The European Round Table of Industrialists comprises the chairman of the leading companies of the European Union. It is making appeals to the EC Commission in Brussels and to EC national governments to deal with the impending pensions crises which, in their view, threatens EC competitiveness and hence economic prosperity and welfare.
It appeals for an EC-wide co-ordinated approach instead of piecemeal reform by individual EC countries. It calls for changes to EU rules to allow:
a) workers to transfer pensions across borders
b) co-ordination of the tax and regulatory treatment of pensions
c) pension funds to invest in foreign markets
d) the retirement age to be raised, and
e) older workers to be given incentives to stay on.
If reforms are not made now it will be necessary to increase contribution rates at a later date which would be harmful for employment or renege on previous commitments.
In Italy employees currently pay 33% of their salaries in pensions contributions; by 2030 they would rise to 48% to balance the pensions budget.
The EC Commission is expected to issue its proposals for pensions reform early next year.
Dealing with the demographic “time bomb” is something that has been occupying the minds of the UK government and UK practitioners for some time now. Happily our system of funded pensions makes the problem a little less serious than for some EU governments where state reliance is much more prevalent. Not only that, but expectations of high state pensions seems to be the norm.
As well as the pure pensions issue other factors also impact this most crucial of subjects.
Five years ago the World Bank published “Averting the Old Age Crisis”. This report was very influential and called for “privately funded” pensions to solve the worldwide old age crisis, involving:
a) a small public pay-as-you-go defined benefit pension
b) a private mandatory defined benefit pension, and
c) a voluntary private pension.
At a recent conference in Washington DC the World Bank had a major rethink on alternatives. The “institutional approach” is used by the US federal civil service and Sweden where numerous small accounts are aggregated into large blocks. Investment managers are selected for low fees and costs and due to the bulk purchasing power there is no lack of choice. Administration is dealt with by a government agency.
High volume and low charges is a model that appeals to the current UK government. This centralised system could mean costs of 0.1% a year which makes the proposed 1% a year UK stakeholder cap on charges seem expensive. Academics concluded that on average between 40% and 45% of the volume of individual accounts in the UK were consumed by fees and costs including marketing costs.
To deal with pensions funding as a standalone issue may be difficult if EU countries do not have a harmonised tax system for corporate and personal taxation including taxation of pensioners. Taxation is a business cost like any other cost and different systems of tax breaks mean different levels of funding and benefits. The abolition of ACT in the UK has meant that the UK has become a higher-cost location; it will also mean that, all other things being equal, pension benefits produced from pension funds for a given amount of money will be lower.
EC countries have different accounting standards. In the UK the Accounting Standards Board have published a Financial Reporting Exposure Draft “FRED 20” to replace Statement of Standard Accounting Practice “SSAP 24”. This calls for a market value based valuation for assets in a defined benefit pension scheme to replace valuation on an actuarial basis. The EU has yet to decide on whether to use international accounting standards or to issue EU accounting standards.
Inadequate funding of public pension schemes is caused by an ageing EC population. A declining birthrate means that a smaller working population is having to support a larger retired population. The UK has put pensions at the heart of the battle against life-long poverty which marks a shift away from a social security safety-net.
Not eveyone agrees with the proposed pensions reforms. The National Association of Pension Funds has said that concentrating stakeholder pension on the lower paid will put back the clock to the class based system of 25 years ago while leaving higher paid employees in an occupational scheme.
It advocates that the same tax advantages should be given to all pension schemes and claims that occupational pension schemes have been a welfare success because they include both lower and higher paid employees. However this argument tend to ignore the overwhelming commercial fact that giving an open ended promise, interest in defined benefit schemes is something most employers are (understandably) unwilling to do.