EUROPE - The European Commission has suggested an improved legal framework may be required to improve pensions coverage and ensure individuals have adequate income at retirement.

Vladimír Špidla, social affairs commissioner at the EC, published a report today on privately-managed pension provision in Europe which confirms the take-up of private arrangements is rising but the wide variations of schemes, contributions and terms available mean pensions are still not sufficient to provide a replacement income at retirement.

As a result of this report, Špidla has claimed additional work may be needed on the regulatory framework of pension provision to improve contribution levels and return on investment.

"We need to adapt Europe's pension system to new demographic and labour market realities and make them adequate and sustainable," said Spidla.

"Privately-funded schemes clearly have a major role to play in helping provide retirement incomes for the future. But we need to ensure better access for all. We need to continue to consider whether a legal framework is needed to ensure that workers get the best results."

The 56-page report, aptly named Privately-managed pension provision and its contribution to adequate and sustainable pensions, is a follow-up to a study conducted in 2005 by the Social Protection Committee (SPC) on the existing arrangements at that time and looks at a series of issues concerning the differences between European pension systems, charges, investment restrictions, tax incentives, education, and the shift from defined benefit to defined contribution occupational schemes.

The report recognises "achieving a right balance between short-term security of pension schemes and the overall long-term robustness of the pensions system remains a challenging task for policy makers and regulators".

But one key message emerging from the report suggests its SPC authors believe keeping costs low is essential to the growth of private pensions, at least where the cost is borne by the scheme member.

"Governments have a clear role here in order to keep costs low, facilitating accumulations of adequate levels of future pension benefits. The challenge for the government is how to regulate the fee structure so as to maintain a proper incentive structure for fund participants as well as for fund managers. Policies used by member states have often taken soft or stricter form in regulating cost levels," noted the report.

That said, it was also recognised despite efforts by some individual financial regulators to publish charges pensions tables on their websites, it is still virtually impossible to compare like-for-like between scheme types and countries because in the case of some arrangements, the presence of an asset management fund is likely to lead to double charging and an increase in the charges borne by the investor, whereas Italy, for example, does not permit the duplication of management fees.
Similarly, one of the hot issues at present is the use of guarantees on investments, either during accumulation phase or at payout - something which has recently been discussed in Ireland with talk of a State annuity pot.

"Regarding guarantees in the payout phase, there are increasing calls for financial service providers to build up guarantee funs of pooled resources as a last resort," continues the report.

"As funded provision forms an ever increasing share of total pension benefits, there is a role for the governments to ensure the long-term pension adequacy to build guarantee schemes for the decumulation phase similar to the accumulation phase, especially for life annuities.

Interestingly, the report suggests there is little evidence to show whether focused tax credits or tax relief actually make a difference to private provision, or whether it instead effectively reduces the contributions made.

"Voluntary schemes, encouraged by favourable tax treatment are generally not likely to be effective in increasing savings levels for the whole population. Focused tax credits might help but whether they are sufficient to reach full coverage where that is an appropriate aim remains an open question. Costs of tax treatments can be very significant and concerns have been raised about their redistributive effects," continued the report.

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