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Tuesday, 16th April 2024
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The efficiency of Ireland’s pension system will determine its place in the pan-European market Back  
Alan Pickering, chairman of the National Association of Pension Funds, (NAPF), UK and vice chairman of the European Federation for Retirement Provision (EFRP) made the opening address at the international pensions ponference held in Dublin last month. His keynote presentation was titled ‘The latest developments in European pension reform - what doors are opening?’ He outlines the basis of an efficient pension system for Europe.
There are two important related but different strands within the current European pensions debate. The first concerns the level of pension provision to which it is sensible for 21st century Europe to aspire. Secondly, there is the pension element within the European single market for financial services. While an efficient marketplace can contribute towards the affordability of a pension system, such a market should, in pension terms at least, be seen as a means rather than an end.

Viewed from a 20th century mindset, demographic trends can be frightening. Fewer babies are being born, people are living longer and have greater expectations of financial security in retirement and labour market demands for certain skills are in decline. Put this basket of trends together and you produce what some have referred to as a demographic timebomb.

However, birth rates can go up as well as down. Existing retirement ages are culturally driven and can, over time, be changed to reflect extended life expectancy. A flexible labour market supported by lifelong training programmes can ensure that a technologically redundant widget maker can be swiftly turned into an employable asset in the next decade’s growth sector. Before we even start thinking about pension systems, we need to think about flexible labour markets. Flexibility within jobs can generate security to a greater extent than would be the case if rigidity were the order of the day. If we can get politicians to embrace these concepts with enthusiasm, demographic trends can be seen as opportunities rather than threats.

Indeed, there can be a vital symbiotic relationship. Efficient labour markets can breed efficient pension systems. Those pension systems can, in allowing pension income from one job to supplement earned income from the next, contribute to that economic efficiency to which we all aspire. What is more, those elements of our pension system that are funded can help create efficient capital markets within Europe which can themselves be an engine for economic prosperity and social protection.

The four cornerstones

A rational pension system should be built on four premises. These are diversity, inclusiveness, simplicity and stability.

In large parts of continental Europe, the state is the predominant provider of retirement incomes. It is unrealistic to expect politicians or their electorates to see such a system privatised overnight. Thus, for both political and economic reasons, it should not be state or private but state and private. Likewise, the optimal pension system should be based on a mixture of defined benefit and money purchase with both collective and individual provision having their part to play. In future, it will no longer be possible to differentiate clearly between second and third pillar pension provision.

Diversity should not lead to market segmentation based on social class or income level. The state should be a universal provider of the first pillar and should not simply fulfil a regulatory function. Beyond that, the mix between collective and individual, defined benefit and money purchase should be achieved within a framework of social cohesion thereby ensuring that private affluence does not coexist with public squalor. It is essential that articulate members of society have a close personal interest in all elements of our pension system. They must not become alienated as a result of a belief that they are single handedly paying for the pensions of the lifetime poor.

A financial relationship with the timescales associated with pension provision will never be simplistic. However, we can make the system simple at both the entry and exit points. Plan sponsors and consumers should not be confused by technical detail or misled by differentiation which goes no deeper than marketing veneer.

The timescales associated with pension provision also make stability of regime essential. Well designed pension systems can flexibly evolve to meet changing requirements. However, these changes which flow naturally from economic and social developments should not be augmented by changes of direction that do no more than reflect changed political complexion. Politicians have a role to play in crafting our pension system. Party politics, however, has no role at all.

The single market

Many years ago, Commissioner Leon Brittan had a vision of three pension freedoms within Europe. These encompassed the freedom to sell professional services around the community, the ability to join a Europe-wide pension plan and the opportunity to invest pension assets freely throughout the European Union. These freedoms have been a long time coming. There is, at least in theory, a single market for most other financial services.

On the benefit side of the pension equation, cross border membership is worth having although, for some time at least, this will only benefit a minority of employers and employees. However, those who do benefit will benefit in a big way. Since simplicity is one of our four cornerstones, one should not underestimate the importance of easy access and smooth operation to those employers and employees who do have a pan European dimension to their activities. It is, however, on the asset side of the equation where the real prizes are to be won. The co-ordinated management and efficient investment of pension assets across Europe will not simply make European labour costs more competitive internationally, it should produce a vibrant capital market which, in its turn, will increase opportunities for that labour to be employed productively.

Having learned many bitter lessons, the European Commission indulged in considerable pre publication consultation before issuing the most recent Draft Pension Directive in October 2000. Because of the compromises that were made in advance of the Directive’s publication, there are those who would argue that the Directive is so modest as to be irrelevant. This is not fair. The prizes of cross border membership and investment liberalisation are well worth having. There is, at least so far as some member states are concerned, a price too great to be paid for these gains. At a time when well-developed private pension systems are undergoing overdue domestic simplification, it would be unacceptable for the welcome void thus being created to be filled by increased bureaucratic complexity emanating from Brussels.

The EFRP position

In advance of the Directive’s publication, the EFRP had published its own proposals for cross border pension provision and defective pooling of pension assets by multinational companies. These proposals were based on collaboration between member states and their pension regulators. It was envisaged that, initially at least, countries like the UK~ Eire and the Netherlands, with their similar pension cultures, would sanction such a system based on home country supervisory supremacy. In time, further member states may join the party. It is understood that the EFRP’s proposals have found favour within the European Commission. This is particularly so since EU wide tax laws would not need changing, bilateral and multilateral treaties would suffice. This approach seems to have the public blessing of Fritz Bolkestein.

The EFRP recognises the hard work that the Commission has put into crafting this particular Directive. The EFRP is generally supportive of the results. However, there would be considerable frustration if member states, particularly those who have not yet got diversified pension systems, were to press for further amendments which would inhibit flexibility in those territories that would wish to take advantage of some of the Directive’s more forward looking elements.

One understands the sensitivity of a politician whose electorate values security more highly than affordability. However, if we have a pension system based on our four key cornerstones, it should be possible to produce a balance between affordability and security. At any meaningful level of pension delivery, absolute security is absolutely unaffordable.

What should the financial services community do?

We must not be threatening. We must not raise the spectre of 21st century colonisation by asset managers. We should play our part in breaking down the barriers between insurance providers and asset managers. Increasingly, the same companies are offering both types of product. Insurance has a part to play in the risk benefit areas of our lifelong system of social protection. Insurance will also have a part to play in our diverse pensions market where some plan sponsors and consumers may value predictability of output more highly than absolute returns. However, those who have a greater appetite for risk should not be prevented from satisfying that appetite.

We can be educators. We can provide a variety of tailor-made services. We can help create that virtuous circle encompassing flexible labour markets and pension systems which fuel that flexibility rather than frustrate its achievement. Ultimately, we are, however, servants and not masters. Our role is not to colonise but to convince.

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