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Impact Investing

IPE special report May 2018

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East beats west on pension reform

The overall message of the European actuaries and consultancies conference on European pensions is that Eastern European pension reforms have jumped the queue while European Union (EU) countries are trying to figure out how to harmonise their existing systems.
Vladimir Kaishev from the Bulgarian insurance and pensions consultancy, MOBS Development,
discussed the new Bulgarian pension legislation and insisted that markets in transfer benefit from a defined
contribution pension (DC) system, though problems resulting from a lack of experience in asset managment
create some setbacks.
In Bulgaria, the number of pensioners is increasing rapidly, while the economically active population is declining, though predictions show some hope for the national market in the future, Kaishev says.
The Czech Republic’s 1999 legislation sets the membership in pension insurance schemes as voluntary, but since the start of this year state support combined with tax incentives have topped individual contributions into them.
Koen De Ryck, managing director of Belgian firm Pragma Consulting, introduced its recommendations for the difficult changes EU countries need to make to survive the retirement of the large age-groups. The percentage of the EU’s pay-as-you-go systems out of the overall GDP is expected to rise from 9.5% in 1995 to 14% in 2030, while the shortfall is expected to increase from 1% to 5% over the same period. How this shortfall is going to be financed remains unclear.
De Ryck also says that while “pay-as-you-go is the basis of pensions it does not mean that their financing cannot be changed”, which seems to be the European consensus of how to preserve the security and solidarity of pension benefits.
The new European directive has received the greatest support from countries that have plans for DC schemes, and the greatest criticism from those without definite plans for the immediate future. While Finland wants the directive to be dynamic and strong, Portugal is worried about its requirements. Greece is confronted by the problem that 99% of its nationals will not be included in the scheme and, together with the UK, they are critical about the Commission’s involvement.
Most countries agree, however, that there needs to be a European directive to achieve mutual recognition of the schemes, even if national regulations vary before a final assimilation of regulation is achieved. The conference speakers agree that the key to a final European directive is a dialogue to aid mutual understanding and to learn from the mistakes of others.
Although an overview of the development of European Union pensions was presented by Dominique Piermay, secretary general of Fixage, a comparative study of all European pensions, including the current developments in non-EU countries, would not have gone amiss.
Ireland, the Netherlands, Switzerland and the UK are the leading European countries in developing alternatives and additions to their traditional pensions, but comparison is difficult as their national systems differ hugely. Caroline Instance, chief executive of the Occupational Pensions Regulatory Authority, described her experience of starting and developing the UK regulatory body and stressed the importance of co-operation in creating a Europe-wide pensions organisation. The current situation causes confusion and the differences are great, even between Ireland and the UK, Instance says.
From a pension scheme regulator’s point of view, Instance sees late
payments as the main problem with the British-DC schemes. In some cases schemes are under-funded because employees do not see pensions as an investment in the future. In her view “the feeling that personal wealth is a pension is a
dangerous perception. The 1980s experience in the UK is going to be a nasty one,” Instance warns.
Michael Larsen, director of SSB Citi Asset Management Group, in his discussion on investment strategies for pension funds, outlined the forecasts for growth in e-commerce in Europe and how the market is expected to grow almost ten-fold by the year 2003. He also believes in the growing profitability of the European market, demonstrated by the dramatic increase in money spent on mergers and acquisitions in the past six years. Last year alone US$1,543bn (£1,802bn) was spent in European take-overs, close to the amount spent in the US. Aside from the mergers, the available pool of money for a Euro-zone company is significantly higher now than two years ago, says Larsen.
Contributing to a pension fund investing in equities is not always wise. In Instance’s experience, many managers in small companies with private defined contribution schemes put their own money in traditional defined benefit schemes, “because they get a better pension out of them”.
Larsen also warns about being too enthusiastic about the stock market, claiming that the bears will come back home one day.

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