EUROPE - Criticism of defined contribution schemes is often "unfounded" as they are the "most appropriate" products to establish a single cross-border market, the European Fund and Asset Management Association (EFAMA) has warned.
Findings from a report commissioned by the EFAMA, entitled "Defined contribution pension schemes risks and advantages", suggested while DC schemes do expose members to investment and longevity risks, workers in DB schemes are subject to wage and job security risks, which cannot be minimised as effectively as investment risk.
The study produced by Oxera, an independent consulting firm, showed DC schemes are, in essence, long-term savings vehicles, so asset managers can maximise retirement wealth by diversifying investments, as any "bad" returns will be smoothed out over time.
As a result, the report warned the European Commission, member states and sponsoring employers shift be dissuaded from implementing solutions which reduce or eliminate investment risk, as they can impose a "significant cost in terms of forgone returns".
Moreover, the report suggested regulations implementing risk mitigation - such as those seen in Germany where members are guaranteed to receive the value of their contributions - could have a "highly negative impact for the majority of participants".
For example, simulation results by Oxera illustrating the accumulation of pension wealth under different strategies - 100% bonds; 100% equities and lifecycle - suggested that "there is little, if any, benefit from investing in bonds instead of equities in terms of the probability of a worse outcome", based on 5% contributions and fees which are 1% of assets.
Instead, Oxera suggested "sound governance and risk management practices" could be easily implemented, while solutions such as default funds, and pre-selection of the investment options are available to help individuals make the right investment choices.
That said, EFAMA admitted clear, reliable and comprehensive information" is needed to address the lack of savings awareness by members and, as a result, urged the European Commission to "investigate whether the Markets in Financial Instruments Directive (MiFID) principles should not be extended to the distribution of pension products to ensure suitable advice and transparency of product and fees".
As the report claimed the level of retirement income accumulated in individual accounts "critically depends on the level of contributions and fee rates", modelling suggested a 3% rise in contributions would increase the final fund by 60% while a 1% increase in fees would see the fund fall by 18%.
In addition, the EFAMA called for the European Commission to adopt "an appropriate framework" to allow DC schemes to be used as the basis for a single pensions market, after the research highlighted the current "fragmented and constrained" European market for occupational pensions - with a particular focus on the UK, Sweden, Poland, the Netherlands, Germany, France and Italy.
The organisation claimed the report highlighted the possible cost efficiencies available to DC schemes through economies of scale in pension administration and investment management, as investment flexibility allows schemes to be "tailored" to individuals while still being "portable".
It argued the "strengths" of DC schemes' flexibility and portability, make them the "most appropriate arrangements" for a Europe-wide pensions market and called on the Commission to ensure a "level-playing field" by supporting the "creation of DC-type pension products, fully portable and mutually recognized within the European Union".
Mathias Bauer, president of EFAMA, said the report was motivated by the need for "impartial research" on DC schemes, and that it represented an "important contribution to the search for alternative and sustainable pension arrangements".
"With this report, EFAMA wishes to reassure policymakers on the suitability of DC schemes as broad-based pension arrangements," he added.
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