Magazine Issues » June 2021

Association column: Security in old age - Europe v USA

Bernard_DelbecqueAmerican citizens are well aware of the shortcomings of the US social protection system, and this has led many of them to save money for healthcare, education and retirement, and to trust financial markets with their savings.

In Europe, the vast majority of households, especially among the low-income earners and vulnerable groups, do not perceive the difficulties they will face to maintain their standard of living when they retire. They believe that the state will take care of their financial security in old age. In addition, not many Europeans understand the merits of diversifying their savings towards capital market instruments to achieve a better return.

Hence, achieving financial security at older age can be considered as a key policy issue in Europe. Gabriel Bernardino, the former chairman of EIOPA [the European Insurance and Occupational Pensions Authority], has said we need a Greta Thunberg moment in the area of pensions.

Differing retirement landscapes
Only a few member states in Europe have reacted to the ageing population challenge by developing a system heavily geared towards funded pensions. This is particularly true in the Netherlands, Sweden, the UK and Ireland. Even if the pension system in these countries may have some limitations, it is in a much better position than in the EU countries that are still based mostly on pay-as-you-go (PAYG) pension systems.

In these countries, policymakers are facing a dual challenge: the challenge of maintaining adequate financial security in an ageing society, and the challenge of securing the sustainability of PAYG pension systems and public finances in general.

It is encouraging that the High-Level Forum on the CMU and the European Commission in its new CMU action plan have put forward some very good solutions to supplement state pensions, including through auto-enrolment and the development of pension dashboards and pension tracking systems.

It is against this background that Efama [the European Fund and Asset Management Association], with Insurance Europe and PensionsEurope, has decided to launch an annual European Retirement Week to debate the future of pensions in Europe and boost people’s awareness of the need to save for retirement. It will take place in the week of November 29 this year, with the support of a number of other organisations.

Securing the future
What is required is a holistic approach that should rest on two central pillars: proactive pension policies, and financial literacy and investment education. Actions in these areas should aim to overcome the inertia that prevents the vast majority of European citizens taking responsibility for their own future wellbeing.

So, the policy challenge is to find solutions that could prompt people to adopt a new mindset, to change their behaviour.

In addition to the measures needed to boost retirement savings, new initiatives should be taken to improve people’s financial literacy and investment education. In order to achieve this, greater knowledge of basic financial concepts such as real return, compound interest and risk diversification is needed. Misconceptions concerning financial markets should also be clarified, while promoting an understanding of investment and saving decisions on society and the environment.

By Bernard Delbecque, Chair, Occupational Pensions Stakeholder Group, EIOPA, and Senior Director, research, at Efama

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