The end game
Written by Nick Martindale
Nick Martindale explores how various European countries are adapting their at-retirement provisions in the face of economic and longevity challenges
The various European countries may all have different approaches and histories when it comes to pension provision but all are facing a similar challenge: how to finance popu-lations that are likely to live considerably longer than previous generations, against the backdrop of a global economic crisis.
How countries approach this issue depends initially on the provisions offered by the state. Nations such as Spain, Portugal, France and Greece have traditionally had far more generous set-ups than the UK, Germany and other northern European states. Fundamentally, though, there is now a trend – with the exception of France, which recently reduced its retirement age from 62 to 60 – to make people work for longer. The Netherlands’ retirement age will increase to 67 by 2023, while Ireland’s will hit 68 by 2028 and the UK’s 68 by 2046.
“Despite large variations in life expectancy from country to country, few countries in Europe have ever had a state pension age of less than 60 and no country in Europe above 70,” says Buck Consultants technical services manager Gary Crockford. “A lot of European countries used to have different retirement ages for men and women but equality legislation has put an end to this.”
In the main, occupational schemes have developed in response to these various provi-sions, suggests Aon Hewitt partner Kevin Wesbroom, particularly when it comes to when – and how – individuals are able to access retirement savings. “Clearly the more generous the national system the less the need is to protect people and force them to do any particular activity when they come to retire,” he says.
European nations vary in how benefits can be taken at the payout phase. Mercer‘s senior associate in the Retirement Resource Group, Anne Bennett says in some countries – such as Belgium – the norm is for the whole benefit to be taken as a lump sum. “By contrast, the Netherlands does not permit any of the benefit to be taken in cash form,” she says. “Denmark allows the member to choose between cash, lifetime pension and a form of phased payment. In other countries, for example the UK and Ireland, a mix of cash and pension is the norm.”
Many of the Eastern European nations are only just beginning to wrestle with some of these issues because occupational schemes are relatively new, she adds, while in Ireland whether members should be able to access voluntary contributions early is a live debate at present.
In some cases changes to state retirement age and restrictions on early retirement opportunities are accompanied by moves to increase the age at which benefits can be drawn from occupational schemes. A recent court decision means this is now the case in Germany, says international law firm Eversheds partner in the pensions team Liz Fallon, with the age for both state and occupational schemes rising from 65 to 67 between 2012 and 2029. “This goes one step further than in the UK, where the increase in state pension age does not have any automatic impact on the individual’s retirement age from their employer’s pension scheme,” she says.
Another example of this is Belgium, says Bennett, where bridging pensions, which have traditionally been used to fill the gap until state pension is payable, were previously a common feature. “Norway is another example, where a flexible state retirement age of 62 to 75 has recently been introduced and occupational plans amended to reflect this,” she adds.
In the vast majority of countries defined contribution schemes are now the norm. In the UK, the requirement which existed until recently that individuals had to use any amount not taken as a lump sum to buy an annuity has seen a move towards a ‘lifestyling’ approach as individuals approach retirement age. “This means the investment portfolio moves out of riskier assets such as equities and towards safer assets such as bonds and cash as an individual approaches retirement age,” says Fidelity Worldwide Invest-ment head of marketing, DC & Workplace Savings Rob Fisher.
Recently, though, the UK has followed the Irish model, where individuals can opt to do as they please with their funds on retirement as long as they have a certain amount set aside so they will not need to fall back on the state, and do not need to purchase an annuity at all until they are at least 75 years old. This has led to a move towards lifestyling based around a target date rather than a specific retirement age.
“The UK has been at the forefront of lifestyling,” says Wesbroom. “Some of the Scandinavian countries don’t incorporate lifestyling at all and have much more of an aggregate investment strategy.” New models around savings and annuities are also emerging in the Far East, he adds.
Countries wrestling with this debate can learn from the UK and Irish models, suggests Russell Investments head of consulting, EMEA, John Stannard. “Russell’s UK research suggests that the alternative to an annuity – adopting a balanced equity drawdown strategy at 65 rather than annuitising – can increase aggregate pension savings by a half.”
The move towards defined contribution schemes has alleviated the pressure to an extent on schemes to guarantee payouts to members, although many former defined benefit schemes will continue to impact organisations for decades. The Dutch model, though, may offer something of a middle ground between defined benefit and contribution schemes, suggests Cardano chief executive and professor of risk management at Vu University in Amsterdam, Theo Kocken.
“In the Netherlands people saw it was not sustainable and they started to postpone inflation corrections in the early 2000s, which avoids having more deficit going to the younger generations,” he says. “It’s a very healthy debate but it’s better than it is in the US or UK where there are deficits which are more or less ignored.”
The Dutch system – based around the concept of “defined ambition” – also appeals to James Walsh, senior policy adviser: EU and international, at the UK’s National Association of Pension Funds. “They have conditional indexation so if economic conditions are tough and investments haven’t performed well then the scheme can decide not to provide an inflation increase. That may sound uncomfortable for pensioners but it does mean that the scheme is much more sustainable over the long term,” he says.
In the future, the move in many European countries towards abolition of retirement ages is likely to see a trend towards allowing individuals to access retirement savings in stages. This is already the case in the UK and Belgium, but a recent ruling in Sweden found compulsory retirement at 67 was ustifiable, says Fallon.
In Ireland, too, employees must take retirement benefits in full when they cease to become members, whether in the form of a lump sum, annuity or transfer to an approved retirement fund, says PensionSource, the Irish sister company of Source Pensions, director Áisling O’Malley. “In order to provide alternative options we would require flexibility for the member to take their tax-free cash at their chosen retirement date,” she says. “Members should then be allowed to continue contributing to the scheme to fund an annuity or approved retirement fund when they retire altogether.”
The emergence of more flexible products such as workplace ISAs might help to provide such flexibility, alongside more conventional pensions. Fisher, for instance, points to a product available to customers in Germany which is a hybrid pension and ISA. “It allows you to invest every month as you would with a pension or ISA,” he says. “They allow you to withdraw your money after 12 years, although if you do this before the age of 60 you lose the tax advantages.”
There are also lessons, though, from other European countries here. “If there is no tax incentive on contributions and no restrictions in relation to cashing in, this is going to leave to a situation where the ISA will have been drawn down long before retirement age,” says O’Malley. “Many company directors in Ireland have drawn on their tax-free options at 50 over the last couple of years and will not build up sufficient funds over the next 10-15 years to have a comfortable retirement.”
Written by Nick Martindale, a freelance journalist