Pension plan risks deterring savers and is unsustainable, managers agree

Policymakers across Europe are examining how best to get their citizens saving enough to finance their own retiremen, Cerulli says

November 05, 2013 9:19 IST | India Infoline News Service
Asset managers active in Europe's defined contribution (DC) pensions industry have criticized a shared-risk pension model-also known as collective DC (CDC)-that the British pensions minister has drawn on to inform his plans for defined ambition pensions in the United Kingdom

Cerulli's European Defined Contribution Markets 2013 report finds that managers who participated in a Cerulli proprietary survey-who run combined European pension assets of more than €1 trillion (US$1.3 trillion)-agreed with statements such as "CDC pension systems are unsustainable in the long run" and "countries moving from a defined benefits-dominated pension system should go straight to individual DC, bypassing CDC altogether."

The UK coalition government, bolstered by the undisputed success of auto-enrolment, has drawn on the Dutch variant of CDC to inform its own thinking on defined ambition pensions.

But at the same time, some Dutch pension practitioners told Cerulli that the Netherlands should adopt an individual DC system, much like the one practiced in the United Kingdom.
Respondents to Cerulli's survey for this report strongly agreed with the statement that an individual DC system is an inherently cleaner way than CDC of defining risk taking and distributing rewards from pension investing.

David Walker, senior analyst at Cerulli Associates and the author of the report, says, "Policymakers across Europe are examining how best to get their citizens saving enough to finance their own retirement. Some of the options being discussed would fundamentally transform the DC pensions systems in numerous countries. The changes could also have a major impact on opportunities for asset managers that are trying to serve Europe's growing DC pension markets."

Respondents to the survey questions showed only lukewarm agreement with the statement that "introducing a CDC pension system would encourage more people to save in pensions for their retirement." 
European Defined Contribution Markets 2013 also:
  • Asks asset managers about their plans for making and selling decumulation products. Decumulation products are an area largely ignored so far by fund managers. But some fund managers say it is not too early to start manufacturing decumulation products. They have named an array of possible distribution channels for the nascent product line. 
  • Identifies which markets offer the greatest opportunities in the next few years. The UK and Dutch DC markets are the most addressable for fund managers at present, according to the report survey, although managers told Cerulli in interviews that the UK market offers more opportunities for managers already present there, not for new entrants. Germany adds its name to the list of addressable DC markets when managers look out over three to five years. 
  • Explores managers' plans to develop cross-border products multinational employers want to use premium pension institution (PPI) structures to pool their pension assets across borders-they just do not want to pay for them. Establishing cross-border pooling vehicles is too expensive for many asset managers. But the DC industry insists that having fewer, larger asset pools is an ideal way to drive efficiencies, and the various cross-border pension pooling vehicles, including the PPI, are ready and waiting to join in this process. 

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