Solving Europe's Pension Problems—A Looming Challenge in 2014
The subject of pensions is rarely out of the news these days. It has been estimated that the annual pension savings gap across Europe stands at €1.9 trillion or 19 percent of GDP.1 Whether the focus is on the savings gap, the demise of defined benefit schemes, the impact of charges, or how governance can be improved, there can be very few who are unaware of the impending demographic crisis that provides the necessary conditions for change and reform, particularly in Europe.
It is likely that pension provision and narrowing the savings gap will be high on the agenda for the foreseeable future across Europe.
The financial crisis has served to magnify the pension challenges across Europe, and in a survey published in June 2013, PensionsEurope2 analyzed the national policy actions that targeted or impacted pensions and pension provision in its wake. These include an upward adjustment to pension age eligibility.
For example, in Finland, for pension contributions to be eligible for tax relief, the pensionable age has been raised from 62 to 68. In France, the government increased the rate of tax applied to pension contributions from two percent to 20 percent in 2012. In 2010, the UK government announced a reduction in the amount that can be saved tax-free in a pension (the lifetime allowance) from £1.8 million to £1.5 million, alongside other changes, including a reduction in the annual pension contribution allowance. The UK then reduced the lifetime allowance further to £1.25 million in 2011.
In Spain, contributions to public sector pension plans were suspended in 2012 and 2013, and a temporary property tax on pension funds was introduced. In Ireland, the government nationalized the pension funds of non-commercial organizations such as universities, transferring assets of €2 billion (with liabilities of approximately €3 billion) to the National Pensions Reserve Fund (NPRF) to become part of the unfunded public sector scheme. In addition, the Irish government used approximately 80 percent of the assets of the NPRF to recapitalize the banking sector.
It is clear that recent policy actions on the part of a number of European governments, while perceived as political imperatives, will make solving Europe's pension crisis more difficult. The very fact that Europe is so fragmented in terms of pension provision has long been a focus of concern at the European Commission. In a number of countries, workplace pension provision is the norm, whereas in several other EU countries pensions are, in the main, the responsibility of the state on a pay-asyou- go basis; it is estimated that 60 percent of European workers have no workplace pension provision at all.3 The recent focus at a European level on personal pensions is thus a welcome move.
Reforms directed by IORPs
Europe's first pension fund directive of 2003, the Institutions for Occupational Retirement Provision, or IORPs (a minimum harmonization directive), is due for revision after a lengthy review. At press time, details of IORP II were expected in Q4 2013 although it may be that these will be deferred and dealt with under the new Commission in 2014.
It was originally envisaged that IORP II would propose insurancestyle solvency provisions alongside governance and transparency rules. However, following significant resistance on the part of trade associations, employers and trade unions to the solvency ideas initially mooted, the Commission has decided that this stage of the reform program for occupational pensions will be confined to proposals harmonizing governance and transparency requirements for pension funds. The solvency issue has not gone away, however, with more work underway at the European Insurance and Occupational Pensions Authority (EIOPA) to develop an effective solvency regime in the form of what it calls a 'holistic balance sheet.'
In his statement to the Economic and Monetary Affairs Committee of the European Parliament in October 2013, Gabriel Bernardino, the chairman of EIOPA, said that "...the minimum harmonisation approach of the current IORP Directive has resulted in large differences in the protection of members and beneficiaries across Europe…" and announced his intention to present the next Commission with tested technical proposals for a European risk-based prudential regime that appropriately reflects the specific reality of pension funds.4 If IORP II is indeed deferred and dealt with under the new Commission, then a more comprehensive draft proposal may be expected if EIOPA has concluded its solvency analysis.
Approaching a plan for personal pensions
Even if the proposals in IORP II were confined to governance and transparency issues, a smooth passage is unlikely to be guaranteed, given that there are so many different models for pension provision in Europe and the potential transformation costs could discourage employers from continuing to support workplace provision. Alongside its focus on workplace pensions, last year EIOPA turned its attention to personal pensions with a discussion paper on a possible EU single market for pension products published in May 2013. The idea of a single market for personal pensions is attractive if it confers the benefits of increased competition, reduced costs and improved outcomes for retirees, but however welcome, a single market for personal pensions is some way off.
It is estimated that 60 percent of European workers have no workplace pension provision at all.
Across Europe, personal pension products exist in a variety of forms and with varying associated fiscal incentives and treatment. Also, in some member states the distinction among the three different pillars5 of pension provision is blurred, and hence, an acceptable and comprehensive definition is rendered difficult. Thus there are significant structural, regulatory and fiscal barriers to creating a single market for this element of retirement provision. However, it may be that the Commission can develop a framework of commonly accepted standards for personal pension products, including for example, limitations on redemptions to retirement age or earlier death, and risk limitation or diversification rules. The Commission could also facilitate the sharing of best practices among member states.
Whatever the Commission decides to do, whether in its revision of IORPs or in the area of personal pensions, it is likely that pension provision and narrowing the savings gap will be high on the agenda for the foreseeable future across Europe.
1Aviva, "Tackling the savings gap: engagement and empowerment," September 14, 2012, www.aviva.com
2 PensionsEurope is the trade association representing the national associations of pension funds across Europe, encompassing the trade bodies of 16 EU member states and five other European countries, www.efrp.org
3 The National Association of Pension Funds, a response to The European Commission Green Paper, "Towards adequate, sustainable and safe European pension systems," November 2010, www.napf.co.uk
4 Gabriel Bernardino, Chairman of EIOPA, Hearing at the Economic and Monetary Affairs (ECON) Committee of the European Parliament, Brussels, www.eiopa.europa.eu
5 Pillar 1: state funded pensions; pillar 2: occupational employer-sponsored pensions; pillar 3: personal pensions.