The future of European pension funds could lie in a 'fourth pillar' system, which would take the form of a direct contribution social security framework, according to speakers at a recent Luxembourg conference.
Mike McShee, managing director of Buck Consultants, Switzerland, told those gathered at the European Pension Funds Conference that the pensions system was not a binary world" merely consisting of defined benefit (DB) or defined contribution (DC) options of pension provision, with no other choices to consider.
Instead, he suggested the possibility of merging DB and DC systems in order to stem the current flow to-wards DC, which he said: "left all the risk and responsibility to the em-ployee".
This, he argued, was creating a feeling of uncertainty amongst workers often unable or unwilling to take a long term view of the possible risks involved.
"The key to past success of company pension provision has been constructive engagement of the company in the plan. However, with the increasing move away from this, we must ensure we have a balance that does not jeopardise future provision."
Looking at a variety of international trends including the US 401k system, where employees and employers combine pension contributions, as well as the moves in eastern Europe towards DC models, he pointed en-couragingly at the growing interest in the 'Chile model' of privatized DC social security; a fourth option looking to balance the loads between the existing idea of the three pillar pension framework.
He stressed though that governments should: "back off and let companies be business like, in order to ensure a truly vigorous engagement into the question of the right direction to take for future schemes."
In a speech closely analysing the development of pension schemes in the emerging markets of South America, Monica Queisser of the OECD also argued the need for a reevaluation of current trends to ensure a safe future pensions equilibrium.
" The challenge for Europe is to take on board some of the systems being looked at in emerging markets, such as the so-called 'fourth pillar' of DC social security being developed in Chile, and to make them better."
Outlining Chile's success in implementing a pensions sector, which has followed a dramatic improvement in stock market safety and consequently prompted the government to follow the lead socially, Queisser advocated similar multi pillar progress worldwide as "a safer bet for the future," but one that still needed "much research."
Identifying the greatest challenge to future pension transition as the risk of the same generation being forced to pay twice over for any change, she argued that a gradual shifting of the balance between pension pillars would not only lessen this financial strain, but also allow time to develop the best portfolio philosophies and security instruments which were often dangerously lacking in emerging markets.
Another of the key issues discussed at the conference was the development of Luxembourg as a centre for international pension funds, in a bid to offset its waning importance as a European currency centre in light of developments with the Euro.
Lucien Thiel, general manager of the Luxembourg Bankers' Association announced that with the imminent shift in the country from a PAYG to a second pillar system, alongside a desire to set up an international pension fund market of both DB and DC schemes responding to the conditions and specifications of different European countries, all eyes were now on the draft for a government pensions framework set to be implemented by the end of the year.
The general feeling proposed was that this international pension fund 'made in Luxembourg' would take the legal form of either a pension savings company with variable capital (SEPCAV) or a pensions savings association (ASEP).
Whatever the outcome, Thiel stressed the hope that such a system be: "the right product at the right place at the right time," in order to guarantee what he called Luxembourg's reputation as a 'sound financial centre', as well as safeguarding the country's economic and political stability and its professional expertise in asset management (See page 37) Hugh Wheelan"