EC admits 'pensions are not immune to crisis'
EUROPE - European pension funds have not suffered during the ongoing economic crisis in the same way as other financial institutions, according to the European Commission, but defined benefit schemes in particular are likely to see "challenges" as they struggle to pull back their funding balances.
A memo issued by the Commission on Friday claimed its recent review of data and analysis indicated pension funds had not been affected by the crisis in the same way as banks and similar institutions because their long-term perspectives mean pension funds can "afford to ride out even severe market turbulence as the long-term assets they hold relate to liabilities that will not fall for payment for many years yet".
The EC noted pensions are primarily the responsibility of member states and most schemes have conservative investment strategies which encourage them to steer clear of direct investments in "toxic assets".
That said, officials stated while it is too early to predict the impact on member states, pensions systems will be "impacted to some extent", it continued.
More specifically, it noted while funded schemes may carry a liability to be paid several decades down the line, the impact of falling investments and rising deficits could accelerate the long-term trend towards closing DB schemes to new members and accruals.
"The financial crisis may also have put into sharper focus underling structural issues regarding the sustainability of pension systems. These issue may previously have been masked to some extent by expectations of returns in funded pension schemes which now seem over-optimistic. Adjustments may therefore be necessary to ensure the long-term health of pension systems," said
Similarly, the EC warned member states may need to give "careful consideration to the appropriate maximum proportion of overall pension income expected to come from DC pensions" as it suggested the less well-off, in particular, may be less able the risks their assets carry, even though it believes "DC schemes are usually a small or negligible element of overall retirement income for most people retiring today".
Looking at the future, the EC said "one early lesson" it has been reviewing is the role of DC investment programmes, though it appears to favour certain practices which are "designed to encourage the right choices and that the ‘lifecycling' or ‘lifestyling' of asset allocation is the mainstream option for everyone".
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