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Impact Investing

IPE special report May 2018

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Soup-kitchen future?

There are increasing forecasts of widespread poverty for Europe’s pensioners in future decades. For a start, there are the 60m citizens in the EU who do not have an occupational scheme. Longevity combined with feeble returns on investment, plus millions of young, non-contributing unemployed people, support the forecast of misery.


At the Pensions Europe (formerly EFRP) conference in Frankfurt in late November, the prospect of future calamity ahead was bluntly expressed by Karel Van Hulle, head of occupational pensions unit in the European Commission’s internal market directorate, who expressed the “bad news” that “the available money for payout for second and third pillar pensions is, unfortunately, drying up”.  

He talked about “promises made in the past when the rules were not as strict... when pension liabilities did not have to be put on the balance sheet. They were, at best, just put in the notes... when accountancy rules... [permitted] quite an optimistic rate of return”.

Van Hulle’s words were not the only pessimistic note. Another danger was said to be ‘piracy’ by governments with greedy eyes on pension funds. Joanne Segars, chief executive at the UK’s National Association of Pension Funds (NAPF), warned delegates that governments regarded pension funds as part of the solution to resolving economic pain.

In Ireland, the National Pensions Reserve Fund had been used to bail out the banks.
Hungary had effectively nationalised workplace pension. Quantitative easing in UK and the manipulation of Gilt yields has added around £90bn (€111bn) to the funding deficits of defined benefit pensions and sent annuity rates into a tailspin, she said,

Added to the evidence of a soup-kitchen future for Europe’s pensioners is the confusion caused by the lack of data and that basic comparable figures on deficits are simply unavailable.

Here, the European Insurance and Occupational Pensions Authority (EIOPA), is hoping to quantify pension funding statistics across the EU, says Charles Cronin, a member of EIOPA’s occupational pension stakeholder group.  

EIOPA’s exercise on the holistic balance sheet (HBS) in its quantitative impact study (QIS) will shed some light on how bad things really are. “At best,” he comments, “data on the whole pension sector is ‘patchy’.”

Cronin adds that, of the 140,000 occupational pension schemes in the European Economic Union, most have fewer than 100 members. Member states can opt these funds out of the EU’s occupational pension (IORP) Directive.

As for the UK’s pension deficit, The Pensions Regulator says that the deficit for UK pension schemes – under current UK funding rules – was around £300bn (€370bn) at the end of 2011. This is based on assets of £1trn and liabilities of £1.3trn, although the liability figures are “sensitive to the discount rate used”.

A further pessimistic note came in the September 2012 report on Pension Markets in Focus from the Paris-based Organisation for Economic Co-operation and Development (OECD), which commented: “Reforms over the past decade have cut future public pension payouts, typically by 20-25%. This could cause pensioner poverty to increase significantly.”

The report also states: “Only 13 out of 33 countries, for which information was available, had assets-to-GDP ratios above 20.”

Admittedly, not all agree with the gloom-and-doom scenario. Longer working lives will help alleviate the problem in years to come, some believe.

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