EC: towards adequate, sustainable and safe European pension systems

Comments from ACCA to the European Commission, November 2011.

ACCA welcomes the opportunity to comment on the European Commission's green paper on pensions.

ACCA is a global body of professional accountants. We are based in the UK but have 140,000 members in 170 countries. We aim to offer business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence.

The comments in this submission draw on the contributions of senior members of ACCA who have long experience of pensions from the perspectives of trustee, employer, auditor and financial adviser. While pensions is not ACCA's primary area of interest, we recognise that pensions are a matter of great importance for the overall financial well-being of society, and a matter of great interest to businesses: our comments in this response come from this perspective. 

As a general response to the green paper, we believe the Commission is right to address this issue at this time and very much welcome the fact that it has undertaken such a wide-ranging analysis of the nature of the pension challenge which faces Europe. Both citizens and governments have a strong interest in ensuring that this challenge is met: every individual wants to be able to count on receiving a reasonable and secure income in their retirement, and governments want to make this happen without incurring a huge and potentially ruinous liability. Striking this balance presents a very difficult challenge to national governments, economically and politically, as we have seen just recently in France. But it is becoming more and more clear that the assumptions that citizens have been able to make over recent decades about the value and security of their pensions, both public sector and private sector, have to change. The combination of economic pressures, demographics and long-term changes in what used to be the support network for occupational pensions are all contributing to the crisis, and the response must likewise involve a joined-up approach which addresses the various constituent factors which are likely to contribute to the creation of an environment conducive to the funding and maintenance of secure retirement benefit schemes in the 21st century.  

We set out our comments on selected questions posed by the green paper below.

Q1 How can the EU support member states' effort the strengthen the adequacy of pension systems? 

We support fully the proposed approach to link the three elements of the strategy agreed at the 2001 Stockholm Council, namely to reduce public debt, raise employment rates and productivity and reform pension, health care and long-term care systems. It is clear that the budget deficits currently being run by some member states are unsustainable in the long term, and if they continue they will make it more and more difficult for those states to pay pensions. Also, the ability of any pension scheme, whether in the private or public sector, to fund retirement benefits will depend to a great extent on the participation of its citizens in the workforce. Only by generating an income for themselves will they be in a position to pay contributions into the system.

The level of unemployment in the EU, especially among young people, is very worrying. According to EUROSTAT, the EU27 unemployment rate was 9.6% in May 2010, rising to 20% or more in some countries. Youth unemployment was over 20% throughout the EU27 area and over 40% in Spain. The welfare burden that high unemployment imposes on governments is substantial enough in itself, but it also exacerbates the long-term financial pressures on governments and increases the prospect of pensioner poverty. Key to the EU strategy on pensions must therefore be to address this problem and to interlink the pensions strategy with efforts to create jobs. The danger of any long-term trend of youth unemployment, coupled with the increasing proportion of older people in the population, is that it could profoundly threaten social cohesion, with younger people, where they do have jobs, resenting the fact that they must shoulder a substantial burden for paying the pensions of those in retirement.     

Q3 How can higher effective retirement ages best be achieved and how could increases in pensionable ages contribute? 

Financial pressures on pension schemes, in both the public and private sectors, mean that it is inevitable that individuals will have to wait longer before starting to draw their benefits. Given this reality, it is essential that all unjustifiable legal and practical barriers to the participation of older workers in the workforce need to be dismantled, otherwise those workers will be forced to rely on state welfare benefits where those are available, thereby exacerbating the pressures on the state.

Q4 How can the implementation of the Europe 2020 strategy be used to promote longer employment and its benefit to business? 

It should be illegal, in principle, to make age a ground for dismissing, or not hiring a particular worker (although common sense dictates that some positions will demand evidence of physical strength and fitness which would otherwise amount to direct or indirect age discrimination). The same goes for activities at the recruitment stage.

But statutory intervention should not be the only means for ensuring higher participation of older workers in the workforce, and is not always the most effective. Employers should also be encouraged, rather than obliged, to make reasonable adjustments to premises or working practices to cater for the needs of older workers. The object must be to get employers to value the participation of older workers, where this is appropriate. This process will necessitate a certain degree of cultural and attitude change on the part of employers and their younger workforces; where possible efforts should concentrate on persuading employers of the business case for that change, for example using empirical evidence which addresses concerns about the reliability of older workers and health issues associated with them.

Efforts to encourage participation of older workers must not, however, diminish  governments' efforts to address the employment of younger workers, as discussed above.   

Q8 Does current European legislation need reviewing to ensure a consistent regulation and supervision of funded schemes and products? 

The special nature of pension fund saving is that the contributions paid in to schemes by individuals (and their employers) are locked into the schemes concerned and are not available to withdraw in the form of benefits until the individuals concerned reach the age at which they are entitled to do so. Given that their savings are kept out of reach for such a long time, it is vital that the individuals concerned are suitably reassured about the safety and security of the assets held by their fund, and that their benefits, in due course, will in fact be paid. Where gaps in regulatory protections are identified, then it is right that they be addressed in order to encourage individual savers to entrust their contributions to the schemes concerned. It may be especially important to ensure that pension providers operating on a cross-border basis are properly regulated. But any additional regulation of schemes must be very careful not to add to the disincentives which already exist for employers, or groups of employers to run them, in terms of cost and management time. 

While regulatory burdens must be kept to acceptable levels, we believe that the EU's approach to the regulation of pensions should strive to encourage the continuing involvement of employers in pension schemes. This is because the operation of an employer-based scheme acts as an incentive for individual employees to start and continue saving, especially if the employer makes an additional contribution to supplement whatever is contributed by the employee. It would be detrimental to the goal of encouraging supplementary pension saving if employers were moved to disassociate themselves from workplace schemes.

We endorse the analysis in section 3.4 of the green paper to the effect that defined contribution schemes are likely to grow in number because of their lower costs and security of outcome on the part of scheme sponsors. This has now become a reality. We also support the observation that risk sharing has great potential for lowering scheme costs. We consider in particular that employers should be encouraged to offer collective schemes, whether these are organised by sector or on some other basis, whereby the administrative costs can be minimised. Such schemes have become very popular and successful in the Netherlands and have led to substantial savings of administration costs. Earlier this year it was claimed by Hermes Fund Managers that an individual saving for a defined contribution pension is likely to retire with a pension worth only 50% of the pension that a person in the Netherlands would draw, having paid in the same amount of money. This is because of the lower charges associated with Dutch collective schemes.  

Q11 Should the protection provided by EU legislation in the case of insolvency of sponsoring employers be enhanced? 

Providing some form of legal guarantee for supplementary pension benefits where an employer has become insolvent is a vital part of engendering confidence in pension schemes on the part of savers and we welcome their adoption by member states. We do not, however, favour the obligatory introduction of measures which guarantee benefits in full on employer insolvency. Such measures impose potentially enormous liabilities on states and, where some form of levy is imposed to fund the measures, on schemes as well. It would not, in our view, be appropriate to impose such measures on member states at this time.