'Avoid UK's mistakes'
In these days of heated debates on a European Constitution it seemed appropriate that the IPE/Royal Institute of International Affairs conference in London entitled: ‘The Future of European Pensions’, should commence with a conciliatory message from Alan Pickering, chairman of the European Federation for Retirement Provision (EFRP) that there are mutual lessons to be learnt from the pension experiences of each country in Europe.
Looking to home, Pickering noted that the UK faced a very different problem from that of many of its European counterparts – low state provision and high occupational and private pensions cover, which through a combination of pensions scandals and subsequent protection moves by government, he said, had become bogged down in bureaucracy.
“Detailed legislation has made the UK system expensive to operate and confusing to employer, commercial provider and consumer alike.
“Friends on the continent can learn lessons from the way that we legislate here in the UK. Hopefully, they will then be able to avoid our mistakes.”
To this end, he said the UK government was looking at a stick-and carrot method of persuading people to retire later by increasing state pensions if they do. “The government is going to bring forward proposals that will make it attractive for people to defer drawing their state pension. In this way, in a non-threatening fashion, the government may have brought into the public domain the idea that working longer produces bigger state pensions.”
This, Pickering said, reflected the move toward an‘adult’ debate on pensions and a general realisation that the system couldn’t be simplified without changing overall policy and moving to discourage early retirement and amend labour market practices to allow people to work longer.
“If a universal, taxpayer-financed state pension can provide bread and butter security for all workers in retirement, the private sector can, without too many restrictions, be relied upon to finance those extras that will convert the endurance of old age in the enjoyment of retirement,” he argued.
The message was certainly one that Jean-Pierre Thomas, managing director at Lazard Frères in Paris could appreciate.
Thomas, a former leading light of the push towards funded retirement provision in France, said he believed the proposed reforms to France’s pay-as-you-go pension system would be insufficient to meet what he calculated as a E15bn annual shortfall in the pensions balance in France as a result of its costly state retirement system.
“Projections that were made in terms of growth and employment in France were too optimistic in my opinion,” he added.
With this in mind, Thomas noted that the French government had begun further discussion on amendments to the Epargne Salariale system of company-administered savings plans.
The first debate, he said, would concern extension of the existing 10-year arrangement into a more retirement-oriented 15-year plan. However, Thomas also predicted that the government would seek to introduce further individual retirement savings plans ahead of a new finance law to be introduced in October.
David Birtwistle, international benefits director at UK chemical group ICI, explained how corporations’ attitudes to the risk of DB pension fund arrangements had changed on the back of the three year bear market and a need to explain any funding gaps to shareholders: “Employers still want to provide pensions for their employees but these plans will look different in the future because companies no longer want to underwrite the pensions promise.”
The resultant move to DC, however, he said should not be used by employers to cut costs – a factor he believed good employers recognised.
What it did mean though, he pointed out, was that employers had to ensure that employees understood the ‘new deal’, while employees had to take a greater responsibility in deciding whether they were paying enough money into their pension plans.
Debate ensued on whether the Europe-wide shift to DC pensions could be made more palatable by the provision of guarantees.
Frits Potemans, adviser to the social department at the metal industry’s employers association Agoria in Belgium, explained how the fund’s 3.25% DC guarantee satisfied both employers and social partners, while relieving the investment burden by ‘smoothing’ out the guarantee.
However, Malcolm Kemp, director and head of quant research at asset managers Threadneedle Pensions argued that such guarantees were expensive to provide and may be lacking in value: “I don’t believe guarantees should be compulsory and if individuals want them they should have a choice.”
Birtwistle at ICI also commented that he didn’t believe large numbers of multinational companies would yet put in place cross-border pension schemes on the back of the recent EU directive: “Issues of tax and administration are still too difficult and companies are wary of doing anything about this at present.”
However, Robin Ellison, head of strategic development for pensions at law firm, Pinsent, Curtis, Biddle, flagged up the Scandia case in the EU Court of Justice as a possible short-cut to truly cross-border pensions. Presciently before the judgement he said: “The advice looks like it will be in favour of the liberalisation of tax rules and this may well short-circuit the Directive, meaning that we get pan-European pensions through the back door.”