The stock markets managed to recover part of the huge losses incurred up to the beginning of March, which is particularly welcome news for all working people with funded pensions. The values of individual accounts in DC schemes and funding ratios of DB plans look much rosier today than six months ago.
I observe with some satisfaction that Europe played a considerable role in containing the crisis. Brussels guided national bail-outs of banks and insurers to ensure compliance with state aid rules. The European Economic Recovery Plan laid the ground works for a coordinated stimulus package to provide the economy with a substantial fiscal boost in 2009 and 2010. This was complemented by massive liquidity injections and an expansionary monetary policy by the ECB.
Before the summer, the European Commission published the blueprints for a comprehensive reform of financial markets to ensure future financial stability. The programme is based on the recommendations made by the High Level Group chaired by former IMF president Jacques de Larosière and includes a wide range of initiatives to enhance the regulation of financial institutions.
The EU supervisory framework is strengthened by introducing a European Systemic Risk Board (ESRB) and a European System of Financial Supervisors (ESFS). The three existing supervisory committees (for banking, insurance and occupational pensions and securities) will be transformed into authorities and afforded more powers. EFRP will see to it that the interests of pension funds are well represented within the new European Insurance and Occupational Pensions Authority (EIOPA).
In the meantime, the Swedish Presidency and the newly elected members of the European Parliament have started to consider the various legislative proposals. Particularly noteworthy is the draft Directive on Alternative Investment Fund Managers (AIFM), which, in my opinion, is in need of some serious amending and rewriting.
On 2 October the Irish people voted on the Treaty of Lisbon. As I am writing this column, the outcome of the referendum is still unclear, but – irrespective of the result – it will pave the way for putting together a new European Commission.
This is important since we still face major long-term challenges that are in need of a concerted EU policy response.
Providing Europe’s citizens with adequate retirement income is such a challenge. It is well known that population ageing is making state pay-as-you-go schemes increasingly hard to afford. Many governments have responded by reforming public pension provision resulting in a decline in future retirement income. The European Commission estimates that public replacement rates are to fall by on average 20% in EU member states by 2060.
The economic crisis has resulted in a stark deterioration of public finances in the EU. Budget deficits are projected to reach 7% of GDP and government debt 80% of GDP in 2010. I fear this will trigger additional reductions in public pension expenditure.
Higher private pension savings are urgently called for to maintain people’s living standards after retirement. Capital funded pensions need to cover more people and to make them save more than is the case today. Costs should be kept at a minimum as small differences in charges have a huge impact on final pension outcomes. EFRP is convinced that workplace pensions are well suited to deliver retirement income in an effective and efficient manner.
Europe’s role in pension policy has so far been confined to coordinating national strategies and setting common policy objectives. I believe Europe can and must do better. The new commission should take ownership of the pensions dossier and set out a comprehensive EU strategy to facilitate workplace pension provision. It should seek firm commitment from member states to provide their citizens with adequate retirement income. Europe cannot risk having future generations suffering from poverty in old age.
• Chris Verhaegen is secretary general of the EFRP
©2009 Funds Europe