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Friday 18 October 2019

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Growing the second pillar

Written by Ilonka Oudenampsen
November/December 2011

Ilonka Oudenampsen meets with the EFRP’s Chris Verhaegen and Matti Leppälä to discuss the importance of occupational pensions and the EFRP’s plans for the near future

After 14 years as secretary general of the European Federation of Retirement Provision (EFRP), Chris Verhaegen will be moving on as the chair of the Occupational Pensions Stakeholders Group at the European Insurance and Occupational Pensions Authority (EIOPA). Together with her successor Matti Leppälä, who was previously director – international, investment and legal affairs at the Finnish Pension Alliance TELA, she looks back on the growth of the association and current and future challenges the European pensions sector is facing.

This December the EFRP is celebrating its 30th anniversary. Having started off as an additional task for the secretariat of the association’s British member, the National Association of Pension Funds, the EFRP has since then become well established in Brussels. “Looking back, the most strategic issue the EFRP has accomplished over the years is that there is now a separate and distinctive European legislative framework for pension institutions in the second pillar, for occupational pensions,” Verhaegen says.

The establishment of pension funds as financial institutions has been acknowledged by an IORP directive. Despite having welcomed the IORP, the EFRP is also aware the directive will mean more work and challenges for the association.

Verhaegen believes the directive is not perfect and has to come under review, although the EFRP is not convinced of the urgency of the process. However, the European Commission has requested a review and EIOPA has recently launched the second part of a consultation on the IORP directive, which has been keeping the European pension industry busy.

One of the main issues is whether IORPs should also fall under the new Solvency II regulations. The EFRP strongly opposes this and Verhaegen notes the concept was developed eight or 10 years ago, when the economy was completely different. Rather than Solvency II, she would like to see different solvency rules for pensions and an IORP directive II that also takes into account defined contribution pensions.

“How you organise the second pillar is a policy choice. We have members where the occupational pensions are not so well developed and if they are developed they immediately start on a DC-oriented scheme. And for DC all those solvency rules are much less com-pelling,” she explains.

A European model or structure on pensions is vital for the pensions industry, Verhaegen says, so that the member states would be in agreement that there is a first pillar, a second pillar and a third pillar. At the moment not all member states agree on that and there is not even a proposal from the commission.

“It should not take the form of a directive or anything legal, but a working document of the commission would already be something. That can then later on be turned into a communication. But member states are wary of discussing that.”

As a lobby association representing the European pension industry, the EFRP’s membership consists of member states’ pension fund associations, all of which have different needs and issues. The most drastic case is Hungary, where the state has nationalised assets from private pensions in order to square its accounts.

Leppälä elaborates: “In many cases the sustainability of public finances is a problem and there is this urge to shift back to the first pillar, the state, and to have the funds under the control of the state and thus alleviate those problems. But countries have moved into more sustainable systems by having private funds and private systems that should be taken into account when looking at the sustainability of these economies.”

According to him the big challenge is to put systems in place that provide good results on a general basis. Verhaegen adds that it is also an enormous task because governments have never told people.

“They have raised generations with the idea: the pensions, that is the state and you can rely on the state for your social security and a decent pension. And now all of a sudden they have to say: we will only give at best something basic and for the rest you have to do it yourself. This is a message that nobody wants to give, not even the govern-ments. And now this message has to be nuanced.”

At the moment the main focus of the small EFRP team is the 500 page EIOPA document on IORPs, but they are also keeping an eye on other financial market rules and regulations that are under development, such as the OTC derivatives legislation and the financial transaction tax.

“In itself these can be very good, but they can also mean very big costs for the pension funds. So is it the right kind of security, what is the total amount of costs and what effect will that have on the returns?” Leppälä asks. “Because if we have very high costs and very low returns, we either need to raise the contribution levels drastically, which is not likely, or you have to cut the benefits.”

Verhaegen adds that there has also been more awareness of costs over the last five years. “When we had high returns, nobody cared about the costs. But now, if your return is one or two per cent, you care about costs. And that is also becoming of great importance for the individuals and that’s why we read now that in DC schemes the costs have to be better disclosed, transaction costs, and not only the management fee but also other costs.”

Apart from the IORP directive and other legislation, another important challenge for the association is enlargement. They hope to add Central and Eastern European countries to their membership and to help them to develop their systems.

The EFRP has therefore estab-lished a Central and Eastern European Countries Forum (CEEC Forum) where they try to have a dialogue with these countries. Hungary, Croatia and Romania are already members, but the association hopes that other countries will soon join too. “We try to have a dialogue with them, but they always say ‘we are different’. But there is a big difference between
the UK and France too, and they are also members of the EFRP, but we are also working with them,” Verhaegen notes.

Leppälä believes that it is vital for all pension funds to also be represented on a European level. “Occupational pensions are a vital part of the total pension provision in many countries. It is not something that is in addition. That’s why we have and will be talking about this holistic approach to pensions and to have a good understanding of what vital part they play. That’s why you shouldn’t jeopardise the existing well-functioning pension systems and you should enable the good development of these.”

He adds many issues that are important to EFRP members are global and this needs to be recognised (in order for the association to lobby effectively). “If in fact something has been decided at a global level and it has just been implemented at European level, it’s not adequate or not enough to just influence the European Commission or the parliament, because they are not really deciding on the issue. It’s a new world to some extent and I think we still don’t know how to deal with that.”



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