T he private pension product sector is “persistently the worst-performing retail services market of all throughout the European Union”, according to the European Commission, as cited in a new report.

Better Finance for All, a Brussels-based consumer protection NGO, has published a sharply critical research report – Private Pensions: The Real Returns. The 196-page document analyses pension profiles for each of eight EU countries, including Belgium, Denmark, France, Germany, Italy, Poland, Spain and the UK. These countries account for 75% of the EU population.

This follows a pioneering work along the same lines, which was published in June 2013 but which only covered Denmark, France and Spain. That report showed real returns on retirement-saving products over the 10-year period to 2011 had been “very low” after charges, inflation and tax were taken into account. The latest report shows a slight improvement but pulls no punches with its detailed condemnations.

Better Finance, also known as the European Federation of Financial Services, represents numerous local bodies, whose membership consists mainly of individual pension savers and totals around 4.5 million citizens. The organisation receives supplementary financial support from the European Commission. 

Shedding light on saving

In the most recent study, individual country profiles bring together facts and figures for different types of pension schemes, management aspects and returns achieved by occupational pension schemes, among others. Also covered in the analysis is the performance of life insurance contracts.

“Pension saving appears to be one of the few retail services where neither the customers nor the public supervisors are properly informed about the real net performance for customers of the services rendered,” the paper’s seven authors conclude.

Moreover, it sheds light on the Commission’s criticism that there is insufficient long-term saving, which it attributes to the “often poor performance of financial intermediaries to deliver reasonable return and costs of intermediation”.

The study cites a variety of sources, including the OECD, academic journals, such as Italy’s Journal of Public Economics, and the UK’s Oxford Bulletin of Economics and Statistics. Government ministries, such as Germany’s finance ministry, also feature. 

Despite apparently painstaking delving, the new study identifies serious information gaps, notably in data reported by the OECD, due in turn to shortfalls from national authorities. One cri de coeur is that great swathes of data dealing with the real return on pension savings are entirely missing from certain EU countries. Blame falls heavily on France and on some eastern European member states. 

Better Finance is clearly exasperated at the lack of transparency in some countries on the expenses borne by pension savers, such as entry fees and taxation. As a result, it laments that European financial supervisors are unaware of the actual performance of the services they are supposed to regulate and supervise. 

In other words, these overseers are unable to report on “consumer performance data”, despite a legal duty to do so. The institutions in focus include the Commission itself and also the three European financial supervision authorities, including EIOPA, which are responsible for controlling insurance and pensions. 

The authors, including Jean Berton, president of Better Finance, Guillaume Prache, its managing director, and policy officer Juan Manuel Viver, make a remorseful comparison between Europe and the US.

There, they note, mutual funds have for decades been mandated to disclose the after-tax net real return of pension-saving products in the summary of their prospectuses. This is not the case across the EU. 

The authors explain they would like to be able to report on factors including long-term returns over at least 10 years and that cover a minimum of two full economic and financial cycles. While this is not always impossible in the EU, it is a “challenging” task. 

Factual data in the report is copious. For example, referring to the old-age dependency ratio in a commentary on country profiles, the study finds that the ratio is low in Spain (13%) and Poland (19%). It is highest in Italy and Germany (around 31%). Belgium, the UK, France and Denmark are in an intermediate position (around 25%).  

The 14 pages dedicated solely to France reveal that pension plan assets increased from €7.5bn in 2011 to €10.4bn in 2013, although the report notes that the share of personal pension assets “remains very small”. 

The UK is complimented as “one of the European countries with the most developed and mature pension funds”. On the other hand, the paper continues: “British households save less than other Europeans on average and they do not rely much on alternative assets as a means to prepare for their retirement.” 

A timely disclosure

At present, the relevance of the new study is high, Better Finance believes. This is in light of the Commission’s IORPs II occupational pension proposals, which include enhancing disclosure to pension participants. Also cited is the Commission’s new project to develop a single market for personal pensions.

In fact, the study can be seen as an important step in the underlying contest between would-be reformers of EU pension systems and their adversaries. The latter argue for a ‘steady as you go’ policy, as any increase in costs to fund providers resulting from reform could threaten the status quo and put benefits in danger. 

The conflict has several parallels, including the liberalisation of air transport, which was achieved a generation ago, while the liberalisation of rail transport has not been successful. Other cases include the stark reduction in roaming charges for mobile phone users. Another, seeking a significant transfer of EU funding away from subsidising agriculture and towards advancing science and technology, was lost in 2013. 

More or less universally, the pro reform movement starts in the Commission and matters are finally decided in the Council, which represents the governments of the member states.