The financial wealth of European households would be an estimated €1.2 trillion higher if savers had reduced their bank deposits over the past decade and invested in stocks and bonds, EU officials were told.

Bernard Delbecque (pictured), senior director for economics and research at the European Fund and Asset Management Association (Efama), told a recent high-level occupational pensions conference that this missed opportunity was due to the vast proportion of savings that households maintain in bank accounts.

Delbecque, who is also chairman of EIOPA’s occupational pensions stakeholder group, told officials this additional wealth could have been created if households had reduced their bank savings from 41% in 2008, to 30% in 2019, and instead had invested in capital markets.

“This is a huge loss of wealth and potential retirement income,” he told the 10th anniversary conference of EIOPA – the European Insurance and Occupational Pensions Advisory Authority – where he had been asked to address three issues.

He also indicated how the high level of bank savings could hinder the European post-Covid-19 recovery.

“The Covid crisis has led many households saving a lot during the spring of last year because of the uncertainty, the virus fear and the lockdown measures.  Hence, the strength of the economic recovery will depend on whether consumers continue to stockpile cash or start to spend again,” he said.

Here is the full text of his responses, which also cover environmental investing and the potential for digitalisation to increase pensions savings.

How can we motivate occupational pension funds to change their investment strategy in order to achieve the goals of the European Green Deal?

Bernard Delbecque: Pension funds can help contribute to the European Green Deal by managing the impact of sustainability risks and opportunities on the financial performance of their investment.  And for sure, the current pandemic highlights the new types of risks that weigh on the future of our planet. 

This awareness – and the new SFDR disclosure rules – will accelerate the demand for change among pension fund members because pension funds will need to explain how they integrate ESG factors in their investment strategy. And this will empower end-investors and increase their confidence in sustainable investment.

This said, we hope that the disclosure rules will be kept simple to ensure that savers receive reliable, comparable and meaningful information.

It is also important that the board members of pension funds develop the skill sets to understand ESG investing.  Some feel there is a conflict between the best investments for the pension fund members and ESG investing.  The perception that there is a trade-off needs to be changed.  It should be clear that sustainability risks may affect the value of companies in the long run.

Asset managers have also a responsibility to support the Green Deal and to offer ESG investing solutions to pension funds and other investors. The “green” taxonomy is an important framework to make investment flow in the right direction.  However, we are still waiting for the level 2 text to clarify the technical criteria.  Hence, overcoming the political impasse with a science-based approach and finalising this text should be the priority at this stage. 

Asset managers also need consistent and high-quality data to evaluate their portfolio holdings on ESG criteria.  But certain conditions must be in place.  The Non-Financial Reporting Directive review should clarify and expand the scope of reporting companies, in particular to cover both public and private markets.  Sustainability reporting standards should be harmonized at the European and global level.  And the Single European Access Point and a supervision framework for ESG data providers are needed to improve the availability, accessibility, and transparency of ESG data, research and ratings.  

What is the potential of digitalisation to increase savings in supplementary pension schemes (occupational and personal)?

Bernard Delbecque: The potential is enormous to engage people, especially millennials, on the topic of pensions because digital tools allow better and cost-effective communication. This is a very welcome perspective as we are moving to a world of greater risk transfer from DB to DC schemes, and consumers need to be more engaged with their retirement savings as a result.

One of the best ways in my view to engage millennials is to develop mobile apps to check the amount saved and play around with different contributions levels and retirement ages.  By doing this in an interactive and friendly fashion, these apps can help manage expectations around pension savings and promote increasing contributions.

The good news is that there are already tech firms that can create better customer experience via digitalisation.  I have in mind an investment app that shows investors all the companies they own and that enables investors to vote on ESG issues they care about.  This makes it easy for investors to better connect with abstract investment in real world companies.

I have three other comments.

Firstly, I would like to congratulate again EIOPA for having argued that the PEPP could be distributed online and that the PEPP KID and Benefit Statement could be presented using digital means.  This approach is innovative in the area of regulation, and critical for the PEPP to be of interest to millennials.  This will also allow providers to deliver much of their offering digitally and therefore help reduce costs.

Secondly, digital tools could also allow to deliver advice cheaply and at scale.  However, further development is still needed to ensure that robo-advisors can deliver the same quality of service that face-to-face advice delivers.  Existing full-service advice still has a key role to play for consumers and this is the reason why we strongly believe that the cost of initial advice should be excluded from the PEPP fee cap.

Finally, digital tools also allow to develop pension tracking systems for people to have a simple, attractive and comprehensive view on their income at retirement.  I have no doubt that EIOPA’s work in this area will encourage many people to save more for retirement.   

Is it not better to spend the money now than to invest it for the future in the capital market with its erratic or low returns?

Bernard Delbecque: The Covid crisis has led many households saving a lot during the spring of last year because of the uncertainty, the virus fear and the lockdown measures.  Hence, the strength of the economic recovery will depend on whether consumers continue to stockpile cash or start to spend again. 

However, we should not conclude that people should spend money because capital markets are supposedly erratic and unable to generate returns. 

The problem is not that people are saving too much.   The problem is that the vast majority of people prefer saving via bank deposits and guaranteed products because they believe that investing in capital markets are too risky.

This perception has a huge impact on the ability of people to grow their savings and protect them against inflation.  Two examples can highlight this point:

• Assuming a 2% inflation rate, do you know how much 10,000 euros will allow you to buy in 10 years if this money is left in a bank account offering zero interest rate?  8,200 euros!  This represents a loss of 18% in real terms!
• Following this reasoning, we have estimated that the financial wealth of European households would have been 1.2 trillion euros higher if households had gradually reduced the share of deposits from 41% in 2008 to 30% in 2019 by investing in stocks and bonds.  1.2 trillion!  This is a huge loss of wealth and potential retirement income. 

This is a huge problem at the macro level.  An excessive amount of savings kept in bank deposits typically tends to weigh on interest rates, to curb growth and to weaken the potential of the economy. 

Therefore, to secure a strong and sustainable recovery, which is the theme of our panel discussion, it is crucial to incentivize European households to put their savings to better use by investing in capital markets.  This would help savers secure better retirement income. This will also offer companies broader opportunities to obtain funding and this will boost the productivity and competitiveness of the European economy.   This should be the central goal of the CMU.

The key to achieve the pursuit of these goals is to increase European citizens’ financial literacy, adopt proactive pension policies, provide more favourable tax treatment for retirement savings and long-term and green investment products, and measure progress towards greater household participation in capital markets at national level to incentivise Member States to take action to support the future financial well-being of their citizens.

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