There’s nothing wrong with pension funds per se, according to EFRP chairman Alan Pickering, rather it’s our outdated expectations of what they ought to deliver. Falling markets, increasing longevity, lower birth rates and annuity level have done no more than show the unsustainability of retirement levels.
“People around the world are expecting pension systems to deliver more than those systems are able to deliver. There is a lack of awareness that big pensions require big contributions,” says Pickering.
“I do not consider increased longevity as bad news. It’s good but it has consequences for the way we organise our lives and more particularly how we organise the work retirement balance. There’s no ‘pensions crisis’ but just unrealistic expectations.”
Pickering maintains a combination of issues have led to the problem of unsustainability finally receiving the publicity it so desperately deserves. “A number of things have come together at once. Firstly an increasing number of opinion leaders are willing to stick their heads above the parapet and say ‘we cannot go on as we are.’ And a number of politicians have been willing to follow that lead in quite a brave way.”
Pickering himself was one of the fist to do so towards the close of the 1990s. “At that time, a number of British people were criticising Europeans for promising big state pensions. My line then was that it didn’t matter whether it was a state or a private pension. If it’s unsustainable, it’s unsustainable and I called back in 1998 on our own government to notify the electorate that by the 2030 the state’s definition of old, from a state pension perspective, would be 70 and not 65.”
A second issue, also linked to expectations, is that of early retirement and our failure to understand what is needed to make it a reality and a prosperous one at that. During the 1990s, there was sufficient money to fund early retirements as a means of reshaping the workforce.
Says Pickering: “it almost became part of popular psyche that it didn’t cost anything to retire someone in their mid to late 50s. The financial equation is such now that people realise that there is no such thing as a free early retirement pension.” A third factor dealing scheme members a reality check is falling markets, increased longevity and hence weak annuity rates.
In theory, the subsequent switch from defined benefit to defined contribution plans across Europe should not be cause for uproar. “Other things being equal, a switch from defined benefit to money purchase shouldn’t be a problem. If the same amount of money goes in, if the same investment strategy is pursued and if the same dates are available for converting pot into income stream, it ought not to matter.
“Sadly other things are not equal and often the switch from DB to money purchase is often accompanied by a reduction in contributions. Individuals are often less adventurous in their investment strategies than are trustees when investing collectively.”
In the UK in particular, the larger unions have made this a issue with the government and are threatening to strike over the issue. On this question, Pickering says: “it’s unrealistic to make blanket statements that you should never ever do something. I think that where the unions are right is to seek an early and detailed dialogue with companies who are finding the going tough.
“I think that such a dialogue ought to avoid the need for industrial dispute and ought to help employers and employees decide how much they can actually afford to spend on pensions because at the end of the day, it all comes down to money.”
Unlike some commentators, Pickering is not a gloom merchant. Yes, the bear market has lasted longer than both the 1973-4 slump and the two-month storm of 1987, and this, he concedes, differentiates it in the short run.
“I don’t think that the long term economic fundamentals have changed,” he says, excepting the role of inflation. “What will be different this time on the way out is that inflation won’t blur the picture. In the past, some of the pick ups have not been real but illusory because of inflation.
“This time we may well get to some real rates of return but those positive real rates of return will not have the high nominal value that one saw in earlier decades because if inflation is not dead and buried, then it is certainly paralysed for the foreseeable future. There will be real positive returns but the numbers will not be as high as in the past because inflation has largely been stripped out of the equation.”
Pickering is diplomacy itself when asked about problems faced by individual European countries. “In all European countries we face a common challenge which is to explain to our electorate that we are all, on average, living longer and that that will have an impact on the work/retirement balance to pay for our pensions. We have far more in common with one and other that we have differences,” he says.
“In countries where expectations are unrealistically high then those expectations will have to be trimmed and I see the role of organisations such as the EFRP, since we are non-partisan, to use our influence to create an environment in Europe that doesn’t blame anybody for the need to cut back on expectations.
“It’s good news we’re all living longer but it just means we have to change our way of life. If people like the EFRP can raise the issue then it’s easier for politicians to follow than it is for them to stand up and be counted because there aren’t really any votes in tackling pension reform.”
One success for the EFRP, for example, is it influence on the European occupational pensions directive. By all accounts, the EFRP has been effective in its input and it now claims to support the compromise position. Pickering says they need to ensure the proposals are technically workable. “Beyond that we would not like to do anything that undermines the work of the Spaniards.”
“We’ve waited 10 years for this directive. It doesn’t make things any less liberal in those countries who have liberal set ups and it provides a little more liberality in other countries and it does get us a step closer to pan European pensions.”
He gives short shrift to those critics suggesting the directive ought to include more social issues. “This directive isn’t the place to be dealing with them so we shall be doing our damndest to persuade parliament.
“The Parliament has already had a significant effect on the way in which the council responded to the commission’s initial draft and I think that parliament ought to acknowledge when it’s winning and it ought to capitalise on its gains, get the directive though so that we can all move on to the next stage.
“In making sure that having got pensions their proper pace within the financial services action plan then we can move on to more substantive issues facing the European pensions schemes.”
The most obvious of which is the issue of tax harmonisation. A favourable verdict in the Danner case was widely welcomed across Europe. Pickering hopes that it will give impetus to a political solution to the problem.
“It will hopefully stiffen the resolve of those who want to seek a sensible tax regime through the political route because while I don’t deny the right of anyone to take a case to court, court rulings provide somewhat shifting sands upon which to build a pensions infrastructure. I’d rather that we had a sensible political agreement.”
First things first, and the directive needs to pass through its second reading. “I think that if the Danes can bring home the bacon, as it were, then with open co-ordination and sensible debate between the social partners and the technicians then there’s an awful lot of positive things to play for across Europe.”