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New EU members 'need three-pillar system’

EUROPE - The 10 new EU member states ought to encourage defined benefit-type pension schemes and introduce three-pillar systems, according to a report from consultant Pragma.

Nine international institutions, including the two largest Dutch pension schemes ABP and PGGM, sponsored the EU-wide study.

It aimed to give the new members’ reserves “quicker access to EU and global capital markets, while accelerating capital market restructuring and assuring that more institutional investments will be flowing in their direction”.

Pragma says that pension provision is worse in the new member states. “These countries have or had a major ageing problem, combined with excessive pension promises in the unfunded first pillar,” it claims.

“Several countries are suffering from high unemployment and structural discrepancies. They often have insufficient reserves in the second private (or semi-public) pillar.

“The degree of funding (or absence thereof) in all pillars differs substantially among these countries”. According to the report six of the new members have started to introduce funded plans in the state pillar, by means of individual accounts.”

A survey of pension stakeholders and experts found that a second pillar and the role of social partners in pension provision were almost non-existent.

“The commercial sector is predominant in funded provision, but there is often a lack of choice of providers as well as investment funds on offer,” Pragma says.

“The assets are subject to quantitative restrictions, which hinder free movement of capital and has negative effects on funding, return and costs, on the investment management industry and on capital markets,” it adds. “In some countries, like Poland, assets are by and large locked in local capital markets, with all the specific and systematic risks”.

“Where countries have introduced mandatory funded individual accounts within the first pillar, pension provision is rather expensive. In general, individuals have to take more investment risk than warranted,” Pragma claims.

“Although the EU pensions directive on second pillar schemes will hardly be applicable, respondents from the new member states have stated that at least parts, like the prudent man/freedom of investment rule, as well as the transparency and supervisory requirements, should be applied.”

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