out, but there are some difficult issues to resolve," he said.

For more on defined ambition and issues currently affecting the UK industry, see the September issue of IPE.