EUROPE - EU member states need to avoid over-regulating and discouraging defined benefit schemes in favour of a cross-border defined contribution pensions market, Barnett Waddingham has warned.

The UK actuarial consultant said it agreed with the findings of the recent report by the European Fund and Asset Management Association (EFAMA) suggesting DC is the most appropriate type of provision for cross-border workers. (See earlier story: DC "most appropriate" basis for single EU market)

But the firm also warned findings should not be seen as an excuse for EU member states and employers to focus on DC at the expense of DB, as the EFAMA analysis does not hold up for all workers, particularly those who are lower paid and likely to stay in their home country.

Danny Wilding, partner at Barnett Waddingham and a former chairman of the European Actuarial & Consultancy Services (EURACS), admitted for mobile workers "DC is definitely the way to go" but warned the overall level of pension provision is more important than whether it is based in a DB or DC scheme.
The firm claimed "too often" a move from DB to DC by employers is accompanied by a "significant reduction in overall pension contributions" which results in less retirement income for members. 

As a result, it suggested "due attention" should be paid to the findings of the EFAMA report which noted EU workers need to better understand the risks of retirement planning, while asset managers and product providers must focus on making DC pension provision "less risky and more cost effective".

Wilding pointed out most of the EU workforce will continue to work in their home country, including lower-paid workers with an unpredictable retirement income, so "for these workers the arguments for DC do not hold so well".

"Member States would do well to make sure they encourage, and do not over-regulate, occupational DB provision as well as DC provision to supplement State retirement benefits," he added.

But Wilding admitted this could be done at the same time as developing a portable cross-border DC market, though he suggested the biggest barrier to a single pan-European market would be tax not regulations.

"This is a big hurdle, to try and get all member states to tax things in the same way. But there are ways around it, if there's enough demand states would be forced to fall into line or miss out," Wilding claimed.

He admitted it would not be easy to "rationalise" the entire EU tax system, but argued that it is not impossible as it "may be that the EU will centrally need to develop a new pensions product that is to be taxed in a certain way".

At which point, Wilding suggested it would become a requirement for member states to operate a product which can be portable across borders, and which means "each country could have two systems, a domestic pension regime and an EU version".

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