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IPE special report May 2018

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Euracs chew the pensions fat

Paula Garrido reports from Latvia
European actuaries got their teeth deeply into the defined contribution (DC)/ defined benefit (DB) debate at the EURACS pension conference held in Riga last month.
“Economic and social developments are causeing pension plans to change from group programmes based on solidarity into more and more individual packages,” said Joop Rietmulder of Dutch firm Beijer Consult.
David Lewis, chief actuary of the UK Government Actuary’s Department, pointed to this individualism saying that “there is no social element in DC plans”.
“Defined contribution schemes are not a panacea. People don’t want to rely on market fluctuations. They prefer to rely on the government,” he said and added: “Regulation will be the key if we move from government schemes to DC systems to provide adequate guarantees and security of assets. The unknown level of benefit can be very disappointing.”
Lewis believes that DC plans’ transparency is attracting more people. “People understand DC schemes because they see how much they pay into them. There is a sense of ownership that make people think they are saving instead of being taxed.”
The crisis in the pension systems is one of the main social and economic aspects of the transition in central and eastern Europe. Elaine Fultz, social security specialist for the International Labour Organisation Central and Eastern European Team (CEET), discussed the importance of people awareness in the reform process: “The best pension system will fail if people don’t believe in the reform. It’s very important to understand how countries see their own needs.”
To achieve that a high level of education is needed. Jerry Gandhi of Cap Services, a new London-based corporate consultancy company, said that member education is the key to the future of DC plans. “Individuals have to have market understanding and risk awareness” he argued.
Gandhi referred to investment strategies in transitional economies and said that one of the problems they are facing is that disappearing borders are changing people aspirations. “Transitional economies are transitional now, but they are growing rapidly within the marketplace. Smaller families and material wealth growth are changing our expectations .People have to develop their own retirement strategy based on supplementary plans.”
“Central and eastern European countries should be prepared and take care to find their specific solutions,” said Klaus Heubeck of Büro Dr Heubeck in Germany. He added that there are several aspects of the social security systems that should be clarified, such as the persons to be covered ,type of benefits, levels of convergence and methods of funding.
Huw Wynne-Griffith of UK firm Barnett Waddingham, described the situation in the Russian Federation as a “no-pillar system.” “It is a very complicated system with difficulties in collecting contributions and delivering benefits. At the moment there are no pensions, the payments are extra salary reviewed every two years. They divert income form those who are retired to those at work, when it should be vice versa”he said.
In France “the effects of population ageing ,as well as a decline in social contributions have plunged the system into crisis,” said Gilles Depommier of Fixage in France. “The private sector has been waiting for specific regulation for 15 years.”
The conference also focused on the impact of the euro on investment strategies. Kevin Finucane of Coyle Hamilton in Ireland said: “It is going to be a difficult time for funds administrators who have to work hard to achieve a smooth transition. They will need to impose new audit checks and balances to validate restated euro values and to reconcile holdings of Euro-zone financial assets.”
Summing up, Danny Wilding of Barnet Waddingham said: “Thinking of DB as pensions and DC as savings helps to clarify the debate.”

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