November 2016

OPINION: Are pensions just ‘legal fraud’?

Being from Glasgow, I am not often shocked. But when I attended a pensions conference in Madrid a number of years ago, I did find myself in a state of shock. There weren’t many journalist in attendance, and I must assume the speakers didn’t realise there were any there at all. Their lust to get hold of retirement savings was outstripped only by their total lack of interest in whether those savings would result in decent pensions for the people concerned. It wasn’t a pretty spectacle.

Nothing I have experienced in the interim when I have, from time to time, danced with the pension-providing wolves has changed the view I formed during those few days in the Spanish capital: the primary objective of many (maybe most, maybe all) companies selling private pensions is to rip people off.

I look forward to receiving lots of costed examples that prove this a wrong-headed notion. In the meantime, I’m obliged to agree with the Bund der Versicherten (BdV – the German Association of the Insured), whose spokesperson, Axel Kleinlein, made the following comment on the European Commission’s plans for a Pan-European Personal Pension Product (Pepp): “The insurance companies are not reliable and trustworthy partners. This pan-European project must be protected from ‘legal fraud’ by the life insurers.”

So it must. The Pepp could be an excellent idea. But it could also be a consumer-protection nightmare if it is hijacked by the wrong kinds of providers. ‘Legal fraud’ just about sums up some previous incarnations of the personal pension, and in its response to the EU’s public consultation on a potential EU personal pension framework, the BdV suggests regulation must be stricter.

“The special German model of state-subsidised private retirement provision (Riester-Rente) clearly shows what happens if mandatory regulation is not strict enough,” it says. The BdV also notes that in 2015 alone, the state allocated about €2.35 billion to Riester-Renten for the contribution phase. However, as entry fees and longevity calculations are not regulated, monthly payouts remain low. So, “the sale of Riester-Renten has more or less stopped”.

There is a sense that the finance industry is dragging its feet. Elsewhere in this issue, we consider how to provide the millennial generation with a decent pension – and note the reputational damage done by investment managers’ apparent unwillingness to disclose costs such as transaction charges.

NOT PRETTY
This issue needs to be addressed as a matter of urgency. We can start by measuring how personal pensions perform over the long term, since, as Better Finance, the European Federation of Investors and Financial Services Users, points out at the beginning of the 2016 edition of its ‘Pension savings: the real return’ report, “one can supervise only what one can measure”. Thus far – bizarrely – it has been left to Better Finance to try to do this.

Why is that? It’s hard to escape the conclusion that it’s because the results – like the greed I witnessed in Madrid – ain’t pretty.

In its report, Better Finance provides a striking comparison of capital markets performance against Belgian occupational pension insurance performance for the period 2000 to 2016. For real performance before tax, the figures are 44% for capital markets and -4% for the pensions insurance.

“Capital market performance is not a valid proxy for retail investment performance, and the main reasons for this are the fees and commissions charged directly or indirectly to retail customers,” the report says.

This all has to change, and changing it ought to be a top priority for everyone who works in finance. For if the finance industry cannot help ordinary people – not rich people; ordinary people – to save for their retirement in a cost-effective way, we must ask ourselves what the point of it is.

©2016 funds europe