Will there be a European pension?

In the column A phone call with... we have a conversation with an expert about a current event related to economy, (responsible) investment, pension and income. This time: Johan Barnard, head of International Public Affairs van APG, on the question of where there will be a pan-European pension. “This is a solution looking for a problem.”

The so-called PEOP (Pan European Occupational Pension) is intended to be a new European standard, alongside existing national pension schemes, for the pension that is accrued through the employer, the so-called second pillar. This product should be able to be offered by, among others, insurers and pension funds in every European country, writes PensioenPro. The discussion paper comes from the OPSG, the advisory board of European pension regulator EIOPA. This plan will not go very far, Barnard believes. There are several objections.

Big failure
One of the difficulties of this PEOP, according to Barnard, is that it repeats the mistakes of a previous European initiative. This involved a third-pillar individual pension product - individual pension insurance - that was to be marketed in all 27 EU member states, also as an alternative alongside existing national pension products. “However, this Pan-European Personal Pension Product, or PEPP, turned into a major failure due to a lack of enthusiasm among financial institutions to offer it. This was partly because member states offered too little fiscal support and the product contains complex consumer protection regulations. So far, only Slovakia has a financial institution offering PEPP in some member states. The regulation underpinning PEPP will therefore be revised in the coming years in order to offer a more balanced product.”

The plan now on the table is very similar to the PEPP, only this time it involves a product in the second pillar: the occupational pension. “As with the PEPP, the choice was made to introduce a European alternative to the existing occupational pension products. One of the main problems with the PEPP was that it does not offer a tax advantage across Europe. The reason is that European tax agreements require unanimity of member states, and that is not remotely present. Most countries have not created tax advantages to encourage saving through a PEPP. There is no reason to suppose that this would be different for the PEOP.”

A second problem with the pan-European occupational pension, Barnard tells us, is that most EU member states that have pension funds most likely have no appetite for a PEOP as a competitive product for their pension funds’ retirement plans. “And certainly not now that the existing rules for pension funds are being revised. After all, it makes no sense to start negotiating an alternative at the same time.  So I don’t expect EIOPA and the European Commission to do much with this advice. Support from the member states for PEOP seems to me even more unlikely.”

Procrastination
And then there is a third, more fundamental problem, Barnard continues. “The issue is not so much that there are now no financial institutions and/or pension products or providers for EU citizens who are not yet saving for retirement. Much more importantly, policymakers underestimate that most citizens are procrastinators when it comes to retirement. Thus, they put off retirement choices until it is too late. To finance a pan-European occupational pension, incentives and/or requirements are needed to overcome procrastination.”

This can be done, Barnard argues, by introducing mandatory membership, as we have in the Netherlands. Here, employees in certain sectors and companies are required to join a pension fund. A softer form of this - very successful in the U.K. - is the so-called “auto-enrollment with opt-out” system where employers are required to enroll employees in a pension plan unless an employee requests to remain outside the scheme themselves. “You also see tax breaks for pension savers in every country with funded pensions. Finally, financial literacy is key, as is transparency about how much pension a person has accrued. For example, in the Netherlands we have mijnpensioenoverzicht.nl.”

Paternalistic
So why the desire for a pan-European pension, if it has such problems? “That is related mainly to the fact that there are two different visions of how pensions should be organized. Critics of a pension system as we know it in the Netherlands consider it paternalistic. They don't like the social character of a pension fund and see pensions purely as a financial service best offered by competing financial institutions. More market forces, they say, are the solution, and the PEOP should provide it. All in all, the PEOP strikes me - at least for now - as a solution in search of a problem. It makes more sense to review the failed PEPP for the third pillar first, before discussing a variation of it for the second pillar with PEOP. In order to help more workers across Europe get to a funded supplementary pension, the European Commission and member states should first look at introducing appropriate incentives and/or obligations in member states that don’t have them yet.”