EUROPE - Officials at the European Commission and European Parliament have called for the development of innovations and new ideas in pensions delivery which could provide some level of guarantee to retirement incomes but which do not restrict investments to the fixed income market.
Speaking an EFAMA conference in Brussels today, Karel van Hulle, head of the insurance and pensions unit of the Internal Market & Services DG at the European Commission told delegates the Commission is keen to hear of new ideas for the development of defined contribution pension products which would allow a mixture of investment strategies over the life of the product but which still provide some form of guaranteed income at retirement.
"We lost hundreds of billions [of euros] since Sunday. That is a disaster. Just imagine you are investing all your money in one of these [defined contribution pension] products and then find it is all gone on the event of your retirement. We need guarantees and security in the system, otherwise we invite people to be poor. We have to avoid sending people into retirement without enough retirement income," said van Hulle.
Responding to later questions from delegates about the evidence for growth potential in diversified assets, he then added:
"I have not been pleading for all investments to be in government bonds, I think investment in pensions have to have a mix of bonds and equity. But we must have a system whereby when people retire, there will be sufficient income to retire on as elderly people. My fear is defined contribution products alone are not going to give me that. I would welcome any ideas along these lines. But I am not saying we should all buy government bonds and hope things will get better."
Adding her own comments to this discussion, Ieke van den Burg MEP, member of the steering committee of the European Parliamentary Pension Forum, suggested she is also keen to see innovations in pensions investments, providing the investments are sufficiently transparent to be understood by those buying them.
"We should not be too simplistic about the investment options available [to defined contribution pension plans] because the problem is not only equities and bonds but innovative products taken [up] by pension funds and asset managers without knowing what they realy are. This has caused the [financial] problems we in and there regulation should bring them to be transparent so we know the risks involved, and have links with liquidity.
Comments from both parties followed the delivery of a report commissioned by EFAMA and produced by Oxera Consulting which shows equities should play a key role in the diversification of pension investment returns, as 100% investment in equity over the life of a pension plan is, at worst, still nearly always better than the worst returns from investing in bonds, while ‘lifestyle' funds provide a balance in between.
"Most of the worst outcomes (in terms of retirement wealth accumulated) under the equity-only strategy are better than the worst outcomes under the bonds-only strategy over the 20 or 40-year time horizon. Over these long time horizons, the probability of a worse outcome when investing in equity is low," said Oxera.
Further comments from van Hulle also noted a key element to any design of pensions in the future must also be the provision of financial education about pensions.
More specifically, he repeated a comment from one European Central Bank official who said the financial literacy of most adult individuals is equivalent to that of a seven-year old child.
"We need choice [of pension provision]. We need DB and DC, we need second and third pillar, and we also need fourth, fifth and sixth pillar or our [pension] problems will never be resolved."
He continued: "Let's make the best of all the works and help consumers make the right decision. If you leave it to the individuals to decide what products they should buy they will not, they must be helped."
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