EFAMA, the representative body for the European investment management industry, has issued recommendations for the first-of-its-kind European-wide pension product.
Following widespread research and feedback, the association has produced a blueprint which it hopes will guide the European Insurance and Occupational Pensions Authority (EIOPA) as it works to create a standardised EU-pension product.
The product would be a European brand of pension which is designed to overcome what the European Fund and Asset Management Association (EFAMA) said is a “fragmented” European pensions market. The product would need to meet certain standards and be distributed throughout Europe for EU passport-holders.
Feedback around the European personal pension (EPP) concept was generally positive, with 100% of asset management firms wanting to take part as providers, and a third also wishing to act as distributors.
EFAMA’s recommendations include:
-Ensuring there are sufficient product rules in place so that providers offer the same EPP throughout Europe
-An appropriate investment default option should be on offer for those who are unable to choose
-Information about the different EPPs, including risk-reward indicators, should be given to potential EPP holders so they can compare and make the right choice
-An EU framework should be developed for a standardised EPP to reduce distribution costs and encourage more consumers to save for retirement
Introducing a cross-border EU pension product – otherwise known as an Officially Certified European Retirement Plan (OCERP) – would enhance the choice between types of products and providers, said EFAMA.
The association also highlighted that a single market for personal pensions would simplify and improve the portability of pension savings, therefore benefiting the increasing number of people moving abroad.
This news comes after the European Commission announced its plan to create a capital markets union (CMU), which would hope to create a single market across the 28 member states in order to improve cross-border investment and therefore boost the European economy.
“By removing barriers for cross-border flows of pension savings, the creation of a European personal pension would contribute to a well-functioning CMU and enhance the flow of capital to long-term investment projects,” said EFAMA.
Peter De Proft, director general of EFAMA, said the EPP initiative and the EU passport for cross-border selling both hold “significant promises” for the CMU project and could stimulate jobs, growth and retirement savings in Europe.
“EFAMA is eager and well-placed to participate in such an ambitious project,” said Proft. “We believe our industry has a crucial role to play in this initiative which has the potential to significantly improve the well-being of European citizens.”
The statistics on our ageing society never fail to startle.
By the 2030s, the over-65 population is forecast to increase by 4.8 million to over 14m and the number of people over 85 is expected to more than double to 2.9m. The fact we are all expected to live longer is very good news indeed. However, it does demand that all (public) services make plans for the UK’s changing demographic profile.
To date the focus has largely been on what this means for the NHS, social care and pensions. However, there are serious implications not just for what we are building (the HCA’s HAPPI reports make a strong case for building homes which meet the needs and aspirations of older people) but also for the social housing sector and its existing stock. This applies as much to providing decent homes and services for older tenants as it does to factoring financial implications into business plans.
Over the coming decades, there will be many more older people who are not able to manage stairs, are susceptible to illness from cold or damp or who struggle with dementia. Housing associations and other social landlords will face more acutely some of these downsides of an ageing population.
Social tenants are more likely than the population as whole to suffer from poor health and have lower incomes, both of which can also lead to social isolation. Not all older people of course will be in poor health and many older residents will continue to live independently. However, conservative estimates in our report into housing associations and the ageing society suggest that the sector is likely to be housing 45,000 more tenants with memory loss and 170,000 more tenants with mobility problems.
Providing appropriate homes and good-quality services (including training for housing association staff) for more and more older people will come at a price. Without active steps the housing association sector alone could face an additional bill of up to £900m a year by 2034.
At the moment housing associations don’t appear to be ready for an ageing population – not that society as whole does either. Over 80% of associations we surveyed feared not having enough funding to meet older residents’ needs in 10 years’ time.
As our report argues the costs of an ageing society will have to feature more prominently in associations’ business plans. But the challenge is such that there will also need to be greater collaboration with public service providers and ultimately additional funding from government. On the upside we do have a good idea of the scale of what is needed which gives associations time to plan. However, if they and other partners are not properly prepared the future will be a bleak one for thousands of older people.
With the publication of the Green Paper on Building a Capital Markets Union, NAPF welcomed the paper’s emphasis on strengthening European capital markets and the “Commission’s commitment to creating an environment conducive to long-term investment”, but emphasised policymakers should act according to the interests of members of pension funds.
Joanne Segars, chief executive at NAPF, said: “It is important to remember that any reforms to the functioning of European capital markets should be seen through the lens of the providers of capital, in particular pension funds. This will help policymakers to avoid unintended consequences where intermediaries benefit at the expense of funds and ultimately future pensioners.
“The NAPF’s members have over €1tn of investments in the EU and global economy. They are looking to policy-makers to help deliver the supply of investment opportunities needed that are suitable for institutions investing to meet long-term liabilities.
According to the Green Paper, the European Commission (EC) hopes to “strengthen investment for the long term” by building a single market for capital for all 28 member states – a “Capital Markets Union”.
The EC aims to enhance the flow of capital from investors to start-ups, SMEs and long-term projects. The Commission also wants to remove barriers to cross-border flows of finance and diversify sources of funding in order to reduce bank lending.
The NAPF said investing in other EU states was less attractive because economies in other EU countries might be less flexible than the UK economy.
Segars said: “Very often the reasons for pension schemes choosing not to invest in other EU member states relate more to the rigidities in some national economies as opposed to restrictions on cross-border investments. We hope the Green Paper debate will home in on the problems that need discussing.”
A consultation on the Green Paper runs until 13 May 2015. The EC aims to build the Capital Markets Union by 2019.
Market failures and misguided government policies over many years have led to under-supply of housing, excessive house price inflation, particularly in the South, and under-investment in pension saving and long-term care.
The older generation has huge wealth locked up in housing, but not enough pension savings; many are capital rich and income poor. There is no supply of suitable housing for the older generation and masses of excess demand from the younger generation.
We don’t need policy nudges like Help to Buy and 4pc pensioner bonds, we need radical reforms.
All parties agree we need to build at least 250,000 houses a year and that everyone has to save more for their pension and long-term care. Pension auto-enrolment was a bold multi-party initiative supported by business and finance and has been a huge success. We need more of this collaboration – markets alone won’t make it happen.
Some consumer necessities, including food and clothing, have come down in price, but other necessities driven by public policy and lack of innovation – including housing, pensions, energy and education – have become far too expensive.
Reform of housing and pensions would provide better outcomes for longer-living consumers: more savings for retirement, better access to savings locked up in property and greater inter-generational fairness.
The Government recognises the market isn’t coping well on its own, but its solutions are often financial sticking-plasters. The Help to Buy scheme could inject up to £10bn into the housing market, and making £15bn of subsidised, high-yielding bonds available for over-65 savers is likely to cost £600m, to be paid for by younger generations.
These are not substitutes for fundamental reforms that address supply and demand. It is far better to reform a market that isn’t working than to compensate with public money after the event.
Legal & General agrees with Shelter, with whom we worked on Garden City proposals, that we need to transform housing supply by building at least an extra 100,000 homes every year .
Our response has been to help create a fast-growing national housebuilder, CALA Homes, as well as investing almost £2bn in student accommodation, affordable homes for key workers, care homes and entering the private rented sector.
The housing debate mistakenly focuses almost exclusively on the first-time buyer having difficulty getting on the housing ladder.
This is only part of the picture. Britain has 11m people aged 65 or over, and a third of the population is over 50. Many benefited from house price rises – our pensioners have around £1.3 trillion of housing equity. But too often the housing is unsuitable for their current needs.
We can’t, and shouldn’t, generalise about the priorities of the senior generation: there is no such thing as the average British pensioner.
Surveys point to a huge and varied level of aspirations: from travel, to active grandparenting, to writing a best-seller, watching or playing more sport. But there is also a higher chance of becoming one of the “oldest old”, and having to fund expensive care costs. More and better housing choice is required to match these varied needs. Research by Demos tells us that a third of retirees – over three million – want to move house.
The dream of a cottage by the sea appears to be fading; the preference is for remaining close to family, friends and facilities, often in an urban setting with good amenities. The problem is lack of the right types of housing, in the right locations, at the right prices. We simply need more, and better, housing for older people.
Less than 3pc of the new homes built are specifically for older people. With an ageing population, this is a clear market failure, and improving it should be in every planner’s objectives: urban retirement villages should be part of our national regeneration programme.
Building more tailor-made housing creates better choices for the senior generation. It also creates jobs, and frees up more housing for younger families struggling up the property ladder.
By releasing capital trapped in property, either through moving house or using lifetime mortgages, an underdeveloped market in the UK that Legal & General is just entering, older people can supplement their incomes without relying on the Government subsidising interest rates for older savers.
Pension auto-enrolment and annuity reforms will undoubtedly succeed in giving people larger savings “pots” and more choice about how to deploy those savings.
These are welcome developments. With over 92pc of auto-enrolled employees currently staying in their company’s scheme, auto-enrolment is a success for the Government and savings are growing.
But for too many people, pension saving remains pricey.
Employers need to play their part, too. Where their pension provider is expensive, they should shop around; it’s simply not fair to saddle your employees with high charges. Historically, fees and charges were too high. Some savers are still paying these higher costs.
A recent study of pension saving products showed that around £25bn of savings is potentially exposed to charges above 1pc, and almost £1bn of savings faces charges above 3pc. Charges at this level massively erode savings over time, particularly when interest rates are at historic lows.
Meaningful reform would require pension companies to give customers paying excessive fees the option to switch to more competitive, modern products with lower fees – 0.5pc is a step in the right direction.
Meanwhile unfair charging practices, which have been banned for new products, need to be got rid of in older products, too.
Forward-looking parts of my industry would welcome these changes. In fact we should drive them – we must be our own “disruptor”, working with the consumer agenda, whether in pensions, insurance, annuities or long-term care funding.
We need to learn from other industries where competition and innovation have generated wins for the consumer.
Pension savings and housing are two sides of the same coin.
In both cases, industry needs to collaborate with government and regulators to help markets work better; to maximise saved income for a lengthening old age, and to give greater choice about how to make best use of the biggest asset most people have – their home.