Brussels should focus on national pension frameworks – EDHEC
EUROPE - Brussels should push for more pension reforms at the national level before trying to implement a European framework, and help pension providers design "better" investment solutions for their contributors, according to EDHEC Risk Institute.
Releasing its response to the White Paper on Pensions published by the European Commission in February this year, EDHEC warned that the implementation of a common framework could lead to profound changes in national systems.
"The current public debates surrounding pensions on the one hand and budgetary coordination on the other would greatly benefit from being held conjunctly," EDHEC said.
"In all logic, unfunded first-pillar public pensions are largely structural problems due to slow-moving demographics, with a large impact on government-sponsored DB [defined benefit] schemes and social security pension schemes.
"Unfunded and underfunded second-pillar pensions have also the potential to weight on future deficit, as countries may need to eventually bail out some pension plans."
EDHEC called on the Commission to take advantage of this opportunity and, in the short run, help with citizens' information and push for national reforms.
In the longer term, it should take into account unfunded implicit pension commitments mentioned in the Stability Treaty, as that might be the "only" way to encourage coordinated reform across countries.
Additionally, EDHEC voiced concerns over the introduction of solvency capital requirements for pension funds similar to those for insurance companies.
EDHEC said: "If a homogenised framework for pensions supervision in Europe is needed, to model it after Solvency II is a mistake.
"While insurance providers may want to position themselves in a competition with pension providers, it is a misunderstanding of the specificities of pension provision."
Lastly, EDHEC argued that the constitution of any prudential framework needed to go hand-in-hand with the design of better retirement solutions, with pension providers opting for asset liability management (ALM) strategies.
"It is pointless and wasteful to apply prudential rules to poorly designed strategies," EDHEC added.
"The current practices of pension funds are still largely inadequate, as are the vast majority of third-pillar products."
EDHEC called on the pensions industry to take action, but conceded that, in order to do so, it would need the support of regulation that recognised the specificity of retirement needs and incentivised investment solutions that matched those needs.
"Currently, many pensions solutions are using the wrong asset allocation strategies applied to the wrong building blocks," it said. "Often enough, they do not provide any form of risk management, or leave it as an afterthought."
However, EDHEC stressed in its response that it was "possible" to increase pensioners' security while also benefiting equity holders by moving towards hybrid solutions, notably through the development of subtler surplus sharing rules.
"If pensioners are given access to part of the plan surplus, they will be more willing to accept higher levels of risk-taking, which is required to reduce the contribution burden of equity holders," it said.