“Europe is entering a period of time of both opportunities and risks that will place the second pillar on a knife’s edge”
Occupational Pensions, or workplace pensions, as they are appropriately called by the European Federation for Retirement Provision (EFRP), offer Europe’s employees the most efficient way to accumulate capital for retirement. At its core, a workplace pension is a benefit an employer provides to its employees, not a product sold to customers. Due to their not-for-profit character and their collective structure, second pillar pensions are clearly far superior to individual, third pillar for-profit schemes. Furthermore, institutions for workplace pensions are not in competition; they are not battling for a share of the growing market for retirement products, but rather offer employees high-efficient social benefits that they cannot purchase on the market as individuals.
For small and mid-size companies sector-wide pension funds set up as mutual assistance institutions and the like by employer associations or unions, can offer optimised collective concepts. National and European policymakers must have a fundamental interest in preserving and fostering such a remarkably efficient and, therefore, valuable form of retirement income concepts.
The Green Paper, ‘Towards Adequate, Sustainable and Safe European Pension Systems’ - to use its full, ambitious title - is the first initiative by the European Commission dedicated to comprehensively addressing Europe-wide efficiency and safety of pension systems. Politically, this is very important. The Commission and the European Parliament will take advantage of the momentum supplied by the experience of the financial crisis and state indebtedness to introduce standards that will have considerable impact on the member states. This characterises the most important effect of the Green Paper and its follow-up processes. The driving force behind EU retirement strategy and, in particular, the centre of gravity of the second pillar - occupational pensions - are increasingly moving from the member states towards Brussels. Although responsibility will remain with member states, the fundamental decisions for Europe as a whole will be made in Brussels.
So, Europe is entering a period of both opportunities and risks that will place Europe’s second pillar on a knife’s edge. If the right course is taken in the upcoming decisions, then in those member states that already have a developed second pillar, this most efficient method of accumulating capital for retirement, will pick up additional momentum. In those member states where until now the individualised, and therefore more expensive and less efficient forms of pension concepts that make up the third pillar were in political focus, the second pillar can flourish.
But if, on the other hand, the wrong path is chosen, then the second-pillar pension concepts that have been well established in member states will be badly damaged and in other member states they will be suffocated even before they can grow.
The Commission has announced an update to the IORP Directive: there, a risk is Solvency II. The European insurance industry is pushing hard to transfer these rules to IORPs, but why? Cui bono? This must be prevented, because ultimately it would severely damage this most efficient, not-for-profit way for European citizens to accumulate capital for retirement. Neither the Parliament, nor the Commission, nor the supervisory bodies will participate, consciously or unconsciously, in a strategy that will entail weakening or obstructing national or cross-border IORPs as not-for-profit institutions in Europe and replacing them either partially or completely by for-profit concepts.
One very positive sign is the Occupational Pensions Stakeholder Group in support of the newly founded EIOPA. However, the group suffers an unfortunate starting oversight that needs immediate correction. It includes representatives of the ‘relevant stakeholders’, but omits to mention the most important group - the employers sponsoring the occupational pensions (sponsoring companies).
Without these sponsoring companies - the employers - Europe’s occupational pensions would be inconceivable. There are some more hopeful signs. The Commission recently stated that “poorly thought-out regulation places excessive burdens on pension funds and employers, thereby undermining the economic efficiency. We must ensure… that regulations do not… cause employers to discontinue company pension plans.”
But Europe will have to go further. Regulatory practices and regulations will have to focus even more on the best way to motivate Europe’s sponsoring employers to offer their employees domestic and cross-border not-for-profit workplace pensions as the most efficient method of accumulating capital for retirement - sustainable and with the best possible results.
The best way to improve efficiency is at the level of the sponsoring employers (see figure). Undoubtedly, it is crucial that the internal structures of IORPs are properly regulated and that solutions are found for issues at the levels below the IORPs. But not-for-profit IORPs will not grow if the sponsors are no longer expressly welcome by the legislators and the supervisory authorities. It is also time that IORPs receive efficient national and cross-border options that would enable them to also create inexpensive, efficient and major cross-border collective structures. This includes treating national and cross-border activities within IORPs completely equal in terms of supervision. In the IORP Directive, existing obstacles must be eliminated and bridges for cross-border IORPs built.
The discussions in the EU Parliament and the Commission offer the best opportunity to raise awareness that the extraordinary efficiency of the second pillar to European employees is due to the fact that employers provide these collectively structured workplace pensions on a not-for-profit basis. Here, Europe needs to use all its hidden reserves of efficiency, which will be critically important in laying the groundwork for future decisions. It is in the best interests of Europe’s employees that clear leadership in the second pillar should be assigned to the not-for-profit stakeholders.
They guarantee the extraordinary efficiency of the second pillar by monitoring, restricting and controlling - for the beneficiaries of their IORPs - the financial services and insurance providers involved. At the same time, this is a significant aspect of a forward-looking, preventive regulatory and supervisory approach, which undoubtedly offers clear advantages over retrospective supervision. If stakeholders exercise their pre-eminence on a not-for-profit basis, a number of problems, risks and conflicts of interest will not arise.
It is therefore time to seize this broad range of opportunities for the future and use the new IORP Directive to strengthen workplace pensions as the most efficient way to accumulate capital for retirement.
There is no better option for Europe’s citizens.