Anne Maher Chief Executive The Pensions Board Ireland 6 April 2006 Pensions 2006 – Is there real change?

Anne MaherChief Executive

The Pensions BoardIreland

6 April 2006

Pensions 2006 –Pensions 2006 –

Is there real change?Is there real change?

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AgendaAgenda

Increase in regulation

Pension reform/moving risk

EU Pensions Directive – as catalyst for change

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Increase in RegulationIncrease in RegulationWhy regulation is necessary

“Pension funds are set up to serve as a secure source of funds for retirement benefits” (OECD)

And so we regulate to• Control commercial relationships between parties whose

knowledge or power is unequal• Avoid risk of market failure of a financial institution• Avoid abuse of Government tax encouragements• Foster public trust in pension provision

And not to• Thwart good pension provision

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Increase in RegulationIncrease in RegulationIssuesIssues

Recent ‘scandals’ led to mass of new regulations covering pension plans, providers, advisers and accounting requirements

Loss of balance between necessary regulation and unnecessary cost

Different focuses needed for DB and DC Wide variation between countries Is regulation really effective? Regulatory excess blamed for ‘murder’ of pension

plans

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Increase in RegulationIncrease in RegulationIs Regulation ‘Murdering’ Pension Plans?Is Regulation ‘Murdering’ Pension Plans?

Employers say that new UK solvency requirements and Pension Protection Fund are driving DB plan closures

However If regulator suggests weakening regulation there

are cries of potential misselling Are employers really more concerned about actual

COST of pension provision? “Income from pensions down by 80% in 10 years” And do employees really value pensions?

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Increase in RegulationIncrease in RegulationConclusionConclusion

Regulation is necessary

But Regulators/supervisors should:

• Avoid knee-jerk regulation• Review regulatory regimes on regular basis• Test effectiveness• Consider indirect impacts

Regulation is one influence on employer decisions but not the big one

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Pension Reform/Moving RiskPension Reform/Moving RiskPension Reform

Increasing recognition of pension issue at national and individual levels

Is happening in almost every country Responses being considered

• Raising retirement age• Increasing contributions/taxes• Reducing benefits• Voluntary or mandatory?

Germany, US, UK, Norway, New Zealand, Ireland…….

all considering major reform

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Pension Reform/Moving RiskPension Reform/Moving Risk

What is Risk? The prospect of some event occurring which will

cause disruption to the expected view of the future Hazard, chance of bad consequences, exposure to

injury or loss Main pension risks are:

• Investment • Longevity• Market failure• Fraud

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Moving Risk

Three parties

• State

• Employers

• Individuals

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Moving Risk State role

• Provide framework • Provide supervision to protect beneficiaries• Should it have guarantee role for mandatory systems?• Seen as target for blame, for example:

“Giving misleading impression on security of pension schemes” (UK)

“Failure of Government to implement European law to protect workers pensions” (UK)

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Moving Risk States concerned about:

• Sustainability of State systems• Perceived guarantees• Effect on the markets (for example, LDI and long dated

bonds)• Effect on overall economy• Social effect

States trying to shift risk

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Pension Reform/Moving RiskPension Reform/Moving RiskPensions Expenditure as % GDP

France 12.6%

Germany 12.5%

Ireland 3.7%

Italy 15.7%

Netherlands 10.6%

Spain 8.4%

Sweden 13.0%

United Kingdom 11.6%Source: Eurostat. Figures 2003

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Pension Reform/Moving RiskPension Reform/Moving RiskMoving Risk

Employer role• Key to private pension system• Increasingly ‘reluctant’ involvement• Favour DC over DB

Employer concerns• Effects of regulation and accounting standards on ability

to pay dividends, change ownership, raise loans (and can even trigger company collapse)

• Volatility and cost• Breaking a promise?• Employer competitiveness and national competitiveness

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Moving Risk Employers

• In UK closing DB schemes to new entrants, future accruals or even totally

• In Ireland many DB schemes change to DC for new entrants

• Netherlands employers generally holding on to DB• German employers setting up CTAs (or maybe IORPs?)

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Pension Reform/Moving RiskPension Reform/Moving RiskMoving Risk

Individual Role• To consider his/her position

• In DC individual carries the risk

• Now demands flexibility and choice

Individual Concerns• Lack of expertise

• Inability to bear risk

Individual• Is likely to have increasing responsibility, for example ‘quasi

mandatory’ approach in New Zealand and being considered elsewhere

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Conclusion

States are unlikely to take on more liability

Global shift from DB to DC unlikely to reverse

So shift of risk to individual is likely to continue

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EU Pensions DirectiveEU Pensions Directive

Progress

Directive supposed to be implemented by September 2005

In January 2006 only 10 Member States had notified full implementation of Directive

Discriminatory taxation is still an issue in some Member States – 18 identified by EFRP

Protocol between supervisors has been adopted

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Types of Cross-Border IORPs

Existing plans which relocate

New employer sponsored cross-border plans

New commercial cross-border arrangements

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Who is Interested

Multinational employers

• For pooling or merging

Employers with existing pension plans

• For regulatory or financial advantage

Commercial IORPs providers

• Looking to sell pensions cross-border

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Influences on Change of Location

Tax arrangements

Investment opportunities

Pension tradition/services available

Availability of tried and tested pension skills/resources

Regulatory/compliance structures and environment

Ability to accommodate countries outside EU

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EU Pensions DirectiveEU Pensions Directive Pensions Directive

• Is first step in single market for pensions• Provides a framework for change• Investment/asset pooling is happening• Liability pooling and centralised administration are next

steps• And there will be increased EU-wide competition

amongst providers

Full Pan-European Pension Funds• Will take time• But WILL come about

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Pensions 2006 – Pensions 2006 – Is there real change?Is there real change?

In conclusion

We are seeing change

Change in regulation, shift of risk and (tentative) moves to EU single market for pensions

These affect plan sponsors, beneficiaries and the industry

And will lead to a very different pensions landscape

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Documents

Anne Maher Chief Executive The Pensions Board Ireland 6 April 2006 Pensions 2006 – Is there real change?