The big picture
With so many European pension fund luminaries gathered for IPE’s first awards ceremony in Brussels last year, it seemed a shame not to get their thoughts on the state of the industry. IPE editor Fennell Betson opened the first session by asking the panel how convinced they were that Europe’s demographic problem could be solved by increasing the retirement age and getting more people into the workforce.
Kees van Rees cited the root of the problem – falling fertility rates combined with increased life expectancy- and an associated anomaly. Despite greater longevity, employees are opting for early rather than late retirement. He said that in theory it is easy to tell people to retire earlier, in practice a lot harder. Worse still is his belief that increasing the retirement age in Europe will only serve to increase unemployment. An alternative would be to change attitudes towards employment. He quoted an OECD report that found Europe’s effectiveness at creating jobs lags behind that of the US. “It’s about time we addressed this problem,” he said.
While more jobs and hence more contributions would undoubtedly help ease the situation, there is a more fundamental problem. Van Rees’s point was that if you have a fixed amount to distribute among an increasing number, the logical step is for them to expect less. “I see very little in terms of lesser ambitions. On the contrary, the question is always about more, never about less. The first politician to be elected on a platform of reducing ambitions is probably going to be thrown out of parliament but, nevertheless, it is a problem that we are going to have to address,” he said.
One proposal by van Rees was what he calls active retirement, a practice more prevalent in the US where citizens receive a pension but remain employed part time. A practitioner himself, he says that so far it suits him very well.
Anne Maher said increasing the size of the workforce and raising the retirement age would help but not solve Europe’s demographic problem. Instead, there is a combination of other measures that will help to alleviate the issue. One such idea to contain benefits would be tightening eligibility conditions, reducing benefit accrual rates, increasing contributions for both employers and employees and putting pensions on a sounder footing.
Time is of the essence, according to Maher, given that delay will put the demographic problem beyond repair. Europe’s dependency ratio stands at 27% and on current projections, Ireland is the only European country that will have a ratio under 40% by 2040. Most severe are Spain and Italy whose ratios are estimated to be over 65% by 2050. In addition, the link between social contributions and benefits could be strengthened so that the people who get benefits are in fact contributing, (such is the Irish system). She said that governments can help by drawing up a legal and fiscal framework for funded pensions.
She also agreed with van Rees and said she would support what she called the fourth pillar – the concept in whatever combination of some earnings in addition to some form of pension. “This is not only the way to a secure retirement but it’s also the way to a happy life,” she said.
John Stewart felt that more people in the workforce simply retiring later is a palliative not a solution. What is needed are incentives encouraging people to save more and to encourage employers’ contributions to employee plans. Another area often overlooked as a means of easing the problem is trying to reduce the cost of administering pension funds.
Speaking along these lines was Piia- Noora Kauppi who suggested that the EU directive will give pension funds greater investment opportunities and will cut the cost of running the fund. But before the directive becomes a reality, politicians can do their bit and lay down the implications of what will happen if they do not act now. “After all, every day costs money and every day the problem becomes bigger,” she said. Given this predicament, it is vital for Europe’s politicians and those involved in pensions to educate the public and to stress how important they are.
Koen de Ryck took a marginally more optimistic tone and suggested the two would help the demographic problem. He criticised the measures taken by European governments as being insufficient. Average retirement age across Europe is around 58 years. If, rather than raising this by just a couple of years, it were to be upped by 10 years, then it would be a significant move. In addition, attracting more people to the workforce is easier said than done. “There must be jobs and good jobs at that too,” he said.
Having given their thoughts on this matter, the debate was thrown open to the audience, a member of which asked the panel how they felt they could convince younger generations to pay twice for their pensions. Kauppi was resolute and said that the only way to convince them is to persuade them that if they do not do it now, then it will simply cost more in the future.
Maher said that every country faces the problem of getting younger generations to show solidarity with their elders. Worse than this though is the more significant problem of getting the young to make provisions for themselves, let alone the generations above them. She went on to cite an Irish pension fund in which the members under 30 asked to be exempted from the scheme.
As a follow-on question, the same member of the audience asked whether it was possible to retain the luxury of early retirement. Kauppi agreed with de Ryck and said that it would be ideal for citizens to work from a younger age and retire later but that there is a lack of sufficient jobs.
Van Rees added to the debate saying that it is not uncommon for some pensioners to receive a pension from their fund for a longer time than they have made contributions. “What we ought to do at the very least is start turning around the incentives. In many
countries the incentives promote early retirement and at the very least we could start turning this around and start giving disincentives. We also need to do something about the employment situation, we need to ensure that those people who want to stay on are productively employed, are educated and trained and are given that motivation to work longer,” he said.
The next issue for the panel was whether the concept of funding remained the best approach for European pensions. Maher concluded that, on balance, it probably is. A fundamental problem remains and that is that the resources to support a growing population will still need to be generated by a declining number of workers. That said, it was her belief that it is a more effective means of transferring resources from one generation to another than other measures like increased tax and social security contributions. Another benefit is that it sharpens people’s attention on affordability, in other words, what is affordable opposed to unaffordable political promises.
There remains the question of whether funding should be mandatory or not. Referring back to the question of how to make younger generations pay for older generations, Maher joked that it is straightforward – make it mandatory for the former.
Van Rees said a shift towards funding would be beneficial because, unlike the US, the balance between the PAYG and the funded system is skewed. “There is an over dependency on PAYG in Europe. At the same time there is a high saving ratio but that money is dispersed to the economy in a very strange manner as a lot of that doesn’t go through the market and that leads to major inefficiencies,” he said.
De Ryck maintained that as long as the real return on investments is higher than wage growth upon which PAYG pensions are based, then funding is the answer. It has been this way for a very long time and will probably remain so for some time to come. Another advantage is that it makes employees more responsible due to greater involvement in their pensions. He agreed with van Rees that the Europeans save too much; “We’re probably not as good investors as we are good savers,” he said. The question is therefore how to transform high levels of savings – pension funds are a very good way of making this transformation.
The discussion proceeded to the question of whether a pan European model for pensions is either possible or desirable. De Ryck didn’t think there should be a pan European model for pensions, rather a pan European model for regulation and supervision, something encapsulated by the directive. “There is a need for some freedom for member states, companies, sectors and individuals,” he said.
Maher was more outspoken and highlighted the fact that each country has its own very distinct characteristics. She said any model needs to consider the existing pensions and social security set-ups in each country. “We’ve recently seen the EFRP’s Eiorps proposal and in the EU commission’s taxation communication, it has proposed their pan European pensions institution. Both of those are supposed to be possible structures for a pan European pension scheme that could be operated by a multinational which is a little different perhaps from a pan European model that might apply to countries. Also, both of those proposals are immensely complicated and involve so much administration that I cannot quite see how they would work. So, under both of those headings, I cannot see any pan European structure as being a viable way forward.”
Van Rees stressed the fact that the differences within countries, let alone across the EU, is significant. “With the background of approaches in the various countries, the role of solidarity in pension provision and the way of financing. I don’t see how a European model could develop. I don’t think it needs to develop. What needs to be developed is an efficient funding element and we need that tool and we need it tomorrow.” He also doubted whether the future of the EFRP’s proposed pan euro pensions vehicle was very bright. The EFRP was grateful that Mr Bolkestein put it in his communication and surprised that the commission so openly accepted a proposal. He went on to say it is essential to solve the issue of tax, something upon which there is little evidence demonstrating any progress.
The proposal was discussed in ECOFIN after it was heavily criticised by the technical working group. He said that some member states are against these developments for two different reasons: “One because they want to do their own thing and as long as you have a total PAYG system then you have no problem. Read France. Secondly, there are some countries that feel if it is established they would lose out because multinationals would not go to some member states to base their European model. It is therefore seen as a competitive threat,” he said.
His last point dwelled on the tax authorities who view the tax issue suspiciously and see it as a potential means of evasion. “Frankly we have not been able to come up with a watertight technical solution to ensure that we cannot be accused of opening up the way towards tax evasion,” he said.
John Stewart suggested it would be difficult to create a single model for pensions across Europe and that nor is it actually desirable. There is a cost to this too. A lack of a pensions model reduces the mobility of labour, with a special impact on multinational companies.
When the audience was asked whether there was a need for pan European pensions vehicle, Alan Broxson, chairman of the EFPR between 1994 and 1997, said that it is easy to forget that we are already moving towards this, albeit slowly. “Everything in Europe moves painfully slowly and for me it’s always a question of ‘are we moving in the right direction?’ and in fact we’ve already seen a number of initiatives over the last few years. The idea of cross border investment is now well accepted, whereas it was a sin not too long ago. We’ve seen the proposed directive for a common approach to taxation. We’ve seen the prudent man concept accepted and so on… I don’t worry whether there should be a pan European model or not, the real question is, ‘are we moving in the right direction?’, and I think that we are and that will ultimately lead to some sort of pan European model. But I hesitate – not in my lifetime.”
To close the debate, panel members were asked that if they could be certain of achieving one thing in the field of European pensions in the next five years, what would it be. Stewart at State Street said that he would like to see the portability of pension provision and pension rights both nationally and across Europe, something that he said was vital for the mobility of labour across the EU.
De Ryck was upbeat and predicted that within five years there will be a European pension fund directive on pension funds. He said it has been held up under the Belgium presidency quite unnecessarily but that the Spaniards would be likely to get it moving again.
Maher took a different tack and said she would like to see a simplification of pensions at all levels. In her opinion, policymakers have done a fine job in making pensions too complicated. “We approach every pensions problem by adding another layer of complexity and we’ve done this at both a national level and at an EU level.” This is one of the things killing progress in Europe and discouraging younger generations to get involved and take out pensions. Van Rees said that the major problem Europe faces is first pillar provision and that his wish was to see all European countries in Europe pass measures to ensure that the first pillar is robust.
Kauppi would like to see the occupational pension fund directive passed. She said the parliament has done its work last summer but that progress in council is sluggish. “As Mr Vandenbrouke has said, there are big problems in council and I don’t expect anything to happen before the French elections.
“Unfortunately, Belgium does not have a lot of interest in taking up this issue and Spain also has its problems. So, we will probably have to wait quite a long time for a consensus from the council.”
With that less than edifying conclusion, the subject moved on to investment in Europe (page 37).