New sense of realism
2003 was the year when pensions came out on to the streets. While it was by no means the first time in countries such as France that the state had been brought to a halt by public outcry over retirement reforms, other countries such as Austria – where thousands paraded their banners in May against government plans to reform pensions – tasted some of their first large-scale demonstrations on an issue that had ruffled few feathers in the past.
2003 was also the year when governments decided that enough was enough. Pensions needed reforming and states could wait no longer to face up to the alarming demographic deficits looming before them. Months of stoppages in Paris and elsewhere did little to prevent a determined French administration pushing through its new pensions bill, despite the inclusion of controversial proposals such as the harmonisation of public and private sector pension systems.
The bill also extended the possibilities for funded retirement provision in France.
The public protests and political tension did put pressure on the Austrian chancellor, Wolfgang Schuessel, to make concessions to the country’s proposed pension changes. Nevertheless, in June the parliament still passed its reform bill. The age of retirement will be increased from 61.5 years to 65 years for men and from 56.5 to 60 years for women.
And 2003 was also the year when the continuing bear market really began to put the squeeze on the solvency levels of Europe’s occupational pension schemes. Two in five pension plans in Switzerland – that bastion of pensions stability – were declared technically insolvent by Swiss advisory association ASIP.
Europe’s largest pension fund ABP also announced that it was submitting a recovery plan to the Dutch regulator, PVK, to stabilise its funding position after the WM Company announced that Dutch pension fund returns for 2002 were the lowest since the inception of the WM Universe in 1986.
In a similar vein, the UK government reacted to criticism of its pensions policies by issuing its long-awaited Green Paper on in June this year.
One significant feature was the announcement of an insurance net for UK pension plans based on the US Pension Benefit Guaranty Corp, in response to a number of high profile scheme wind-ups where members had been left with little in the way of benefits.
Another notable strand of the UK government’s policy was the abolition of the Minimum Funding Requirement (MFR) to be replaced by a new scheme-specific funding requirement, with the idea that companies would be able to exercise greater control of the design of their pension fund and its financing.
For Europe’s occupational schemes, these two issues – scheme structure and financing have been key - this year as in the last two or three. Defined contribution pension fund arrangements continued to rise in popularity among European employers keen to unshackle themselves from the risk of DB guarantees.
And for those retaining DB plans, the question of how to keep them fully funded in the midst of a continued share market dive has been paramount. The past year or so has seen a wholesale rethink across the continent of the cult of the equity, a re-evaluation of the role of bonds in pension fund portfolios, a renaissance in real estate investment and an intensifying of the debate on alternative investments.
Perhaps the biggest surprise of 2003 though was the arrival of the pan-European Pensions Directive – just 10 years in the making!
Its final rapid conception took many by surprise and governments around Europe are still trying to digest what the main areas of the directive: security of retirement plans, removal of investment barriers and cross-border pension plans, will mean to them.
In this IPE Top 1000 pensions survey, we asked a number of key observers in the different markets what they felt the implications could be on their home markets.
Responses varied. In the developed funded markets – Ireland, the UK and the Netherlands – there was concern about what impact greater reporting duties might have on funds that have honed their own systems over decades (Netherlands), or whether the scope of regulator might need to be widened (UK, Italy), or how regulation and supervision of cross-border pension arrangements could really work (Ireland).
Peter Borgdorff, director of the Dutch Association of Industry-wide Pension Funds makes an interesting point when he notes that domestic regulators will increasingly start having to work closer together with other, less familiar pensions markets. A new pensions Europe perhaps?
Furthermore, in countries such as Italy, the reality of the prudent man investment principle rule will also have notable effects on the way newly created pension funds and pre-existing foundations manage their assets.
For multinationals, the adoption of the directive starts to lay down a framework for pan-European pensions – much clamoured for over the years.
As Petra Zamagna, chief investment officer at Aventis in France comments: “We are very happy with the arrival of the directive because the current debate on pensions is not only pushing the countries to sort their situation out, but is also pushing companies to realise how important is to converge on their approach to pensions. It was very important for companies like ours to get a European standard on pensions.”
However, David Collinson, partner at Watson Wyatt in the UK, says that thus far multinational interest in the potential for pan-European pensions plans is at the “wait-and-see” point.
“It could be that people are looking for one company to lead and implement such a plan. Maybe one of the consultant companies might demonstrate how it could be done?
That Europe is moving forward though on pensions harmonisation was underpinned by the European Commission’s follow up earlier this year to its 2001 ‘communication’ on the elimination of tax obstacles to cross-border provision of occupational pensions. Launching five new infringement procedures, against Belgium, Spain, France, Italy and Portugal, and pushing forward with an existing case against Denmark, the Commission has said it will refer cases to the European Court of Justice if countries persist in fiscal discrimination.
It’s been a tough year then for European pensions, but one that has not been short of action. And as pensions around Europe continue to morph towards a greater mix of public/private provision, as DC plans keep growing, and as pan-European pension plans start to emerge, we are sure that the Top 1000 European pension funds we present to you in this special supplement will not be the same next year or the year after!