Gabriel Bernardino, former chair of EIOPA, the European insurance and occupational pensions supervisor, has suggested the EU give financial support to member states who opt to develop second pillar retirement savings by reducing social security contributions, and where the transition in funding would create economic difficulties.
Bernardino, who is now chair of the management board of CMVM, the Portuguese securities markets commission, was speaking at a panel discussion on the future of defined contribution (DC) pensions organised by EFAMA, the European asset management trade body, as part of its European Retirement Week programme of events.
Addressing the issue of how to create a thriving DC market in Europe in the face of obstacles such as lack of education, risk aversion and mistrust, Bernardino pointed to EIOPA’s mission to promote awareness by its support for tools such as pension dashboards and national tracking systems, on which it published advice for the European Commission (EC) this week.
He said 20 EU member states still had no tracking systems and this had to be dealt with, but he was happy the EC had taken the step of calling for advice.
Turning to the question of whether auto-enrolment was the answer to increasing pensions coverage, Bernardino said: “It can be an important mechanism in increasing participation, but any level of compulsion is very political.”
One problem, he said, was that in countries where contributions into the social security system are relatively high, reducing these so that individuals could afford to pay into an auto-enrolment scheme would create a funding issue for governments, at least in the short term.
He continued: “This needs to be tackled, and I think there should be a role for Europe in this. It’s very difficult for individual countries to carry out these reforms without support at community level, and it could be done by making pension provision and adequacy a central basis of the EU’s economic governance.”
One approach, he suggested, was for the EU to issue debt, as it has done for the post-COVID 19 recovery plan, which would significantly lower the costs of funding for countries which could not afford further economic difficulty.
Pablo Antolin, head of the private pension unit at the Organisation for Economic Co-operation and Development (OECD), agreed that implementing auto-enrolment needed care.
He said: “We all agree it is good, but in some countries [the UK model] might be unconstitutional, because it is voluntary for individuals but mandatory for employers. So in some other countries, it will only be possible through collective agreements.”
But he said the OECD did not believe that reducing social security contributions was the way to go, as it was the most expensive route towards increasing private pension provision.
He said the only way to negotiate the transition was to develop the DC system with new contributions, or have a national agreement such as in Sweden, where only a small percentage of social security contributions goes into the privatised element of the system.
“Otherwise, the cost is very high, and central and eastern Europe is a clear warning that that will lead to abandoning the DC system,” he warned.
Patrick Tissot-Favre, head of international business development, Amundi Employee Savings & Retirement, highlighted the importance of robo-advice in promoting public engagement with DC savings.
He said: “It is particularly important for the younger generation and emerging market countries, in delivering user-friendly tools that should result in better involvement by people. The robo also means education, because it provides a rapid diagnosis, resulting in a personalised asset allocation. It’s a wake-up call on the need to save for retirement.”
He said a study this year by Amundi comparing 20,000 French employees using its robo service with 60,000 non-users has shown that, relative to self-management, robo-advice is associated with more time spent by investors in monitoring portfolios and more willingness to increase their investments, bear more risk and rebalance their portfolios, achieving higher risk-adjusted returns.
Bernardino said EIOPA had gone a long way with the design and implementation of the pan-European personal pension product (PEPP), developed on his watch, which had been mooted as the first really digitalised product.
But he said: “The devil is in the detail and the jury is still out to see whether it really works and people take it. A key aspect for me was the way you present information – it needs to be engaging. The key information for the PEPP was the first one in financial regulation built up not on an A4 sheet of paper, but on the screen of a smartphone.”
He continued: “We really need to lower the cost of distribution and there’s a clear need to bring down the initial cost of advice. That’s the real challenge to the industry – how can we use new technology to bring down this cost?”
He suggested that the key could be via concepts such as open finance, to reduce the cost of profiling and of the suitability analysis for different products.
“Work on that, and you will have some open eyes on this from the regulatory side,” he concluded.
The full panel discussion can be accessed here.
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