Doubts raised over pan-European pensions framework
Rachel Oliver reports from the EFRP Conference ‘European Pensions: The New Challenges’ in London
Any faith put in a pan-European pensions system is misplaced, according to the UK’s Secretary of State for Social Security, Alastair Darling. Speaking at the recent European Federation of Retirement Provision-sponsored conference, ‘European Pensions: The New Challenges’ organised by the Royal Institute of International Affairs in London, he categorically stated that the very nature of Europe’s problems meant that the cross-border pensions panacea is out of reach.
Individual state’s across Europe will come to individual solutions on the social security issue, said Darling, which means any homogeneity in solutions is very unlikely. “The way in which governments across Europe provide this framework will be different in each state,” said the minister. “There isn’t one European pension model any more than there is one European social model.”
However, Darling used the conference to give his full support to the EC directive on mobile workers’ reasoning that “a fully operative single market would improve investment and increase employment”. But to create a single pensions system across Europe would be too difficult, he said and aired doubts as to whether any of his political peers across the continent actually felt to the contrary. “I don’t believe anybody seriously advocates that,” he said.
E Philip Davies, senior international finance adviser to the Bank of England, put faith in EMU as a key driver for the evolution of Europe’s pensions industry. “EMU itself will in-crease the pressure for pension re-form,” he said, adding that throughout Europe, “confidence in social security parameters is declining.”
Anglo-Norwegian multinational Kvaerner’s Lyn Ellis suggested that the nemesis of pan-European pensions was perhaps overrated and that there has too much undue concern on the part of Europe’s governments over tax retrieval. “I know countries are concerned that they will give the tax relief and not get the tax back…but they’ll get their tax by and large.”
Whatever the concerns, she placed the responsibility for sorting out this issue firmly in the hands of the politicians. “This is the stumbling block where we need the politicians to solve the problems,” she said. Tax is a “huge” political problem, she continued and pressure needed to be applied from the corporate sector to push regulation through. “It is probably too difficult which is why we need a court case,” she said.
However the question of investment limitations, said Ann Maher of the Irish Pensions Board, was definitely one for the Euro-politicians. “The investment restrictions in various EU countries is unlikely to fall unless the EC pushes the_directive through.”
Speaking on the UK market’s current pensions conundrum, Darling welcomed the input given to date from the industry on the stakeholder pensions proposals and confirmed that a response would be coming in the summer, restating the UK government’s commitment in the provision of supplementary pensions. “There are critical weaknesses in our pension system,” he said. “The government must provide security for those who cannot provide it for themselves.”
He also confirmed that the second state pension was expected to be paid at a flat rate and not earnings related as anticipated. Contributory pensions would remain universal and would not be means tested, he said, and he criticised the state earnings related pay scheme (SERPS) for being biased against low income workers.
“Low earners will be building much better pensions through the second state pension,” he said, adding that stakeholder pensions “will provide people with a real choice for funded pensions where non already exist”.
Opposition MP Quentin Davies criticised the government’s proposals, referring to the current situation as “an unbelievable shambles”, ad-ding that “stakeholders only make the slightest sense if there is compulsion”, without which it is “complete nonsense”, he said.
Darling reaffirmed that he has always “had doubts” whether a system of compulsion actually works and added philosophically: “Pension reform will always be controversial. Whatever you do is bound to provoke somebody.” At which point the minister appeared to throw down the gauntlet for another proposal to be put to the test by stating categorically: “Nobody, but nobody has come along with an alternative structure.”
Looking at the investment issue, Roger Urwin of Watson Wyatt referred to a “peer group industry” inclination forming amongst European pension funds. He admitted that the effect of EMU on asset allocation would “obviously” bring greater homogeneity of euro assets and pointed to Belgium, Ireland and Portugal as the states to pave the way in terms of asset allocation switches despite, he suggested, these changes being made for the wrong reasons.
“Pensions funds are not basing their behaviours on any proof of what is the best asset allocation,” he says, adding the industry does not have “enough data to draw reliable conclusions” on the effect of EMU just yet.
Based on the tremendous performance of the equity markets over the past 20 years, he carried on to say, pension funds had to expect “substantially less returns going forward”. As a result he argued for taking advantage of opportunities outside the traditional bond/equity investment arena – notably into the realm of alternative assets.
However, while one alternative asset class – venture capital – has been providing “consistently superior re-turns,” according to BVCA chief ex-ecutive Ron Hollidge, UK pension funds in particular are simply not biting. “It seems that US institutions really see the benefit of investing in UK venture capital whereas unfortunately UK institutions fail to do so,” he said.
Peter Davies of risk management firm Askari however says discovering the “truth” behind the investment strategies implemented by both traditional asset management and quant techniques is becoming more difficult, and pension funds should be pressing for more transparency. “There is a need for portfolio managers to disclose their strategies,” he says, adding that the industry need to move away from proprietary strategies. “What your manager says and what your manager does can be very different.”
In a wide ranging look at European pension reform issues, Rob ten Wolde of the Dutch company pension scheme association referred to the need to to encourage pension provision by means of “fiscal facilitation, and the removal of legal obstructions”. “So I very much hope the EET model will be generally adopted in Europe.!”
The idea of tax-deductible pension contributions and exemption from tax on earnings, with tax only becoming payable on receipt of the pension benefits might, he acknowledged, “fill some governments with great worries”. “They fear an extravagant pension build-up on the basis of high premiums, and thus a substantial loss in tax revenues.”
Ten Wolde said that while fiscal limitations could be imposed on private pensions, but he added: “Fiscal facilitation of the build-up of supplementary pensions could well be the bribe that is needed to gain acceptance of drastic cuts inthe field of statutory social security. These cuts may yield substantially more than the tax deduction cost.”