Elizabeth Corley, CEO, Allianz Global Investors Europe
You can’t fall in love with the European single market. At least that is the considered opinion of the father of the project, Jacques Delors. However, you can celebrate its outcomes. European integration has fostered an environment that has allowed the various financial market sectors to consolidate. Today, sectors such as banking, insurance and asset management have broadened their business and extended operations across Europe, while European pension funds have largely stayed on the sidelines.
This is all the more surprising as the IORP directive, introduced in 2003, was supposed to create the regulatory framework for cross-border operation of pension funds in Europe. Yet, those initial great hopes have not yet been realised. The latest figures suggest that only 76 IORPs currently exist.
One critical question confronting the European pension markets is, will a pan-European market develop in coming years or will national markets continue to function largely in isolation?
Allianz Global Investors recently partnered with the Centre for European Economic Research (ZEW) to examine the issue of a pan-European pension market as well as other issues relevant to the future of pensions in Europe. We undertook a survey of professionals in the six largest European retirement markets - France, Germany, Italy, the Netherlands, Switzerland and the UK, paying particular attention to the future of defined contribution (DC) schemes.
The professionals surveyed from pension funds, academia, consultancies and other industry-related institutions have shared their views on current trends and expected future developments (Allianz Global Investors 2009, ‘Defining the Direction of Defined Contribution’). Although expert assessments are not infallible, the combined views can provide a considered benchmark for what may happen.
Great uncertainty surrounds the big question of whether a pan-European pension market will develop within the next 10 years, and respondents to the survey were divided on this matter. On average, 42% agree and 40% disagree. Dutch and French respondents are more optimistic than the average, while their UK counterparts are the most pessimistic.
Less than 10% share the view that the current legislative IORP directive is a good enough framework to encourage the establishment of pan-European pension plans. What is seemingly needed is reform at a national level.
A vast majority (75%) of experts believe that a pan-European market will only develop once additional changes have been made to social, labour and tax laws in the member states. Whether this will happen remains unclear. Modest optimism coupled with a high degree of uncertainty seems to be the general mood of the industry. Around 40% expect the reforms to be eventually undertaken, 20% do not, while a substantial proportion opted for a neutral position.
There is more unity regarding the drivers of a pan-European market. Overall, 72% of those surveyed believe that the demand for cross-border schemes will be driven by multinational companies.
The idea that the increasing numbers of mobile workers will stimulate the development of European pensions receives a significantly lower rating. It could be argued that these two drivers are interlinked. Increasing worker mobility within the firm could trigger company demands for pan-European pensions.
However, from the perspective of employers, pan-European pensions offer other benefits as well. They offer the opportunity to simplify governance structures, to lower administrative costs and to achieve economies of scale; cross-border asset pooling is a good example of these benefits to employers.
Despite all the uncertainties about the emergence of a pan-European market, one point remains clear. Should it emerge, it is likely to be DC in form rather than defined benefit (DB). This view is supported by more than 80% of respondents. The largest percentage of analysts who disagreed in any one country was in France, but even there the number was minimal (7%). So, it seems that if there is a future for pan-European pensions, then that future will be DC.
However, this finding brings up a question that will be decisive for European pensions: what actually is DC in Europe? While many think of DC in terms of participant-directed plans with individual accounts, the European reality is much more complex.
Many different DC models are in operation throughout Europe. While DC plans in the UK, the PERCO plans in France and the closed and open pension funds in Italy come close to the individual DC model, the DC plans in Germany, the Netherlands and Switzerland are substantially different.
In none of the latter three countries do plan members have a say in the investment choice; this is done collectively. In addition, these DC plans have to guarantee either a minimum return (Switzerland) or paid-in capital (Germany). Alternatively, there is some form of redistribution and risk-sharing (Netherlands). This means that the plans in these countries are DC-like plans with elements of DB built-in - a very different animal from what most people mean when they talk about DC.
Another line dividing the European pension landscape is the approach to investing, individually or collectively, which is embedded in the different investment cultures. For example, German pension funds tend to be much more cautious in their investment strategy and have a lower proportion of equities in their portfolios than their UK counterparts.
This is partly a result of quantitative investment regulations in Germany, but these patterns are also visible in the general savings behaviour, so national investment cultures seem to play a crucial role in determining investment strategies. The financial crisis seems to have reinforced these patterns. When asked about the effects of the financial crisis on pension fund investment behaviour, 80% of German pension experts anticipate a shift towards less risky assets, but only slightly more than 30% of British experts expect the same.
What does the existence of all these differences and the insecurity about the progress of pan-European pensions mean for asset managers? What type of environment do they need to prepare for? Given the demand of multinationals for cross-border pensions and the likely absence of a regulatory big bang towards pan-European solutions, it is likely that the integration of pension plans will proceed, but not as a comprehensive integration at the plan level.
National plans are likely to be with us for some time, but they are unlikely to remain as isolated from each other as they currently are. Those plan elements that can be integrated and can contribute to better governance, less complexity, lower costs or more effective investments will be integrated. This development is already visible in the areas of asset pooling and plan administration.
Thus, we will find ourselves somewhere between the poles of purely national plans and fully-integrated pan-European plans. Custodians, administrators, managers and their legal and tax advisers all have a critical part to perform in enabling this to happen. After the financial crisis, there should be no doubt that plan sponsors and pension funds will want to know all the risks arising from their pension plans. Therefore, consolidated risk management on a cross-country basis is crucial.
On the other hand, there is no need - and probably no chance - to impose alien plan types to subsidiaries that are used to other forms of pension provision. Asset managers increasingly need to be prepared to develop solutions that simultaneously consider the central and the local level, and to adapt their own organisation to that.
Elizabeth Corley is CEO, Allianz Global Investors Europe