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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Pension Reform/Moving RiskPension Reform/Moving Risk
Moving Risk
Three parties
• State
• Employers
• Individuals
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Pension Reform/Moving RiskPension Reform/Moving Risk
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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Pension Reform/Moving RiskPension Reform/Moving Risk
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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Pension Reform/Moving RiskPension Reform/Moving Risk
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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Pension Reform/Moving RiskPension Reform/Moving Risk
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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EU Pensions DirectiveEU Pensions Directive
Types of Cross-Border IORPs
Existing plans which relocate
New employer sponsored cross-border plans
New commercial cross-border arrangements
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EU Pensions DirectiveEU Pensions Directive
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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EU Pensions DirectiveEU Pensions Directive
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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