EFAMA 1 Responsetothe EuropeanCommissionsGREENPAPER towardsadequate,sustainableandsafeEuropeanpensionsystems Longversion

[EFAMARegisterIDnumber:337367069224]

KeyPoints
a. Giventhefinancialcrisisanditsimpactonthepublicfinancesandtheimplicationsofageingon future public spending, action is needed to encourage people to save more and longer for retirement and thereby strengthen the adequacy of pension systems. To increase the participationofhouseholdsinpensionschemes,avarietyofmeasuresarepossible,andcurrently appliedbysomeMemberStates,suchasmandatoryparticipationinpensionplansandautomatic enrolmentwithanoptoutclause. b. In order to adapt in time their saving behavior, people should be fully informed about the financialimplicationsoflivingsignificantlylonger.EFAMAmembersbelievethattheEuropean Commissionshouldtakeseveralinitiativestocontributetoraisinghouseholdsawarenessabout theirneeds,notablyby Developing a methodology to estimate the scale of the pensions gap at an aggregated nationallevelanditsimplicationsforindividuals; Disseminating statistics about the oldage pension replacement rate to inform Europeans abouthoweffectivelytheirpensionsystemprovidesincomeduringretirement; Promotingfinancialeducationtohelpindividualsassesstheirneedforretirementsavingand facilitateinformeddecisions. c. Thereisnojustificationforthesametypeofsolvencyrulesforpensionfundsasforinsurance companies. Insurance companies and pension funds offer different pension products, and the differencesbetweenproductsrequiredifferencesinregulatoryrules.Aonesizefitsallapproach

EFAMA is the representative association for the European investment management industry. It represents through its 26 member associations and 45 corporate members more than EUR 13 trillion in assets under management,ofwhichapproximatelyEUR7.5trillionwasmanagedbyapproximately52,000fundsattheend of June 2010. Just under 36,000 of these funds were UCITS (Undertakings for Collective Investments in TransferableSecurities)funds.FormoreinformationaboutEFAMA,pleasevisitwww.efama.org.

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would result in numerous adverse consequences for pension funds, beneficiaries and the economyasawhole. d. The increasing role played by definedcontribution (DC) plans can be seen as a positive developmenttothepreparationofEuropeanpensionsystemstofuturedemographicpressures. This will contribute in particular to provide DC plan members with a valuable supplementary source of retirement income. DC plans can also offer their members significant advantages. They give individuals control over their pension assets, allowing them flexibility and choice to adjust their pensions in line with their needs and preferences. They allow clear and reliable informationaboutthelevelofretirementwealthaccumulated.DCplansalsohaveadvantages when it comes to portability of pension rights. What's more, they can be structured along a broadriskreturnspectrumtomeetdifferentriskprofiles. e. Given the longterm savings plan characteristics of DC plans, asset managers can structure DC investmenttomaximizereturns,diversifyportfolios,managerisksintheaccumulationphase(for instancethroughalifecycleapproachtopensioninvestment)andthedecumulationphase(for instance by proposing drawdown plans), and specify appropriate default options to help those investors who do not make an investment choice. This expertise and the experience accumulated in managing UCITS the most successful panEuropean investment vehicle in Europeandaglobalbrandintheworldmakethe caseforallowingassetmanagerstoplaya biggerroleintheEuropeanpensionmarket.AnextensionofthescopeoftheIORPDirectiveto create a level playing field between pension funds, insurance companies, banks and asset managerswouldcontributetothisobjective. f. Another key priority of the Commission should be to develop a regulatory framework for pan Europeanpensionplanstoallowindividualstoenjoyportablepensionplans,fosterjobmobility, stimulatecompetitionandreducethecostofsavingforretirement.AgreeingonpanEuropean pension plans is possible without impeaching the principle of subsidiarity as this would not required harmonizing the existing national pension regimes. What we propose is to create an additional choice for retirement saving, i.e. a robust personal retirement plan, with unified standardsacrossEurope. g. To show that the concept of a panEuropean plan can be translated into a concrete proposal, EFAMA has published a report calling for the introduction of Officially Certified European Retirement Plan (OCERP). In a nutshell, an OCERP is a personal retirement plan based on individualretirementaccountsandpersonalownershipofpensionassets.AnOCERPallowsfor adequateinvestmentchoiceandcomplieswithasetofunifiedstandardsacrossEurope.When certifiedbyacompetentauthorityinonememberstate,anOCERPcanbeofferedacrossEurope by insurance companies, banks and asset managers. To create a legal framework for pan Europeanpensionplans,theCommissionshouldconsiderdifferentoptions,includingdeveloping a28thregimeforpanEuropeanpensionplans,assuggestedintheMontiReport.

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1. Introduction TheEuropeanFundandEFAMAManagementAssociationwelcomesthepublicationbythe EuropeanCommissionofitsGreenPaper,TowardsadequatesustainableandsafeEuropean pensionsystems. SecuringthefinancialfutureofEuropescitizensremainsattheheartofEFAMAsstrategy for the coming years. Hence, we look forward to working cooperatively with the Commission and offering the benefit of our experience and expertise in order that the challengesfacingpensionsystemscanbemet. WefullysupportPresidentJosManuelBarrososviewontheimportanceoftheEuropean approach to pension systems, and we trust that following the consultation period, the European Commission will take initiatives to respond to the key challenges facing pension systems.Inparticular,wefeelthatprogresscanbemadetostrengthentheinternalmarket for pensions and the mobility of pensions in a coordinated way, without forcing Member Statestoharmonizetheirpensionsystems. 2. PrioritiesformodernizingpensionpolicyintheEU 2.1. Overarchingobjectives:adequacyandsustainability (1)HowcantheEUsupportMemberStates'effortstostrengthentheadequacyofpension systems? Should the EU seek to define better what an adequate retirement income might entail? In our view, ensuring adequate retirement income is a function of (at least) four main criteria: (i) the pension benefits that can be provided by the publiclyfinanced pillar of the pension system, (i) the total value of pension benefits promised by employers in defined benefit plans, (iii) the overall value of employer and employee contributions to pension plans made during the accumulation period, and (iv) the investment returns on the accumulatedpensionassets. Totheextentthatthebenefitsofthefirstpillararetobecurtailedinmanycountriesandthe shiftfromdefinedbenefit(DB)todefinedcontribution(DC)plansisexpectedtoaccelerate, thedemographicchallengewillputEuropeanhouseholdsunderconsiderablestrain,asmany of them may have not have sufficient pension savings to finance their desired level of consumptionandlifestyle.Accordingtoarecentresearchreport,Europeancitizensretiring between 2011 and 2051 would need to save 1,900bn more a year if they hope to retire withpensionsthatwillsecureanadequatestandardoflivinginretirement.Thisisthesize of the socalled annual pensions gap. i Even if the gap varies substantially between countries,thereisnodoubtthatactionisneededinmanyMembersStatestostrengthenthe adequacyofpensionsystems.
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IngeneralwebelievethatMemberStatesstrategytotacklethepensionsgapshouldhave threecornerstones: Provideproperinformationontheadditionalpensionsavingneeded This requires providing clear and reliable information to individuals on the expected amount of the future (pillar 1) publiclyfinanced pension. Periodic individual pension statements could be sent to individuals, for example. Members States should also encourage pension providers in pillars 2 and 3 to inform participants about the contributionsoftheirplansintermsofrecurringincomestreamafterretirement. Provideproperinformationontheadvantagesofsavinglonger Member States should encourage people to start saving for retirement as early as possible, for two main reasons: saving longer increases the total amount of assets available to generate retirement income, and saving longer reduces the probability of negativeoverallreturns. ii Incentivizehigherlevelsofpensionsaving Differentrecommendationstoincreasepensionsavinghavebeenhighlightedinareport publishedbyEFAMAinMarch,RevisitingtheLandscapeofEuropeanLongTermSavings Acallforactionfromtheassetmanagementindustry iii : o Mandatory participation in pension plans: This measure was one element of Swedens pension reform in 1999, which aimed to increase the participation from Swedish people in pension saving. Under this system, a small mandatory contribution goes to the Premium Pension, a defined contribution pension scheme basedonindividualretirementaccountswhichwaspartofSwedenspublicpension system; o Automatic enrolment with an optout clause: Another wayto increasesavings is to introduceautomaticenrolmentofallcitizenswithanoptoutclause.Thismeasure willbeintroducedintheUKin2012tohelpovercomethefactthatmanyindividuals donotmakeanapplicationtojoinapensionplan.Automaticenrolmentcanalsobe combined with a system where employers have to offer longterm saving plans to theiremployeesandemployeesthechoicetooptout. o Cooperation from employers: Employers that have in place the infrastructure to collect contributions should propose to unemployed, selfemployed, or small businesses,tobenefitfromtheirinfrastructureandbargainingpowerindealingwith retirement plan providers. Also, employers would benefit from scale economies by
agreeingonpensionplansthatcanbeofferedbyagroupofenterprises.

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o Tax benefits: Granting the best available tax benefits at a national level for compulsory retirement provisions would be helpful to reduce households temptationtooptout. TheEuropeanCommissioncouldsupportMemberStatesstrategy,forinstanceby: monitoringthemeasurestakenatnationalleveltoincreasetherateofpensionssavings andhighlightbestpractices; developingamethodologytohelpMemberStatescalculatetheexpectedamountofthe futurepillar1pensionunderdifferentscenariosconcerningtheevolutionofthebenefits ofthatpillarandtherespectoftheStabilityandGrowthPact; Disseminating statistics about the oldage pension replacement rate to inform Europeans about how effectively their pension system provides income during retirement; Promotingfinancialeducationtohelpindividualsassesstheirneedforretirementsaving andfacilitateinformeddecisions. Actionisalsoneededtohelpindividualsgettingthehighestpossiblereturnontheirpension savingsconsistentwiththeirfinancialcapacityandriskprofile.Standinginthewayofthisis ahighlyinefficientpensionsmarketinEuropewherefragmentationofmarketsistoohigh, accessistoolimited,costsaretoohigh,innovationtoolowandchoicetoolimited. Toovercometheseproblems,thedevelopmentofasinglemarketforpanEuropeanpension products and a level playing field across this market would represent an important step forward towards overcoming these problems, leading to lower costs of pension provision and higher returns. We strongly believe that the European Commission has a major responsibilitytotaketostrengthenthesinglemarketinthisarea(pleaseseeourresponseto question5). (2)IstheexistingpensionframeworkattheEUlevelsufficienttoensuresustainablepublic finances? The key instrument to ensure sustainable public finances should remain the Stability and Growth Pact (SGP). We hope that the Commission package of proposals presented on 29 September2010toaddresstheshortcomingsobservedintheimplementationoftheSGPin recentyearswillanchorthesustainabilityofpublicfinances. We believe, however, that the government deficit and the annual expenditure growth should not be regarded as the only instruments available to ensure sustainable public finances.Intheshorttomediumterm,theymaybethebesttoolstoavoidexcessivedeficit. In a longrun perspective, however, given the amplitude of the expected increase in age relatedpublicexpenditure,thepublicfinanceswillbeexposedtoseverepressureinmany countries even if the debttoGDP ratio has declined towards the 60% reference value. In
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otherwords,wefearthatMemberStateswillbeabletocomplywiththeSGPrulesmerely until when the pressure from health care and retirement benefits linked to an ageing population will be too strong. If this risk materializes, Member States would likely go throughabudgetcrisisandfinancingproblemswithsevereconsequencesforstatepension systems. ToavoidthisdangerthesurveillanceofbudgetarypositionsinthecontextoftheSGPshould include a monitoring of the implicit liabilities linked to ageing, taking into account the measurestaken(orplanned)tomitigatetheimpactofageing.IftheCommissionbelieves thattheevolutionoftheagerelatedmightputatriskthesustainabilityofpublicfinancesin thelongterm,itshouldaddressrecommendations,andproposetosanctionMemberStates showinginsufficientcompliancewiththerecommendations. To help the Commission undertake this assessment, Member States should be invited to prepare and update regularly credible medium to longterm plans for debt reduction, demonstratinghowtheirstrategywoulddefusethedemographictimebomb. 2.2.Achievingasustainablebalancebetweentimespentinworkandinretirement (3) How can higher effective retirement ages best be achieved and how could increases in pensionable ages contribute? Should automatic adjustment mechanisms related to demographicchangesbeintroducedinpensionsystemsinordertobalancethetimespentin workandinretirement?WhatrolecouldtheEUlevelplayinthisregard? (4) How can the implementation of the Europe 2020 strategy be used to promote longer employment,itsbenefitstobusinessandtoaddressagediscriminationinthelabourmarket? WeunderstandwhytheEuropeanCommissionhasdecidedtotakepartinthedebateonthe retirementage.ClearlythisisanoptionthatshouldbeconsideredbyMemberStates.And werecognizethatthekeyvariableisnottheeffectiveretirementage.Itseemsalsonatural to establish a link between the evolution of the retirement age and the rise in life expectancy. We also feel that there is a high degree of interdependence between the effective retirement age and the functioning of the labor markets. From this perspective, we fully support the Commissions position that a holistic approach across economic, social and financial market policies is needed to respond to the demographic challenges. Ambitious retirementageobjectivesdolittleiftheyarenotintegratedintoamultidimensionalstrategy takingintoaccounttheparticularitiesofeachMemberStateseconomyandsociopolitical structure. Anotherissuethatneedscarefulattentionistheprospectthatageingsocietieswillreduce thepotentialgrowthrateoftheeconomy.WeinvitetheEuropeanCommissiontoanalyze thisriskcarefully,anddeveloprecommendationstomitigateit.Withoutsufficientlystrong growth, it is hard to see how all Member States will be able to grow their way out of the demographicchallenge.
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2.3.RemovingobstaclestomobilityintheEU 2.3.1 Strengtheningtheinternalmarketforpensions (5)InwhichwayshouldtheIORPDirectivebeamendedtoimprovetheconditionsforcross borderactivity? Creatingalevelplayingfieldintheoccupationalpensionmarket At present, participants in the European market for occupational pension provision face a nonlevelplayingfield.ThisisduetothefactthatrequirementstoqualifyasanIORPdiffer among categories of financial institutions. The IORP Directive requires investment management companies to establish separate entities in order to qualify for the IORP passport, whereas insurance companies merely have to ringfence IORPs assets and liabilitiesinsomeMemberStates. The prevention of asset managersand banks from competing with pension funds and life insurancecompaniesintheprovisionofpensionsolutionshasledtopensionmarketsbeing dominated by a limited number of providers belonging to the latter categories. As asset managerscanofferawidespectrumoflifecyclefunds,targetdatefundsandotherproduct solutions for different risk appetites, it is highly regrettable that the IORP Directive denies themthefreedomtoofferspecificpensionproductsaspartoftheircorebusiness,utilizing their considerable accumulated skills and experience in the management of longterm savings products. UCITS has become one of the most robust and trustworthy investment vehiclesinEurope.ThismakesastrongcaseforUCITStoserveasunderlyingproductswithin pensionproductsandplans. Basedonthesearguments,wecallontheEuropeanCommissiontostandbyitscommitment to monitor the situation in the occupational pension market and assess the possibility of extendingtheapplicationoftheIORPDirectivetoregulatedfinancialinstitutionsotherthan standalone pension funds and lifeinsurance companies. iv This would require extending Article4tootherfinancialinstitutions. Enhancingtransparencyaboutnationalregulatoryrequirements Atpresent,differencesininformationrequirementsthatIORPshavetoprovidetomembers, beneficiaries and regulatory authorities hamper the offering of occupational pension schemes on a crossborder basis and have the potential to create a nonlevel playing field betweenMemberStates. Enhancing transparency about the relevant regulatory requirements that IORPs need to follow when operating crossborder occupational pension schemes/plans would facilitate crossborderactivitiesintheareaofoccupationalpensions.
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WewouldalsostronglysupportareviewoftheIORPDirectivethatwouldaimatlimitingthe regulatoryspacefornationaldifferencesandincreasingefficiencyintheinternalmarketfor pensions. CreatinganunifiedframeworkforpanEuropeanretirementplans Sincetheprincipalobstaclestotheestablishmentofasinglemarketforpensionsrelateto pension products, a key priority of the European Commission should be to develop a regulatory framework for panEuropean pension plans. This is also a request from the European Parliament, which invited the Commission to undertake the preparation of an appropriateandfeasibleframeworkofregulationandsupervisionofpanEuropeanpension products, and stressed that an internal market for occupational and thirdpillar pensions would allow individuals to enjoy portable occupational pension arrangements, stimulate competitionandreducethecostofsavingforretirement. v Withaviewtocontributingtothedebateonwhatshouldbethebasiccharacteristicsofpan Europeanpensionproducts,EFAMAhaspublishedanumberofreportsinrecentyears.Our latest publication in this area is the think tank report, which called for the introduction of officiallycertifiedEuropeanretirementplans(OCERPs). In a nutshell, an OCERP is a personal retirement plan based on individual retirement accounts (one account per person) and personal ownership of pension assets. An OCERP allowsforadequateinvestmentchoiceandcomplieswithasetofunifiedstandardsacross Europe.Whencertifiedbyacompetentauthorityinonememberstate,anOCERPcanbe offeredacrossEuropebyinsurancecompanies,banksandassetmanagers. The proposed basic requirements for OCERPs are presented in Annex 1. We believe that those requirements for OCERPs offer a good basis for undertaking discussions on the adoption of a regulatory framework for panEuropean pension products at the European level.Andwetrustthattheobstaclestofurtherintegrationinthisareawillnotpreventthe Commissiontotakeaninitiativeinthisarea. It should be clear that we dont propose to harmonize the existing national legal regimes. What we propose is to create an additional choice for retirement saving, i.e. a robust personalretirementplan,withunifiedstandardsacrossEurope.Wealsoacknowledgethat itmaybenecessarytoaccommodatesomenationalspecificity.Thiswouldnotpreventthe full realization of efficiency gains from scale economies and competition if the national versionsofthepanEuropeanpensionplansremainsimilar.

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To create a legal framework for panEuropean pension plans, the European Commission shouldconsidertheprosandconsofdifferentoptions,including Developing a 28th regime for panEuropean pension plans, as suggested in the Monti Report Preparing a proposal for a new Directive on the regulation and supervision of pan Europeanpensionplansandtheirproviders ProposinganadaptationoftheIORPDirective 2.3.2. Mobilityofpensions (6)WhatshouldbethescopeofschemescoveredbyEUlevelactiononremovingobstacles formobility? EFAMA considers that the OCERP concept offers a response to the lack of job mobility betweenEUcountries,whichisoneofthehugeshortcomingsoftheEuropeanintegration. ItisgenerallyrecognizedthatthissituationhampersthegrowthpotentialofEurope,even moresowithintheeurozonebecauseitisalsowellknownthatlabormobilityisessentialto the good functioning of a monetary union. As job mobility would help to reap greater economic benefits from integration and make the European economy more dynamic, EFAMAproposesthattheadoptionofanunifiedframeworkforpanEuropeanpensionplans shouldbepartoftheEurope2020Strategy. (7) Should the EU look again at the issue of transfers or would minimum standards on acquisitionandpreservationplusatrackingserviceforalltypesofpensionrightsbeabetter solution? Ifminimumstandardsonacquisitionandpreservationplusatrackingserviceforalltypesof pension rights is all that can be achieved at this time, then that is what should be done. Thereshouldbetransparencytowardstheemployeeontherightshe/shehasaccumulated underhispensionscheme,andthiscommunicationshouldbeeasilyunderstandableaswell asbepromptlyavailable.He/sheshouldalsounderstandthefinancialvalueofthoserights, inordertobeabletoplanhis/herretirement.Thisshouldbetrueforallsystems,whether theyaresocialsecurityschemesorprivateschemes,occupationalorindividual,voluntaryor mandatoryundernationallaw.

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2.4.Safer,moretransparentpensionswithbetterawarenessandinformation 2.4.1 Safer,moretransparentpensionswithbetterawarenessandinformation (8) Does current EU legislation need reviewing to ensure a consistent regulation and supervisionoffunded(i.e.backedbyafundofassets)pensionschemesandproducts? Ifso,whichelements? The question has to be asked as to what the EU wishes to achieve through consistent regulationandsupervisionoffundedpensionschemesandproducts.Thenatureoffunded pension provision differs significantly across countries. At one end of the spectrum lie DB schemes,whereitisquiteclearthattheabilitytofulfillapromiseoffuturepaymentstreams isessential.AttheotherendliepureDCschemes,i.e.schemeswithnoguaranteesandonly arequirementtopayoutattheendoftheaccumulationphasethevalueofassetsheldon behalfofanindividual.Suchschemesareessentiallylongtermsavingsproductsdesignedto provideretirementbenefits.Inbetween,standsamultitudeofhybridschemes,suchasDC schemes with a minimum guarantee, either in the form of a minimum rate of return or a minimumbenefitlevelatretirement.Furthermore,agreatvariationofschemestructures hasemergedbothwithinandbetweencountries. Given the different starting points and national specificities of pension systems across the Union,andthefactthatMemberStatesretainfullresponsibilityfortheorganizationoftheir pensionsystemsandthesocialandlaborlaws,itisnotrealistictoexpectconvergingtoward a common consistent legislative framework covering all funded pension schemes and products. OnthespecificissueofriskmitigationinDCschemes,wewouldliketosummarizesomekey findingsofresearchreportscommissionedbyEFAMA. vi DCschemesareinessencelongtermsavingsvehicles.AssetmanagerscanstructureDC investmenttomeetthepreferencesandneedsofindividualsandtomaximizetherisk return performance of the retirement wealth. Solutions exist to reduce or even eliminate investment risk. However, they can impose a significant cost in terms of forgone returns. Consequently, regulations that ask for such risk mitigation and thus strictly limit investment in certain asset classes can have a highly negative impact on retirementwealthforthemajorityofparticipantsinDCplans. For DC schemes, investment funds are particularly suited as underlying investment productsastheyallowforsufficientdiversification,differentdynamicassetallocationfor differentriskrequirements,significanttransparencyandconsumerprotection. Individuals can expect to enjoy a substantially higher consumption level if they keep a balancedassetallocationoftheirpensionsavings,atleastforanextendedperiodafter retirement.Theriskofbeingworseoffintermsofretirementincomeincaseofadverse stock market developments is limited for individuals adjusting their pension asset portfolioovertheentireretirementperiod.
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Permittingmoreflexiblechoiceamonginvestmentsolutionsforthepayoutphaseallows to take into account peoples preferences, level of risk tolerance, and other source of wealth to tap into retirement. This last factor is particularly relevant in countries guaranteeing a significant replacement rate in the form of firstpillar pensions. In this situation, individuals should be allowed to choose an asset allocation tailored to their personalsituations.

(9)HowcouldEuropeanregulationoracodeofgoodpracticehelpMemberStatesachievea better balance for pension savers and pension providers between risks, security and affordability? The European Commission could analyze the national pension systems with a view to identifygoodpracticeandinnovativeapproachesofcommoninterest. A code of good practice could potentially be a useful development, particularly in the DC environmentwhereconsumersbearmoreriskandresponsibility,andaddressissuesrelating toinformationanddisclosureofcharges;investmentchoice;defaultfundetc.Itshouldalso beclearthatinvestmentriskinDCschemescanbemitigated,eitherbyinvestinginsafe assets or by shifting the risk to another party (e.g. a financial institution providing a guarantee).However,giventhetradeoffbetweenriskandreturn,bothapproachescomeat a cost. Also, the risk and return tradeoff is also important when considering different investment solutions for the decumulation phase. Concerning this point, it is widely recognizedthatcompulsoryfullannuitizationofretirementwealthhasasignificantcostin termsofforegoneconsumption. EFAMAmembersalsofullyconcurwiththeGreenPapersstatementthatshiftingchoiceand responsibility to the individual requires that people understand the information to make informed choices. Promoting financial education remains therefore essential. Progress in thisdirectionwillneedacoordinatedeffortthatcouldbeledbytheEuropeanCommission. EFAMAseesaspartofitsresponsibilitytoprovidesupporttotheCommissionandEuropean governmentsincontributingtoinvestoreducation. Looking forward, onepractical issue is how a code of practice could function. It could be constitutedasstandardsfromthenewLevel3committees.ButifitcamefromtheEIOPA, wewouldwanttoensurethatassetmanagerscouldinputintothedecisionmakingprocess. 2.4.2. Improvingthesolvencyregimeforpensionfunds (10)Whatshouldanequivalentsolvencyregimeforpensionfundslooklike? Whenassessingsolvencyrulesforpensionfunds,itisvitaltoidentifyveryclearlytheareas where solvency is an issue for pension funds and to assess the appropriateness of current regulation accordingly. As explained above, there are a variety of pension fund types in operationinthecontextofpensionsystemsthatarewidelydifferentacrossEurope.Hence, debating solvency rules for pension funds without clearly delineating different kinds of
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pensionproductswouldbeproblematic.Aonesizefitsallapproachwouldresultinadverse consequencesforpensionfunds,beneficiariesandtheeconomyasawhole. EFAMAalsostronglybelievesthatanysolutionwouldhavetobeproportionateandreflect therelevantriskstowhichthevariousfundtypesareexposed.Inthisvein,pensionfunds that do not offer any products with guarantees and/or biometric risk coverage should be exemptfromsolvencyregulationregardlessofwhetherthefundoperateswithintheirhome countryorconductcrossborderbusiness.Thisshouldalsobethecasewhereapensionfund has outsourced guarantees and/or biometric risk coverage to a third party institution that itselfissubjecttosolvencyregulation,inordertoavoidundueregulatorycost. AstowhetherSolvencyIIwouldprovideagoodstartingpoint,whilstwewouldagreethat theconceptofriskbasedcapitalasrequiredbySolvencyIIisaprudentapproach,thereisno justification for the same type of solvency rules for pension funds as for insurance companies. Insurancecompanies and pension funds offerdifferent pension products, and the differences between products require differences in regulatory rules. There are a numberofpointsworthnoting: Firstly, the degree of sophistication between insurance companies and pension funds differssignificantly.Whileinsurancecompaniestypicallyofferaplentitudeofproducts, variety in contracts etc, pension funds typically offer unique and coherent pension schemesforalltheirmembers. Secondly,aspensionfundschememembershipisoftencompletelyornearlycompletely compulsory, cash flows are much more predictable than they are in insurance companies,wherepoliciesmaybeterminatedorboughtoffprematurely. Thirdly, there are additional security mechanisms beyond solvency rules that protect certain pension products. In the presence of such security mechanisms, less stringent solvencyrulesshouldapplycomparedtothoseproductsthatlacksuchmechanisms. Inaddition,anyextensionofSolvencyIIwouldhavetoconsiderthepotentiallysubstantial detrimentaleffectsonpensionprovision,financialstabilityandtheeconomy: ASolvencyIIlikeregimeonpensionfundswouldleadtocapitalintensiveproductssuch asguaranteesbecomingmoreexpensivetoprovide,asadditionalcapitalwillbeneeded tofortheircoverage.Thisinturnwillreducetherangeofsolutionscurrentlyofferedto schememembersandmayhavedrasticsocioeconomicconsequencesforemployeesin certainMemberStates. Given that pension funds take on very different types of liabilities compared to most insurancecompanies,pensionfundsshouldbeallowedtorelyonlongterminvestment strategies with adequate diversification and exposure to assets with sufficiently high expected returns. From this perspective, it is important to avoid that a reform of solvency rules would force pension funds to reduce their exposure to equities, which wouldleadtoseverelongtermconsequencesontheirabilitytoaccumulatewealth.
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AriseinthedemandforfixedincomeinstrumentsspurredbyaSolvencyIIlikeregime would also have the potential to depreciate of pension funds assets base while increasing the value of future liabilities, leading to a spiraling effect and systemic risk. This scenario is summarized in the Financial Services Committees Report on the implicationofageingonfinancialmarkets(4164/07):Itisimportanttoensurethatthe regulatory(accountingandprudential)frameworktakesintoaccountofthespecificityof pension liabilities, in order to allow long duration savings to be covered by a sufficient levelofinvestmentinequities.{}Newrules,whenrelevant,wouldneedtobeintroduced in an appropriate way as not to lead to distortions in financial markets by fostering inappropriate investment strategies, i.e. resulting in sudden shifts in providers asset allocations. Finally, basing solvency funding requirements upon marktomarket accounting principles would force pension funds to sacrifice longterm financial sustainability to meet regulatory requirements on solvency levels trigged by shortterm market developments.Thiswouldalsoenhancethescopeforsystemicrisk.

Concerning the suggestion that pension benefit guarantee systems should be promoted, EFAMA members believe that governance solutions exist to address the risk of failure in sponsorbackedDBschemesandensuresafeguardingofpensionassetsinthebestinterest oftheschememembers. WithrespecttoDCschemes,governancesolutionsintheareaofclearallocationofdecision making responsibilities, oversight of administration and investment functions, asset protection,andtransparencyanddisclosure,shouldensurethatpensionassetsareinvested soastodelivergainsthataccruetoindividualmemberaccountbalancesinlinewiththeir investmentgoals.DCschemescanalsobestructuredinawaytolimitinvestmentrisk,for examplebyofferingappropriateassetclassbuildingblocks,lifecycleinvestment(toreduce the exposure to market volatility shortly before retirement), or guarantees of certain benefits.Whilstguaranteesmaysuitthepreferencesofveryriskadverseindividuals,others will find the cost in terms of foregone returns excessive. From this perspective, imposing systemstocompensateforexcessivelossesinDCschemesacrosstheboardwouldlimitthe possibility of choosing a scheme suited to the preferences of individuals, increase the averagecostofDCschemes,createmoralhazardproblems(encouragingexcessiveriskand transferringthetailshortfallrisktoanotherparty)andincreasetheimplicitpublicliabilities (asgovernmentswouldhavetheroleofultimateinsurersincrisisperiods).

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2.4.3. Addressingtheriskofemployerinsolvency (11)ShouldtheprotectionprovidedbyEUlegislationinthecaseoftheinsolvencyofpension sponsoringemployersbeenhancedandifsohow? Insolvency of sponsoring employers remains an area of considerable national concern, notablyforDBplans.ItisnotclearhowfurtherEUlevelofprotectionwouldhelp. (12) Is there a case for modernising the current minimum information disclosure requirements for pension products (e.g. in terms of comparability, standardisation and clarity)? ThereisacaseformodernisationintandemwithwhatishappeningintheEUinitiativeon PackagedRetailInvestmentProduct(PRIP). Similar disclosure standards as those included in the Key Investor Information (UCITS IV) documentcouldbeappliedtopensionproductswithaviewtoimproveconsumerprotection at EU level in the pension sector. At the same time, the specificities of these products, includingannuities,shouldbeaddressed,inparticularthedifferentcharacteristicsandrisks existing along the pension scheme structures from pure DB to pure DC schemes. Full disclosure of all cost items, and investment options, would also contribute to informed decisions. (13)ShouldtheEUdevelopacommonapproachfordefaultoptionsaboutparticipationand investmentchoice? Default options for participation and investment choice are important tools to strengthen incentivestosavemoreforretirementandimproveindividualschoices. Defaultparticipationoption Automatic enrolment of all citizens with an optout clause is a system that can help overcome the fact that many individuals do not make an application to join a pension scheme.Byautomaticallyenrollingindividualsintoaqualifyingpensionschemewithoutany activedecisionontheirparts,thissystemtakesadvantageofindividualsnaturaltendencyto resisttakingaction. Byallowingindividualstooptoutoftheschemeiftheychoosenottoparticipate,ortostop savingatanytime,thesystemhastheadvantageofnotforcingpeopletosavemore. Automaticenrolmentintooccupationalpensionschemeisparticularlysuitedtoencourage pension saving when the employers are offering pension schemes and make minimum contributionstotheirworkerspensionschemes.

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Defaultinvestmentoption Offeringadefaultoptionisusefultohelpindividualswhoareunableorunwillingtomake investmentchoices. Thedisadvantageofadefaultinvestmentoptionisthatitisunlikelytomeetinfulltherisk returnpreferencesofallmembersinapensionscheme. Therearewaystoaddressthisdrawback.Apossibleapproachconsistsinofferingasmall numberofinvestmentchoicesfromwhichmemberscanchooseaccordingtotheirdifferent riskreturnprofiles.Itisalsopossibletodesignadefaultoptionwithalifecycleoverlayin order to allow younger scheme members to have a larger part of their assets invested in equitiesandtoseetheproportionoffixedincomeassetsincreaseastheplannedretirement approaches. 3.EnhancinggovernanceofpensionpolicyatEUlevel (14) Should the policy coordination framework at EU level be strengthened? If so, which elementsneedstrengtheninginordertoimprovethedesignandimplementationofpension policythroughanintegratedapproach?Wouldthecreationofaplatformfor monitoringallaspectsofpensionpolicyinanintegratedmannerbepartofthewayforward? A common platform for monitoring all aspects of pension policy and regulation in an integratedmannerandbringingtogetherallstakeholdersseemsaverysensibleapproach. Gathering comparable statistics, best practice sharing, peer reviews, and gathering comparablestatisticsarerealisticgoalsforanEUlevelinitiative,giventhatsomuchpension provisionwillremainnationalfortheforeseeablefuture. Wehopethesecommentswillbeofassistanceandremainatyourcompletedisposalforany clarification. PeterDeProft DirectorGeneral 10November2010

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Annex1

BasicRequirementsforOfficiallyCertifiedEuropeanRetirementPlans The basic requirements for OCERPs are that they should (i) be transparent, (ii) facilitate investmentchoice, (iii)be transferable/portable, (iv) provide adequate flexibility, and (v) b bemanagedcostefficientlyandsafely. Transparency OCERPs should be domiciled in an EU member state or within the EEA (European Economic Area) to ensure that they fall under European regulation and the associated transparencyrequirements; Transparency on all costs. The OCERP provider would formally reconfirm costs of the retirementplantoinvestorsannuallyinanitemisedstatement.Thisgivesinvestorsmore information and could encourage competition between providers, i.e., insurance companiesandassetmanagers; Transparency on accumulated savings. The OCERP provider should inform investors of theirtotalsavingsatleastonceayearinordertoincreasethelevelofinformationthey receive,andgivethemtheopportunitytoadjustannualcontributions. Individualchoice Individualchoiceallowspeopletostructuretheirretirementinvestmentsaccordingtotheir ownneedsandpreferences.Therearevalidconcernsaboutindividualsabilitytomakethe right decisions when it comes to planning for their retirement, hence the need for the regulatortosupportthisindividualchoice.Inthiscontext,thefollowingshouldberequired: OCERPs should limit the range of underlying products in which individuals can invest, and putinplacemechanismstohelpindividualsmakewellinformedchoices; OCERPs should offer a default investment option, preferably including a lifecycle overlay; OCERPs should provide solutions for dealing with investment risk during the accumulation and payout phases. This requirement would seek to ensure adequate investmentreturnsoverthelongterm,whileseekingtoavoidindividualexposureatthe pointofretirementtounnecessarymarketrisk. o The solutions for the accumulation phase should offer a range of investment options. These might include guarantees of certain benefits or sophisticated asset allocationorinvestmentapproachesthatensureanautomaticreductionovertimeof
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the share of risky assets in the OCERP portfolio. This would mitigate the risk of investorsfallingvictimtoapotentialmarketcollapsejustbeforetheyretire. o Thesolutionsforthepayout(ordecumulation)phaseshouldofferthepossibilityof converting the accumulated lump sum into a recurring income stream after retirement,e.g.,bysupportingtheuseofpayoutsolutionssuchasdrawdownplans andvariable/deferredannuities. Transferability/portability Transferability between countries and/or employers and/or pillars is essential within the EuropeanUniontosupportthefreemovementofpeopleandlabour.Assuch, Investors should be allowed to merge pension or retirement accounts managed by different providers from different (former) employers without incurring unnecessary losses. This recommendation would also lower complexitycosts for providers and thus potentiallyforinvestors; OCERP assets accumulated in one member state should be transferable to another. Payoutsshouldbetaxedinthecountryinwhichany(potential)taxbreakwasgrantedin theaccumulationphase; OCERPs should also be transferable between pillar 2 and 3 schemes, so that, for example,employeesmovingtoselfemploymentcankeeptheirretirementassets. Itmustbeclear,however,thatnotallcontractsprovideidenticalbenefits,(e.g.,withregard to potential coverage of biometric risk within an OCERP) and that there could be some administrative costs associated with transfers. Regulation of the administrative costs, however, should stop plan/product providers from introducing prohibitively excessive charges,e.g.,forpayoutsbeyondnationalborders. Flexibility Flexibility further increases the attractiveness of the underlying investment products (and thus the OCERP), and should help overcome investors limited stamina for longterm investments. Assuch, OCERPsshouldofferflexiblewithdrawal/borrowingoptionsforspecificreasons,suchas buying owneroccupied real estate, covering oldage health care expenses, etc. Tax breaks should stay in place if withdrawals are returned within a set time frame, giving investorsflexibilityandincreasingtheirpropensitytosave; OCERPs should also offer flexible suspension rights in specific cases, i.e., the right to offsetretirementprovisionsforasetperiod.Specificcasescouldincludeunemployment, havingchildren,buyingowneroccupiedrealestate,and/orventurecreation.Investors
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shouldbeabletomakeupforsuspendedpaymentswithinthesamefiscalyearwithout losing(potential)taxbreaksorgovernmentsubsidies. AnyproductproviderthatwantsaccesstoOCERPs(i.e.,insurancecompanies,banks,asset managers)wouldneedtoensureitsproductsprovidesuchflexibility. Costefficiencyandsafety Finally,toensurecostefficientOCERPsthatbenefitinvestorsandtoprotectinvestorsfrom anOCERPproviderspotentialbankruptcy,theregulatorshouldimpose: Institutional management of OCERP provisions, i.e., contributions from the same employer/employeegroupshouldbemanagedbyasetofproductprovidersselectedby the employer (potentially preselected by the OCERP provider) in order to ensure sufficientscaleandadvantageousbargainingpositions; ManagementofOCERPinvestmentsinindividualaccountstoallowtransparencyonthe value of the individuals portfolio and ensure less disruptive (and thus less costly) asset/investmentproducttransfersfromoneplantoanother. Creationofsegregatedaccounts(i.e.,ringfencingtheOCERPassetsfromtheproviders balance sheet assets), which would increase investor protection in case of product providerbankruptcyandalloweconomiesofscale.

SeereportpublishedbyAvivaatwww.aviva.com/europepensionsgap. ii TheadvantagesofsavinglongerarewelldocumentedinareportpreparedbyOxeraandpublishedbyEFAMA in2008.iiTheLawofCompoundReturnsensuresthatmoneyinvestedforalongtimecreatesmoremoney;this explains the fact that the difference between the level of pension contributions and the total level of accumulated assets tends to get bigger with the investment horizons. The Oxera report also shows that investment over longer time horizons significantly reduces the probability of negative overall returns. This resultconfirmstheviewitisreturnsoverthelongrunthatmatterforpensionplansaspensionplansarelong terminvestmentvehicles. iii Seehttp://www.efama.org/index.php?option=com_docman&task=doc_download&gid=1160&Itemid=99 iv Recital12oftheIORPDirective2003/41/ECrequeststhattheCommissioncarefullymonitorthesituationin the occupational pensions market and assess the possibility of extending the optional application of this Directivetootherregulatedfinancialinstitutions. v Seeparagraph27in http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P6TA20080556. vi SeeRethinkingRetirementIncomeStrategiesHowcanwesecurebetteroutcomesforfutureretirees?An EFAMA Report commissioned to Professor Raimond Maurer (Goethe University Frankfurt) "Defined contributionpensionschemesRisksandadvantagesforoccupationalretirementprovisionAnEFAMAReport commissionedtoOxera.Bothreportscanbedownloadedfrom http://www.efama.org/index.php?option=com_docman&task=doc_download&gid=201&Itemid=99
i

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