Executive SummaryThe roles of public, occupational and personal pension vehicles in each of the 28 Member States diverge significantly. The need for EU products to answer retirement needs was obvious when considering the immense demographic challenges in Europe, current economic uncertainties, and low interest rates. Those factors aggravated conditions for retirement provisions of European citizens, which was a concern to European policy makers. The industry had to adapt.
The Current State of Pensions
The issue was of how to achieve adequate pensions for citizens. Within the pensions framework, the first pillar desperately needed reform. The inevitably unpopular reality was that if a more sustainable first pillar were to be attained with public finances, they would need to lower first pillar pensions. The retirement age also needed to move up. With the ageing population came growth in interest in pensions and retirement, which increased the difficulty of making adjustments to pensions.
The second pillar had various issues, not least that very few countries had it; there were therefore few employers ensuring that their employees had pensions. Additional considerations were made regarding changes in the labour market’s behaviour. Historically, employees would have worked under one employer for their entire lives. That was no longer the case, and the current system was not optimised for the new trend towards many short and small contributions to pension pots.
The third pillar was completely insufficient, fragmented due notably to varying approaches to pension provisions, tax differences and in most cases did not give consumers value for money.
To make the pension gap sustainable they needed more second and third pillar solutions. Although there had been steps towards reforming the sustainability of first pillar regimes, the same was not true for the second and third pillars, and awareness of the problems of future retirement pension revenues was gathering pace. Therefore incentives for good second and third pillar pension provision were essential. Europe could help with all three pillars, in rulemaking, implementation, and reform.
Fear was thought to be at the heart of discussions on all three pillars. People wanted to save, but were unsure. That was in part due to awareness of the low interest rate environment, but also because of lingering distrust in the financial services sector. The widespread fear was thought to be driving customers’ decision making; although that was disputable.
However, it was noted that fear was a positive force if acted upon. The industry had an opportunity to attempt to push the energy and awareness behind the fear towards positive outcomes, and to aid their customers in their long term plans. Another asset to consider was that recent studies had indicated that employees trusted their employers. Therefore early engagement with employers was one route of action to consider.
Insurers had the potential to strengthen confidence in the industry through two routes. First was through transparency. The second was through provision of evidence that they would remain solvent in the long term. Insurance could offer guarantees, and that was a route to restoring confidence that was simple from a consumer’s perspective. Movements towards transparency and education for citizens were strongly supported.
The Relationship between Citizens and Pensions
The widespread European perspective was that people believed that the Government had a responsibility to take care of them. As such, a reasonable measure was to increase financial education and citizens’ understanding that, where possible, they had to take care of themselves. Although it was accepted that there were challenges to individuals being able to do so: some people had insufficient income; the first pillar was insufficient to provide adequate pension income for a good lifestyle; and in countries with a large ageing population, it was not easy to declare that there was no money left and people had to take responsibility for themselves.
Personal pension products were one way for individuals to look after themselves, but the question of how to motivate people to use them remained. The EIOPA had made commendable efforts towards solving the problem of motivation and had suggested that if they wanted people to buy personal pension products, then there had to be guarantees of their reasonableness offered. PEPPs were a viable starting solution, but not a final cure. In order to really motivate people to take care of themselves they had to develop a portfolio of pilot products that met certain investment rules and were properly supervised, and then introduce them on a level playing field.
Furthermore, encouraging people to save was not the final answer. Instead they needed to change the dynamics of the market by engaging people, giving them advice, and encouraging them to think long term. Those that planned for the long term also became more confident in their financial futures because they were more engaged. Therefore early engagement was essential.
Development of Long Term Investment
There was widespread agreement that the industry needed to do more in considering how to bring long termism back into the pension regime. They needed to build on what had already been done. Pensions were fit candidates for long term investment, but work needed to be done in collaboration with companies to refocus the long term approach. Both society and individual savers had much to benefit from that refocus because they were currently missing out on long term gains, which negatively impacted both innovation and wealth.
The immense demographic challenge had been considered, but the challenge should have been systematically linked with the challenge of investment within the European economy. The need for long term investment was substantial, and was a particular issue in Europe.
An additional point to consider was that pension funds were not the only way of channelling long term savings towards retirement or otherwise long term investment. There were many products available that offered similar outcomes, and thus there was scepticism on the need to generalise the pension fund or create a pan European one. The current expectation upon the European Union was for them to analyse the characteristics of long term investment and design a new regime dedicated to long term saving and investment.
Whilst it was possible to build products that would provide value for money for customers whilst allowing more long term investment in infrastructures, a warning was given: customers had to understand that they could not have all of the benefits they wanted. People had a preference for liquidity and were understandably risk averse, but businesses were advised not to try to offer long term guarantees in conjunction with short term liquidity. The economic reality was that it was too costly to do so. However, there was room to do better than they currently did.
The best service that the financial services industry could offer was to provide a money collection product that would maintain a reasonable level of volatility, whilst protecting consumers from hyper-volatility.
The Beginning of PEPP
EU institutions were advancing and preparing regulation for the PEPP. Work had been developed on the PEPP because the industry believed that Europe could add value. Regarding PEPP and the three pillars, work needed to be done on the second and third pillars to improve both efficiency and overall value for money. In many countries the products used for private pension provision were not true retirement saving products; that was problematic because pension investments differed greatly from short term investments. In order for the PEPP to realise its potential, it had to be a true retirement product. More generally it had to be digitalised, simple, economic, and high quality.
Actions were advocated for a second regime that would come from a European perspective and work alongside different national regimes. The regime required a degree of simplicity and was thought to be possible in a more cost efficient and transparent way.
The building of a pan European product was an acknowledged possibility. The industry knew the characteristics that it needed. There was also potential for the introduction of a default product, in the interests of simplicity, alongside the choice from more flexible products.
The challenge of digitalisation also bore relevance in regard to the upcoming PEPP. Discussions on 21st century regulation needed to take place because that was where opportunities were. Europe had the potential to provide pensions in a modern and digitised format, and with greater transparency than previous products.
There were also savings to be made from encouraging individuals to engage digitally. It was further considered that if customers were spoken to in one consistent and transparent language across the industry, it would empower individuals and allow the PEPP much wider acceptance.
There were understandable obstacles to the success of the PEPP; political willingness was one. They were currently in the last hours of being able to make political decisions on the sustainability of the second and third pillars in Europe. In 15 20 years’ time the ageing population would make pension discussions and reforms significantly more difficult.
A further obstacle to the PEPP was the lack of interest towards it. Banking and pension management were not considered exciting activities. In order to gather interest PEPP had to be simple, transparent, and standardised; and people needed to be educated on how to manage their pensions.
Establishing cross-border pensions was a further difficulty. Insurance firms cooperated at the international level, but solutions were mostly national, which was potentially problematic. Further, when looking at new solutions, they had to consider the distribution costs.
A final obstacle was that DC still had scope for improvement with regards to long term investment potential, and portfolio diversification.
The FCA’s post implementation analysis of the Retail Distribution Review would be a good framework for the EU to look at how they compartmentalised the earning and savings habits of individuals across the EU, which would greatly inform the debate on the applicability and usage of the PEPP.
It was clear that the EU had a role to play in ensuring retirement provision and pension coverage for EU citizens. It was recommended that the industry worked to clear existing obstacles and incentivise long term savings for the benefit of European citizens.
Further steps had already been taken. Eventually the work that had been done needed to give rise to pilot products. That had been suggested to the European Commission, and was pending a response; further help on that front was openly invited.
The ageing society had proved to be a substantial concern. Calls were made for more debate and analysis on how to adapt to the new demographic.
An amount of future thought was geared towards helping citizens. Citizens had to understand that they were personally responsible for their pensions. However, the industry also needed to develop a consistently simple framework for customers that was digitally accessible and kept costs down.
Further digitalisation was encouraged. The benefits to the industry were as yet untapped.
The future of the economy would largely depend on the ability to fill the investment gap. That was the highest priority. Meanwhile, all diagnoses indicated that long term investment was hampered by a series of regulations that had been implemented. It was advised that they looked seriously at the business model of long term investors, and that they took the necessary initiatives without delay.
The roles of public, occupational and personal pension vehicles in each of the 28 Member States diverge significantly. It was outlined that the session would focus on EU Products to Answer Retirement Needs. It was suggested that the need for answers may have been obvious when considering the immense demographic challenges in Europe, current economic uncertainties, low economic growth and very low interest rates. Those factors aggravated the conditions for retirement provisions of European citizens, which was of great concern to European policy makers. The industry had to adapt to the environment, and the question was of which answers were available.
1. The EU’s Role in Allowing Occupational Pensions and Pension Products to Better Answer Retirement Needs
The first round of questions would focus on whether there was a role for the EU to play in order to allow occupational and private pension products to better answer retirement needs. The Chair was confident that one speaker would argue ‘yes’ to that, and asked him to introduce the topic.
Developing the Pension Pillars
One public authority speaker stated that the subject was important. He was pleased at the way that the sessions had linked up, as he had previously attended a session on issues surrounding the ageing society, low economic growth and low interest rates. He added that labour changes in the market were a fundamental point which had been overlooked; the careers of the present and future were very different from each other, and that was important to note.
As they were in Amsterdam and he sat in a European authority which tried to bring good things together from all countries around Europe, he would try to be blunt, as the Dutch usually were at his table. By way of a pensions framework he said that the first pillar desperately needed reform. They had seen reforms for the sustainability of regimes, however as countries had been pushed by the European Commission to be honest, have more sustainable finances and make changes to the first pillar to make it more sustainable, they had not seen pushes on the second and third pillars to build a sustainable basis with second and third pillar solutions.
He felt that those things needed to come hand in hand because the real issue was about having adequ²ate pensions for citizens. If they wanted a more sustainable first pillar with public finances, they needed to have lower pensions from the first pillar. Whilst unpopular, that was the global reality. To make the pension gap sustainable, they needed more second and third pillar solutions. He noted that Europe could definitely help, not just with making rules, but with implementation and reform. Therefore he argued that they should look more at complementarity; incentives for good second and third pillar pension provision were fundamental.
An analysis from the industry had revealed that very few countries had a second pillar and so there was no involvement from employers in ensuring that there would be pensions for employees. In the second pillar, there were currently two issues. Legacy was the defined benefit (DB) pension funds, which were becoming difficult. The sustainability of the system was difficult to maintain. The move to DC was there, and should have been supported. They had a situation with DB whereby they needed to take legacy into account in the future, be sustainable, and run them down sustainably without creating a crisis. There should then have been more DC.
He continued that the third pillar was completely insufficient, atomised and fragmented, and in most situations did not give value for money from a consumer perspective. That was another problem. He believed that there could be answers to that from a European perspective. In the first, second and third pillars they could have had solutions from a European perspective and taken advantage of the internal market, which they had not been doing. That was his first intervention.
Another speaker suggested that with Pillar I, they were talking about demographic developments, and they needed reforms. They needed the retirement age to move up. In the Netherlands from 2018 on the majority of people would be over 50; that was almost two thirds of the electorate. At age 50 people began to develop an interest in the pension system, and so there was much more focus on pensions and retirement. It was also getting more difficult to make adjustments, which was a problem in some Member States.
On Pillar II, the speaker was happy that the labour market had been mentioned. In the past people had worked their entire lives for one boss, received a golden watch at the end, and that was that. That was no longer the case: people changed jobs every two to five years, and so it was much more complicated. People no longer had a job for life, but a life full of jobs; that was a mental shift that had to be made in the political and pension systems themselves. The systems were not currently optimised for so many short and small contributions to the large end result.
An industry representative highlighted that the question was on how to respond. He was very interested in the considerations that had been made about the three pillars of the pension system and felt that the awareness of the problems of future retirement pension revenues was gathering pace.
One industry representative stated that they had seen Pillars II and III merging. They certainly saw it in the UK with group personal pension plans, which were transferrable, and easier to understand.
Distrust in the Financial Sector and the Impact on Pensions
One public authority speaker stated that the strongest human emotion was fear and that was at the heart of the discussions on pillars I, II and III. On Pillar III there was also fear. People wanted to save; but they read about the low interest rate environment, and so they did not know what to do, particularly given the persisting bad reputation of the financial sector.
The financial sector was not trusted, which was another important element of fear that the sector had to overcome. She noted that ultimately people just wanted money to buy nice presents for their grandchildren on their birthdays: that was what people were worried about, and what they had to keep in mind when addressing the three pillars.
Other speakers agreed that trust in the financial sector and financial services was lacking. One bank representative argued however that people did have trust in employers. Many studies had suggested that employees trusted their employers, and so engaging the employer at an early stage was important.
One industry representative highlighted that there was a current issue around helping consumers. Fear was driving consumers to make decisions, and so it was important for the industry to think about how to help consumers to better allow them to plan for the long term. That was a challenge for the industry. They also needed to use behavioural instruments and think about how they could use nudges and defaults to better tailor solutions for participants.
A speaker from insurance suggested that there were two pieces of good news. First, he felt that fear was a route to salvation. It was positive if they could act upon it. Second, he noted that the financial sector was not credited with a high rate of trust. However, they were not the only ones; the political and many other industries also suffered.
He commented that in a previous roundtable a speaker had expressed his amazement that French students had contested pension reform projects. That had showed an enhanced awareness that a problem would come. The arising problem was then how to use that energy and awareness, and to use the fear to avoid accidents. He noted that it would not be an easy task and that they also had to bear in mind the complexity of the various rules and regulations in place.
As insurers, he thought that they had to strengthen confidence in the industry in two directions. The first was through transparency of their businesses. Second was that they had to give evidence that they would remain solvent in the long term, as pensions were a long term issue. The third point was that the insurance industry had been underused. Confidence could be restored if people were given evidence that they would get value for money. Insurance offered guarantees, provided that they had long term investment products and that their solvency obligations were fit for long term commitments.
One industry speaker added a comment on liability. He stated that the role of insurance was to remove some of the market volatility by providing guarantees. That was transparent and simple from a consumer’s perspective.
A representative of the public Authorities felt that the idea that fear could motivate people to buy pension products was optimistic. She stated that you could sometimes have excellent products that were not for the purposes of pensions. The increased demand for pension products in the absence of appropriately tailored products could have had a negative impact on trust in the medium term. She therefore strongly welcomed movements towards transparency and education for citizens on how to take care of their futures.
A regulator stated that she tried to be very active in the discussions of pension topics because it was clear that there was a lot of convergence around both the euro and the longevity, and other problems with pensions. It was clear that they also had a divergent approach. They had different replacement ratios, and different tax and labour law. There were different expectations, of which she wanted to introduce some definitions around the rational expectations of future pensioners.
She wanted to discuss reforms that had been introduced in Africa and other countries where pension systems had never been introduced. Each step was highly evaluated. However, from the European perspective, people still believed that the Government had a responsibility to take care of them. In the previous panel it had been made clear that people were being pushed to save, and also noted that everybody could save for their pension.
In her own country they had tried to solve the sustainability problem of the pay as you go system and had introduced the World Bank second pillar. They also had an IORP fund.
She stated that a reasonable measure could have been to increase financial education and peoples’ understanding that they had to take care of themselves if they could. However it was clear that some people had insufficient income to do that. The first pillar, around social care, was not sufficient to provide a nice lifestyle from adequate pensions. It was clear that it was politically sensitive: in countries with an increasing number of middle aged people it was not easy to declare that there was no more money and the individuals had to take care of themselves.
One speaker commented that getting consumers to understand their liability was important. Liability was not about the size of the pension pot, but how long the pot would live for; that was something that everybody consistently underestimated.
Incentivising Consumers to Look After Themselves
A speaker outlined that one way of motivating people to take care of themselves was to look into personal pension products. Some such products had been introduced in the speaker’s country, but the question of how to motivate people had remained. The issue was about finding a balance to provide proper care.
She strongly supported the EIOPA’s efforts to solve the problem. EIOPA had defined the basic requirements that had to be met. If they wanted people to buy products they had to offer a guarantee of their reasonableness.
She thought that they could start with PEPPs as a first solution; but noted that they were not a cure for everything. They had to start with some pilot products and create a portfolio of products that fulfilled some pre contractual information, investment rules and had proper supervision. They had to introduce a level playing field and then motivate people to take care of themselves.
A representative of the industry noted that in a prior session it had been mentioned that the UK had introduced things such as auto enrolment. Other issues that had been touched upon had included how to introduce simple products which could fulfil most people’s needs, and how to create an environment which encouraged productive investment. Savers need a new framework for advice and guidance to ensure that they have the support to invest constructively. This framework should include a minimum standard of impartial guidance and consistent qualification standards for advisers.
He stated that getting people to save more was not the be all and end all, and that most people across Europe suffered from being unable to meet their day to day budgets. Their own investor poll survey of 13,000 people in eight countries across Europe had suggested that over 50% of saved assets were in cash. He felt that that dynamic could be changed if people were engaged in the right way, given advice, and encouraged to think long term. He noted that people that had a plan were two thirds more confident in their financial future because they were more engaged.
He thought that there was a way to get them to think about that, and that was where one got effective retirement planning and the products that came alongside that: both estates and Pillars I and II. Even those who had occupational schemes had moved from DB to DC, and so they had seen much less paternalism from the state because the state could not afford it, due to the ageing population of the workforce and the pensioners that were being supported already. Engaging people at an early stage was very important.
Prospects of Long Term Investment
An industry representative outlined that they also needed to consider how to get long termism back into the pension regime. Previously when something had been done for them, such as the DB scheme, they had been able to invest in long dated assets. He explained that they had asked people to think about their futures over 40 50 years, but the liquidity that they had to put into those pensions meant that the types of investments that were used were not matched up to that liability. A lot had been done, but more could be done to realign that thinking, so that they could reattach that longevity and secure illiquidity benefits of the pensioners investing for 40 50 years. He felt that that could change.
Another speaker commented that in a previous panel it had been said that Governments were shifting risks to individuals. When talking about pensions, it was important to think about funded pensions. The day prior, Keith Ambachtsheer had presented his new book emphasising the need for integrating design and investing. The speaker wanted to comment on those two things.
He agreed that there was a need for long term investment, which pensions were fit for. However they needed to work with companies and refocus the long term approach. Society and savers would benefit form that because they were currently missing out on long term gains, and that had a negative effect on innovation and wealth. Actions were needed in the area, such as thinking about portfolio strategies and roles of institutional investors, better dialogue between investors and corporations, and bringing the long term to company boards.
The final remark was that they needed to consider that if they had more problems to solve, but only one instrument, then they had a problem. They had many objectives and had to consider how many instruments they would require to solve all of the issues, which was a joint challenge.
An industry expert speaker noted that one consideration had been the immense demographic challenge. He suggested that that challenge should have been systematically linked with the challenge of investment within the European economy. The needs for long term investment were huge, and they had to be considered when speaking about saving for retirement. Long term investment was a current issue, particularly in Europe.
His second point was that pension funds were not the only way to channel long term savings toward coverage of retirement and long term investment. Several products were available that offered similar things. He was therefore sceptical on generalising the pension fund or creating a pan European fund.
He believed that the expectation on the European Union was for them to analyse the characteristics of long term investment and design a new regime dedicated to long term saving and investment.
One speaker commented that the real question being asked was how long term savings for retirement purposes could best be linked with long term financing of the European economy. A representative of the insurance sector responded that people should not be penalised when investing in long term assets like infrastructure projects. He continued that they had to endorse all the rules on asset liability management, because of the guarantees they issued. Finally, they had to make enough paper available in the EU for investors to invest in. They could accept more risk and less liquidity, but still needed a minimum of diversity.
Another insurance industry representative stated that the linkage between long term savings and long term investment was to do with the liabilities created and the types of products they had. The answer to a better combination between long term savings and local term investment came from that, as well as the fact that consumers needed to accept that they could not have everything at the same time, such as long term guarantees and short term liquidity. Having both long term guarantees and short range liquidity was too costly.
He thought that it was possible to build certain types of products so that they would provide good value for money for consumers, whilst also allowing more long term investment in more infrastructures. However, he warned against the trap of thinking that one could have everything. He warned that if they went in the direction of long term promises and guarantees without an element of sustainability, then they were fooling themselves. The issue was not about solvency requirements, but the economic reality. Transparency was fundamental and they needed to be transparent to the people. However, he believed that it was possible to do better than they currently did, and he was willing to participate in that discussion.
An industry expert believed that the key to that discussion was to systematically start from an analysis of the liabilities. They had a problem in that people preferred liquidity and were understandably risk averse.
The real service to be provided by the financial services industry was to provide a money collection product that would protect consumers from hyper volatility, whilst maintaining a reasonable level of volatility where needed. Starting from that, they could build a profile of liability and allow for an appropriate policy of long term investment. The only thing that made sense was how liability and asset profiles would evolve over 10 15 years; whether there was the possibility of risk; over which period; and what corrective measure would allow avoidance of that difficulty. That was a brand new approach.
2. The Upcoming Pan-European Personal Pension Product (PEPP): towards an EU single market for personal pensions?
The second main issue was that EU institutions were already advancing and preparing regulation for the PEPP. One speaker wondered what the key issues were for introducing a standardised PEPP what its prospects were, what priorities there were for fostering its developments, and what was the anticipated implementation timeline.
An insurance representative stated that they were developing work on the PEPP because they believed that Europe could add value. He thought that a combination of second and third pillar developments was needed. He felt that more could have been done in Europe for the second pillar.
In terms of the third pillar and PEPP, what they currently had was suboptimal, particularly from a consumer’s perspective. The EU had a completely fragmented situation around the third pillar and in many countries the products used for individual private pension provision were not true retirement saving products, but were purely for investment purposes. Investing for pensions was very different to investing on a short term basis.
Costs on the third pillar needed to be lowered because the cost element was a drawdown on the efficiency of the regime from both a consumer perspective and in terms of the overall value for money. Those things could be attained by having a regime which allowed cross border selling and benefits from economies of scale, whilst bringing a robust and transparent regulatory framework that could help with the fear and distrust of the financial services market.
Only Europe could bring back confidence. What they were advocating was that that should be an initiative done through a second regime.
He clarified that he was not advocating the harmonisation of third pillar pension provision in the EU. They were advocating a second regime that would come from a European perspective and work in parallel with different national regimes. He agreed that there needed to be simplicity, and stated that it could be done in a much more cost efficient and transparent way.
He felt that that would also answer the challenge of digitalisation. He advised that they should be discussing 21st century regulation, because that was where opportunities were. They needed to consider the prospects of automated advice, because they would be a part of the future. He felt that Europe had the potential to provide pensions in a more modern format, with greater transparency, and without imposing things on Member States.
He affirmed that it was possible to build the pan European product in the window of opportunity that they had. They knew the characteristics that it needed. He added that there should have been a default product to ensure that people went a simpler way, but that there should also be more flexible products.
An executive from the industry highlighted that it had been rightly underlined that, in order to reach its target, PEPP had to truly be a retirement product. It was important that, when thinking of its features they also worked on aspects such as the decumulation period and how long the product needed to be kept for the customer to benefit from each of the guarantees. It had to be done clearly otherwise it would be a generic investment product with the same interest.
More generally, the PEPP needed to be digital, simple, economic, but not cheap. It had to be a quality product. He emphasised that they could never forget the interests of their clients because if they tried to accommodate all of the various national systems and tax elements they would be largely left with a basic investment product. The most difficult part of the initiative was perhaps that it had to be implementable; the variety of such systems was such that, like his colleagues, he did not think it was obvious from a practical point of view.
He suggested that the interest of PEPP could also have been in the single demarche of it; if it helped to provide a common set of transparent indicators to give people transparent information on how much they needed to contribute, it would prove a huge advantage over the existing one.
He stated that the PEPP already had some influence on what was happening at a national level. There was a very interesting initiative by the French Government which was currently creating occupational retirement supplementary funds, which was something of a merger between Pillars II and III that would allow for the rechannelling of the existing collective plans. It was an instrument under the IORP I Directive, with some solvency requirements as well as a dedication to investing in long term instruments and the economy, mostly in infrastructure.
He summarised that it was good news. As insurers they were taking benefit from that and adapting both their products and their relations with their clients.
Direct Obstacles to the PEPP
A speaker from the regulatory side stated that there are two major obstacles to it: Firstly, Tax treatment of a future PEPP, which lies in the remit of the Member states. Currently the European commission is about to launch a tender on a survey of different tax treatments throughout Europe. An outcome is to be expected by end of the year. Secondly, such a robust regulatory framework needs broad political willingness.
A speaker on behalf of the insurance sector appreciated that there would be obstacles. Tax treatment was one which he understood that the European Commission would conduct an analysis on. However, the largest obstacle was political willingness, which came back to the point on fear. They were in the last hours of having the possibility to make political decisions on the sustainability of the second and third pillars in Europe. In 15 20 years’ time the voters would be the elderly, at which point discussions would become much more difficult.
A speaker outlined that MEPs were not against the PEPP, but they also saw substantial obstacles. She noted that products had to be simple, transparent and standardised, and that that should be the focus of the PEPP if they wanted people to be interested in it.
She continued that they had discussed the fact that people were unaware of the problems; and that they needed financial education to better enable them to take care of their pensions.
A further note on the reputation of the financial sector was that people did not consider banking, insurance or pension management to be an exciting activity. Other speakers agreed. She suggested that even with an awareness, people still did not want to do those things because they did not like them. She felt that a solution could potentially arise from Fintech, and suggested that they look there. She thought that they should aim to simplify things, but also make them more fun. The most basic point was to make things simpler. By way of regulation, they could help with that.
One regulator stated that the PEPP was a long road, but it could help to discuss the pension products at a local level. She felt that the discussion could have a positive impact on local competition and in terms of the increase in transparency of old products. She was neutral towards whether it would solve or replace all personal pension products because it was not easy to find excellent products with safe transfer. However, she noted that they could recognise a lot of important things that could have a strong impact on products around the world.
A pensions investor stated that it was difficult to establish cross border pensions. Insurance cooperated internationally, but solutions were mostly national, which presented the difficulty.
He continued that when looking at new solutions, they had to consider the distribution costs. The PPI and European Directive had helped bring costs for DC plans down tremendously in the Netherlands. What was also an essential element in that was the decision by an employer to provide the plan to sell to the second pillar, and then the third pillar as a top up for those solutions.
A further challenge for DC was the fact that it could still be improved, in the sense that they wanted longer term investments there. In terms of diversification of DC solutions there was still a long way to go, particularly if they wanted to extend those investments into the retirement period. Given the long period of retirement there was also scope for having diversified portfolios. Therefore there were two challenges: low distribution costs; and having enough risk budget to allow for product diversification.
A representative of the public authorities agreed with much that had been said. His initial analysis had suggested that multinational companies were very interested in the regime. The ability to rationalise several workplace schemes made perfect sense to him. He said that given the movability of individuals across borders within the EU, it made sense. There were clearly a number of challenges that needed to be assessed and understood. The FCA’s post implementation analysis of the Retail Distribution Review would be a good framework for the EU to look at how they compartmentalised the earning and saving habits of individuals across the EU; that would greatly inform the debate about the applicability and usage of PEPP more broadly.
On the cost side, he argued that if they could make saving as easy as it was to get into debt, and if they could encourage an individual to engage digitally upfront, then that would save a huge amount of money that could be reinvested into capability. It also enabled the individual going into the scheme to both understand and not be overcharged. It was about transparency. If they could give people help in one consistent terminological language across all parties involved, it would empower many more individuals and allow the PEPP to be much more widely adopted.
The success of the PEPP
An industry expert speaker did not see why the PEPP would not be successful. He felt that it looked like a very attractive product designed around the most appropriate regime, which would fit all the needs of all generations to come.
One residual fear that he had was that the task would be a regulatory distraction. The Commission had a lot of work and there was more urgency to be put on a new approach to long term investment throughout the various existing savings products, rather than designing a new one for the next century.
A speaker usefully summarised that they had learned that there was a bigger role for the EU in ensuring retirement provision, and broader pension coverage for EU citizens would be appreciated; but a new approach would only succeed if national specificities were taken into account. He said that they should be encouraged to work on existing obstacles and to incentivise long term savings and retirement provisions for the benefit of European citizens.
A public authority representative suggested that, going forward, they needed to translate all of the work that had been done in to concrete pilot products. He had suggested that to the European Commission and was awaiting a signal from them.
On pilot products, there were two things to consider. First was a simple and transparent DC with a lifecycle investment. Second was to explore features of pooling mechanisms which insurers had done in the past. He highlighted that the main problem of having a simple, standardised pure DC would come if you had the misfortune of being close to retirement when there was a shock in the market. They could introduce some level of pooling mechanisms and smoothing of returns, which was what the insurance sector had done; but it had to be done in a more transparent way. He asked for others to help him in that area.
An MEP representative said that Europe had been said to be big in small things, and small in big things. They needed now to focus on the big things. The ageing society was one of the biggest things, and so she called for more debate and analysis, alongside comparison of different scenarios, products and possibilities.
A representative from the banking industry welcomed the activity across Europe. She felt that it displayed the courage of local parliaments and politicians facing the problem. The second point of importance was to explain to citizens that they were personally responsible for their pensions. Finally, she said that they had to create circumstances to offer standard products with appropriate care and an appropriately level playing field.
An insurance representative expressed that he had been very impressed by the positive mood of the speakers. He found it very encouraging on a difficult problem, and so was grateful to all of them. He said that the insurance industry had various multinational activities with different national branches, but that they were also European groups, and they were available to participate at both the local and European level in that work.
His second point was the encouragement of further digitalisation. He wondered if EIOPA could use more digitalised tools and what the speakers and their industry could do to help. He also noted that new digital companies had 24/7 contact with clients, and asked if that could be a possibility for the PEPP as well.
His final point was to thank the Parliament and EIOPA; and ask if they could have a European Commission around the table next time.
Another industry representative stated that it was important to have safe and affordable funded pensions. In terms of affordability, he thought that they should aim for long term diversified portfolios without being hindered by regulations, in the sense that they could not take risk. He continued that low distribution costs were also important. The remaining question was around developing solutions for those who had no funded pensions; that problem differed per country and required the industry to look to consumers to help them to use technology to come to solutions.
One bank spokesperson agreed with all advice thus far. He felt that more partnership was needed with asset management and insurance to deliver transparent, guaranteed, simple, consumable products that would fit the regime.
His second point was that engagement with employers was key in terms of getting them on the right side to deliver Pillars II and III. He emphasised that those two together had the kind of fungibility to make PEPP very successful.
The third point was that it was much easier to give up something that one had never had, than it was to be asked to give up money that one had demands for on an ongoing basis.
The final point was to emphasise the need for a consistent framework which was very simple, across the industry, and could be delivered digitally to consumers, which also kept costs downs on the transmission mechanism.
An industry expert said that the future of the economy and their society would largely depend on their ability to fill the investment gap. That was the highest priority on the political side. At the same time, all diagnoses indicated that long term investment was hampered by a series of regulations that had been implemented. He advised that they looked seriously at the business model of long term investors, and that they took the necessary initiatives without delay.
The panel were thanked for their contributions on a topic which they were sure would be discussed for many more years.