Pension systems are not only intended to secure income for later life. They can also be an important driver of economic growth, innovation and the competitiveness of the European Union (EU). This message is central to the World Economic Forum’s (WEF) new report, Leaders for European Growth and Competitiveness, published this week and to which APG CEO Annette Mosman contributed.
The WEF report outlines the major demographic challenges facing Europe. People are living longer, birth rates are declining and the working-age population is shrinking. According to the WEF, by around 2050 Europe will have fewer than two workers for every pensioner. However, many EU Member States still rely heavily on the so-called first pillar: public pensions, under which younger generations pay for pensioners. These systems provide a stable income but are under pressure from population ageing and rising expenditure. The WEF therefore advocates a better balance between public pensions (first pillar), employer-sponsored schemes (second pillar) and individual pension savings (third pillar).
According to the WEF, a more balanced pension system is important for the EU as a whole. If Member States, particularly those in the eurozone, fail to reform their pension systems in time, this could lead to lower returns, higher inflation or even political disruption, the WEF states. Sound pension systems in other Member States also matter to Dutch pension participants. Funded pension systems (with a second and third pillar) are better able to withstand the effects of population ageing. They also offer the advantage that accumulated pension assets can be invested in the real economy. This creates long-term investment in areas such as infrastructure, innovation, the energy transition and growing companies. In this way, they contribute not only to a good pension for participants but also to the EU’s economic development, the WEF states.
The Netherlands as an example
The report explicitly cites the Netherlands as an example of a country with a highly developed pension system. The pension assets of Dutch second-pillar pension funds amount to approximately 150% of gross domestic product. This is in addition to a strong first pillar and a flexible third pillar.
According to the authors, the Netherlands demonstrates how a pension system can contribute both to income security for participants and to the availability of long-term risk capital for the economy. At the same time, the report emphasises that even strong systems must continue to adapt to changing circumstances. One example is the Dutch transition to the reformed pension system. Under this transition, pension schemes are being modernised while elements of collective risk-sharing are retained. The WEF sees this reform as a way to better align pension systems with a labour market in which people change employers more frequently and careers are less predictable.
Five ingredients for future-proof pension systems
The European Commission also sees a clearly expanded role for supplementary funded pensions in the EU, particularly to counter the effects of population ageing and as a means of strengthening the EU’s economy and autonomy. However, the design of a pension system is not an EU competence: responsibility lies with the Member States themselves, and they will need to take action. A sound pension system cannot simply be copied from one country to another. It is the result of a country’s historical, economic, political and cultural development. The presence and role of social partners, for example, are significant factors.
To facilitate the discussion on future-proof pension systems, the WEF sets out five building blocks. First, countries must formulate clear long-term objectives for their pension system. The design of the system must then support those objectives, with an appropriate balance between public and supplementary provision. Broad participation in pension schemes and sufficient contribution levels are also essential. Systems must also be resilient to demographic and economic shocks. Finally, effective administration is necessary, supported by efficient processes, reliable IT systems and clear communication with participants. The WEF places strong emphasis on trust. Pensions are, by definition, a long-term promise. According to the WEF, consistent regulation, transparency and sound governance are therefore indispensable for keeping participants engaged and maintaining support for reforms.
Relevance to APG
The themes addressed in the report closely reflect the developments currently facing APG and its pension fund clients. The transition to the reformed pension system requires careful implementation, clear communication and the preservation of participants’ trust. At the same time, the role that pension funds can play as long-term investors in tomorrow’s economy is becoming increasingly clear.
APG CEO Annette Mosman was one of the three co-chairs of the Leveraging Financial Markets pillar, alongside European Commissioner Maria Luís Albuquerque and Christian Sewing, CEO of Deutsche Bank. In this role, she contributed to a European debate that will only become more important in the years ahead: how can we ensure pension systems that provide financial security for participants while also contributing to a strong, competitive and future-proof Europe?
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