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PIC tasked David Pitt-Watson – executive fellow of finance at London Business School and co-founder and former CEO of Hermes EOS – and Hari Mann, professor of strategy and innovation at Ashridge Business School, with defining the “purpose of a pension, and what institutions would be best designed to fulfil that purpose”.
After setting out the purpose of a pension and defining it as a collective arrangement, Pitt-Watson and Mann defined a pension as a collective arrangement, meaning that the DC system was “not a pension”.
The lack of collective defined contribution (CDC) pensions in the UK was an example of the extent to which the financial system had been designed without taking purpose into account, the authors added. Introducing such a system would represent a step towards “a more purposeful financial system”, Pitt-Watson and Mann said.
Danish or Dutch institutions like ATP, ABP or PGGM, they argued, came “pretty close to the characteristics we have laid out for a purposeful pension fund”. The CDC system in Denmark and the Netherlands “is recognised as extremely effective in fulfilling the purpose of a pension”.
“In the UK, CDC pensions are effectively illegal, as regulations have been put in over many years, each aimed at some form of consumer protection, which prevent the flexibility needed for such pensions to operate,” Pitt-Watson and Mann added. “In establishing these, regulators were doubtless acting in good faith. Sadly they failed to start by thinking about “the purpose of a pension”, or the governance necessary to make such a purposeful system work.”
Pitt-Watson’s and Mann’s paper is the first in a series that PIC intends to produce with partners investigating the purpose of the financial services sector.