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IPE Awards: Fewer choices and hybrids are pensions future - Nijman

EUROPE - Mandatory contributions, limited choices and hybrid schemes are the "optimum" future of pensions take-up in Europe, according to pension academic Theo Nijman.

Speaking at the IPE Awards Seminar in Vienna yesterday, Nijman, who is van Lanschot professor of Investment Theory at Tilburg Universitz and chair of the Scientific Board at Netspar, told delegates the current varying regimes are too complicated for investors and individuals to understand and are therefore less likely to deliver the retirement income people require.

More specifically, Nijman said he disagreed with an earlier discussion - where MEPs argued the key to ensuring people have adequate income at retirement is financial education - but simpler products, with up to 3-4 investment choices, rather than 10-20, or 650 as is the case in Sweden, mandatory contributions and the growth of hybrid schemes of both defined benefit (DB) and defined contributions (DC).

"Iäm not sure I agree with the [MEPs] panel. Financial education is not the way to go but to keep it simple and give people simple choices," said Nijman.

Nijman said Netspar's research indicates the "optimum contract" from the academic point of view would be:

Mandatory contributions to the second pillar pension, with homogenous products, because of cost advantages; Limited choice of 3-4 investment options in the second pillar, along with an equity default investment in the third pillar were no investment choise is made; Collective schemes developed as a hybrid of DB and DC, and Lifestyling to the individual's needs.

Nijman said he believes it is important to give pension plan holders an equity default instead of free choice.

"Financial education doesn't work. The decisions [people] have to make are far too complicated. Individuals are not willing to make long-term financial decisions, they are not equipped to do s. But the positive news is people are willing to save more. So they should be required to sign a contract saying they will save more. This could be a default where they are automatically enrolled so they save the way they should," added Nijman.

Looking at the various ways in which returns can be lowered, Nijman said evidence shows there would be "less consumption" or lower percentage returns on assets saved.

No use of equity exposure -8.5% Risk variance level of 3 imposed requirements -5% Implementation cost of 30bp -1.2% Implementation cost of 100bp -4% Fixed asset allocation -5.3% Fixed contribution rate -6.6%

"All of this does not address inter-generational solidarity [as seen in the Netherlands]. We assume the pension funds can impose it, but there is a lot of political risk. There is a welfare gain of 6.2% due to inter-generational risk-sharing in age-dependent contracts," added Nijman.

If you have any comments you would like to add to this or any other story please contact Julie Henderson on +44 (0)20 7261 4602 or email julie.henderson@ipe.com.

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