Sluggish Pension Returns in Europe: Calls for Action
The European Federation of Financial Services Users, Better Finance, released its second report on the return of pension products in Europe in September 2014, Pension Savings: The Real Return, 2014 Edition. Together with experts from the Observatoire de l’Epargne Européenne (OEE) and INSEAD OEE Data Services (IODS), Better Finance aims in this report to unveil the real return of pensions after costs, charges, taxes, and inflation in eight countries in Europe.
The issue of pension returns is contentious, with the European Commission having identified as a barrier to long-term savings the “often poor performance of intermediaries to deliver reasonable returns, and costs of intermediation” (see the working document on the Long-Term Financing of the European Economy). Aggregate statistics on pension returns are however scarce but appear to support the views of the Commission:
The OECD Pensions Outlook 2012 revealed that, in collective pension schemes, net returns were below 2% on average from 2001 to 2010, with important differences across European jurisdictions. The 2014 report by Better Finance considers both collective schemes and individual or personal schemes. The study factors not only observed costs and inflation but, where possible, taxation and unobserved costs, by comparing product returns against market returns.
The detailed country studies in the Better Finance report show both poor performance and significant dispersion across European economies. In Denmark, Germany and Poland the average real returns after charges and taxation were positive over the past 10 years. By way of contrast, returns were negative in Belgium, France, Italy, Spain, and the United Kingdom, in particular for unit-linked products — ones that expose beneficiaries to market risk. The report also contains anecdotal evidence of striking underperformance, compared to benchmarks.
The conclusion of Better Finance is clear: Before advising citizens to place more money into pension products, public authorities need to ensure a high level of consumer protection, within appropriate market structures. The report of Better Finance shows that market returns are not the only explanation for poor product performance: high charges, hidden costs, inadequate asset allocation, and inefficient market structures can be equally important and demand a coordinated response.
Better Finance puts forward a number of policy recommendations, including:
- Improving disclosure for all long-term and retirement savings products by harmonising summary precontractual information and disclosing the effects of inflation and taxation.
- Improving the reporting and collection of information of pension returns by endowing the European supervisory authorities with the necessary resources.
- Introducing a pan-European personal pension plan that is simple and easily accessible, and that could be used as a default option.
- Simplifying the range of product offerings to make the market more approachable and easier to understand for individuals.
These recommendations are similar to the ones advocated by other stakeholders in Europe, including the members of the Centre for European Policy Studies task force on Saving for Retirement and Investing for Growth, which urged EU legislators to “deliver more inclusive, efficient and resilient retail investment markets that are better equipped and more committed to deliver value over the long-term to beneficiaries.” The report of this task force also identified the range of failures in the design of pension solutions and market structures that sometimes explain poor performance.
The recent communication on the Long-Term Financing of the European Economy recognised the potential of a single market for personal pensions to mobilise “savings for financing long-term investment, thereby fostering both retirement income adequacy and economic growth.” And the European Insurance and Occupational Pensions Authority (EIOPA) will deliver advice to the European Commission later in 2014 on the creation of a pan-European market for personal pensions (see our earlier blog post: “A European Market for Personal Pensions”).
While the word “pensions” is not featured in the mandates of European Commission President-elect Jean Claude Juncker to the College of Commissioners, it is understood that the creation of a single market for personal pension products is still on the agenda, as long as it does not entail a harmonisation of capital requirements.
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