November 2010

CEOs: united we stand (extract 3)

roundtable_410CEO Roundtable Part 3: our industry leaders look at helping to develop savings and pensions policy in Europe, and the potential for business growth.


(Todd Ruppert, Eric Helderlé, Hendrik du Toit, Pierre Servant, Robert Parker, Elizabeth Corley, Jean-Baptiste de Franssu)

Funds Europe: What can the industry do to help develop savings and pensions policy in Europe? Also, in terms of business development, is Europe too mature for asset managers to grow their business here?

Servant: Retirement schemes in many European countries are unstable and complicated specifically when it comes to taxes. There is no way you can promote a long-term savings perspective with this type of unclear and moving landscape.

De Franssu: The 2020 agenda of the European Commission is to bring more connectivity, growth and integration to Europe. The absence of pan-European pension schemes means that one of the basic articles of the Treaty of Rome cannot even be addressed - that is, people cannot freely move across countries in Europe when they work because they can't carry their pension over with them.

More importantly, which segment of the financial service industry has experience of cross border development in Europe with one product? There is only one example of this: that's us, asset managers, with Ucits.

We have a huge amount of know-how in terms of our pan-European efforts of passporting this one product. The experience we have gained should really be channelled into making sure that future pension schemes benefit from it.

I’m not comfortable with everything that has been said in the EC’s green paper on retirement, but there are some good elements in there. Among these is the fact that they're not going to look at the first-pillar pensions because this is the responsibility of each country within Europe. Instead, the focus on a European level has to be the second and the third pillars and a defined contribution-type of approach is probably one of the best ways to move forward. We as asset managers have the right kind of investment offering to support such an approach, what better container is there than Ucits?

Ruppert: The funded status of many people under first-pillar pensions is now suspect and this enhances the importance of the second and third pillars. I agree, Ucits is a great vehicle and construct, but if you go back to some behavioural finance, most individuals are delegators and therefore outcome-oriented products and education makes a lot of sense to try and bridge this gap. But, as I said earlier, without the right fiscal incentives and regulators and governments working towards this, you have to do it on your own and that doesn’t solve the problem.

Corley: Jean-Baptiste, others and myself worked on the paper and on the think tank around it to get affordable long-term savings for retirement. I prefer to phrase it that way rather than saying pensions, because once you talk about pensions you get into the social policy aspect of things. What we should encourage are affordable, accessible, long-term savings for retirement. We need the industry standards that we talked about in the think tank report, we also need a very cost-effective infrastructure because over a 20- or 30-year accumulation, and then a 20- or 30-year decumulation period, the effect of the difference between 1% and 2% reduces your cash flow in retirement and your cash pot on accumulation by a dramatic degree.

So we have to work out how to do this cost effectively, and that means a lower cost of distribution, a lower cost of access to the decision-making individual and a lower infrastructure cost. It’s not just about the investment solution; it’s about the holistic package that we’ve got to deliver.

Parker: When talking about pension issues one has to emphasise the demographic problem. With changing demographics, not just in Europe but globally, it’s worth reminding ourselves that pensions in Europe were introduced by Bismarck, who said you can have a pension when you’re 65. At that time longevity was 35, so actually introducing a pension at 65 was pretty academic. Now if you’re Greek and you get a pension at 55 and you live to 80, a pension is very real.

Another thing is that given the pressure on government finances, which I don’t think is a short-term issue, you can forget any provision from the government for pensions. I can guarantee government pensions will become less generous, so therefore there will be much more reliance on private savings, private pensions. There are two good models for a private pension system that works well – one is Chile and the other is Australia.

Helderlé: In terms of market maturity, I don’t think it’s right to view the European market as a mature market. The asset management industry is not going to stop just because people retire.

Retirees will be very concerned about capital preservation and so they will look for a well-managed investment solution that generates return with an absolute-return type of performance.

There is, therefore, a huge opportunity for the industry to address these types of clients who are a big part of the current and future demographic in Europe. It’s a big opportunity for revising the way pension schemes are structured and delivered and at the same time it’s a great opportunity for the industry to develop new solutions and address these people’s future needs now.

Ruppert: I would say Europe is an immature market as far as long-term savings go. If you look at savings per capita in the United States it’s about €27,000 per person. In Europe it’s a little over €6,000 per person. That gap is a huge opportunity.

 Corley: There is a big role for good-quality, right-priced, Ucits-type, long-term savings for retirement. But we also need to think about hybrids. We need to recognise that in many of the member states, there is a requirement for a base guarantee, which we’re not going to offer because we don’t have a balance sheet. So the idea of having a hybrid solution, which combines a base guarantee and an affordable, accessible top-up, is a very smart thing to do.

Parker: Yes, but there are two important things to take note of. First of all, it has to be tax efficient, and secondly, people have to be motivated to put money into it.

Ruppert: Yes, the right incentives have to be there.

Corley: The tax issue was going to be my next point, because we did a survey recently and found that the most important element to get right was not product design, but tax incentives. Of the respondents, 76% said getting the tax regime right was paramount.

De Franssu: Yes, but of course we’re limited in Europe because of the absence of tax harmonisation. We need to look at this.

Ruppert: The tax element is extremely important. Look at the defined contribution plan system in Japan; it entered with such fanfare and it’s gone nowhere because there’s no tax incentive.Parker: People are not motivated to put money in.

Corley: Taking the US and Australia as examples, what about auto enrolment and auto escalation? Those are features that need to be introduced in order to give the retiree the chance of a decent pool of money to fund an income.

Du Toit: The hybrid is an elegant solution but we, as the asset management industry, have to then be very careful to understand the conditions which have been explained to the client by the insurer. Ultimately, in this situation, it is often the insurer who determines these conditions.

We’ve seen this in a number of places in Europe now, where there is a huge demand for some form of underwriting. But when you go in, dig around and work with a partner, only then do you realise how complex it is. You have to always keep in mind that it is your brand that is being sold, not the wrapper’s brand. The wrapper just provides a sales force. So the obligation is on the industry to get to grips with this and we all have to invest in our businesses when it comes to capacity.

Asset managers like Elizabeth’s have lots of capacity, but the more manufacturing-oriented businesses cannot be naive about these ventures. In general we really must stick to what Eric said: keep on doing what we’ve done well in the past and remember there is a higher savings rate coming down the line. People are putting less money into real estate in Anglo Saxon markets. There are also a lot of new savings pools coming from the emerging countries that we can access from a strong European base.

De Franssu: There are good prospects in the new, so-called emerging countries and good prospects in the old industrial countries as well, where savings rates are improving. There is even a positive savings rate in the US, which is a new development.

Du Toit: In addition, investments are becoming more global in nature, and those of us who have installed the right infrastructure can benefit very significantly from this.

Helderlé: And we have a huge competitive advantage: Ucits.

Parker: It is interesting that in Asia and Latin America, all the funds business wants is Ucits, and if they have Ucits funds, it allows them to do business outside of Europe.

Corley: Exactly. But we’ve got to be careful about how we treat the Ucits brand and about how the eligible instruments in Ucits III and IV are used. An element of self-policing is required by the industry, because it’s not there at the moment.

Servant: Ucits IV can be a formidable instrument if, first, regulations are fully aligned in the different European countries and, second, tax policies are harmonised. If it’s not the case and despite the fact that you have Ucits IV, Europe will remain a fragmented market where you still need people on the ground in the different countries.

The advantage of the US mutual fund is that once you’ve set up the fund you have a market of 300 million clients with the same tax treatment, so it’s a much more efficient system. Until we have completed fiscal harmonisation in Europe we are still not going to be capable of using the full strength of the Ucits regulations.

De Franssu: I agree with you, in the long-term, although at our current stage of development it does not seem to be a major obstacle.

Corley: It’s a complication, but not a major hurdle. We also need to be careful with Aifm [Alternative Investment Fund Managers Directive], that there isn’t a ‘read across’ into Ucits. The one thing Europe still has going for it is that it is a really great competitive centre. With more than 20 years of experience with Ucits we need to be wary of a contagion effect. If we’re not careful, Aifm could lead to some assumptions about how the Ucits regulations should be interpreted, which is a real risk to the industry. We have to be most vigilant about that.

Parker: Indeed, we must not allow that to happen.

©2010 funds europe