National organisations representing occupational pension plans in Europe are becomingly increasingly worried about well-meaning but clumsy attempts by governments to support the second pillar system. They suggest that in many cases such efforts may do more harm than good.
In the UK, for example, the National Association of Pension Funds (NAPF) suggests that governments bring into play ‘The Law of Unintended Consequences’ when they tamper with pensions. In other words, they achieve the reverse of what they have set out to do.
More seriously, the NAPF has warned that changes to the regulatory framework contained in recent legislation are likely to kill off future forms of occupational pensions.
Other European countries face similar problems. In Germany
the Arbeitsgemeinschaft fuer betriebliche Altersversorgung (ABA) has warned that the occupational pensions industry faces a "jungle of regulations”.
In Sweden, the government’s premium pension fund (PPM) set up in 2001 with the best of intentions has been criticised by pension providers for being too complex.
In Switzerland, the federal governments well-meaning decision to lower the nominal minimum rate of return, unchanged since it was set at the introduction of the second pillar in 1985, caused uproar. Labour unions in particular complained that people had been cheated of a large chunk of the pensions they had been led to expect.
So what role should European governments play in the provision of second pillar pensions? Should they try actively to increase workplace pension coverage or should they leave the workplace pensions market to operate on its own?
And what should happen when things go wrong in the workplace pensions? Should governments act to protect the pensions of members of company pension schemes if companies go bust? Or should they leave it to employers to sort out the problem?
In short, should government do less rather than more? We wanted to know what you thought.
The response to our survey reveals a fairly strong feeling that, on balance, governments do rather more harm than good in the occupational pensions arena. A substantial majority of the managers and administrators who responded to our survey (73%) say that government intervention in the provision of occupational pensions is usually counter-productive
It could be argued that governments should have a minimal role in the provisions of second pillar pensions, limiting their activities to providing tax incentives to employers and their employees.
Opinion is fairly evenly divided here, with slightly more than half of respondents (54%) supporting the idea that governments should provide no more than fiscal incentives. A substantial minority feel that governments have a greater stake. One manager of a UK pension scheme suggests that if a government is going to provide fiscal support for second pillar pension plans it should have some say about how these plans are operated: “If the government provides tax incentives it should have some minimal regulations as to what is provided.”
Others feel that governments have a broader role. One pension fund manager points that governments are also useful for “providing infrastructure for regulation and governance.”
If governments do have powers – through their agencies - to regulate the way compay pensions are operated, should they also have a responsibility to pick up the pieces when things go wrong? If a company with an occupational pension scheme goes bust, should the government foot the bill?
A number of countries such as the US, Sweden, Germany and more recently the UK have provided a partial answer to this question with their own pension guarantee schemes. However, the UK government has said that its proposed Pension Protection Fund must be financed by a levy on employers – the government itself will not underwrite the fund.
UK employers’ organisations, perhaps predictably, complain that this is inequitable and that any levy on firms puts an unnecessary burden on business. Firms themselves are unhappy. Companies with sound schemes cannot be expected to bear the entire risk of baling out those that fail, they say. Government and employees must play their part, they say
So should governments of countries that operate a pensions guarantee fund should underwrite them with taxpayers’ money? Again opinion among pension fund managers is fairly evenly divided with a slight majority (54%) opposed to the idea and a respectable minority (43%) in favour. A small proportion (3%) are undecided.
There are plenty of suggestions of how a protection fund should be funded. One pension fund manager, for example, suggests that “funding for guarantee schemes should be in the form of insurance funded by additional pension contributions”.
If the goverenment, and the taxpayer, will not pick up the tab for failed company pension plans, who should? We asked those respondents opposed to state funding who they thought should meet the cost.
The largest proportion (68%) say it is up to the individual employer to meet the cost. More than half (47%) say that all employers with company pension plans should be liable collectively. A surprisingly large proportion (26%) feel that employees as well as employers should cotribute towards the cost of failed company plans.
One of the concerns about heavy-handed government legislation is that it could discourage employers from offering certain types of pension plans. This has happened in the US where the move from defined benefit (DB) plans to defined contribution was hastened by the weight of federal regulation
The idea that the costs of regulation could dissuade employers from offering DB plans gains strong support, with a substantial majority (92%) agreeing.
However some feel that there are other disincentives - notably the impact of international accounting standards on corporate balance sheets.
Most legislation tend to be reactive rather than proactive – the Robert Maxwell pensions scandal in the UK-led to new pensions legislation, while the Enron scandal in the US-led to the Sarbanes Oxley corporate governance legislation. In both cases, the legislation have added to the burden of companies who operate pension plans.
Yet the case for such legislation is that if governments did not intervene with pensions legislation there would be more risk of abuse of occupational pension schemes by employers. This proposition gains the approval of a majority (62%) of managers.
The commonest criticism of pension regulations is that they lead to higher administrative costs, particularly in smaller firms. Most of our respondents (81%) agree with this criticism: “This is universal but it hits smallest ones hardest,” says one pension fund manager. The manager of a German pension fund points out that cost of administration will, of course, depend on the type of plan and the way it is financed.
A modest majority of managers (59%) agree that reducing or eliminating the regulatory cost of meeting existing standards would provide an incentive for more companies to offer workplace pensions. “Only of the tax incentive is right,” says one. “It would provide a boost, but not a big one,” the manager of a Austrian pension fund comments.
Should governemnets place greater faith in pensions professionals? Can the pensions industry be trusted to run itself? Unsurprisingly, perhaps, a large majority (92%) feel that pensions regulators should place greater reliance on the judgement of pension professionals than they do currently.
However, there are plenty of caveats. One manager at a Dutch pension fund warns that regulators should trust professionals “only if they are really independent advisers, otherwise it is dangerous to rely on their coloured advice”. Another manager of a UK fund suggests that professionals are their own worst enemy, and that regulators should rely on their judgement “only if they can get behind the posturing and protective positioning”.
Finally, we wanted to know whether regulation think that regulation of workplace pensions will mean that occupational pensions coverage will be lower in the 21st century than it was in the 20th century. Not for the first time opinion is fairly evenly divided with a small majority (55%) taking a pessimistic view ‘Undoubtedly – it is already happening,” says one manager. Others – probably rightly - suggest that market volatility will have a far bigger impact than goverenment bungling.