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Retirement Plans

Fund executives grappling with plan design

Janwillem Bouma, center, said the answer to a workable retirement solution across Europe won’t be found as long as countries set their own pension and tax policies.

Current regulation cited as a major impediment to creating a sustainable system across Europe

Regulation, fees and low employee contributions continue to challenge retirement plan executives globally in their efforts for adequate DC plan design, experts agreed during the course of the Oct. 30-Nov. 1 WorldPensionSummit in The Hague, Netherlands.

European experts said the current pan-European regulatory framework, due to labor and taxation powers sitting with individual governments in the European Union, is not sufficient to build a sustainable retirement system. Europe-based speakers also argued that multiple employer, cross-border and multicountry plans should be boosted by supplementary arrangements such as the pan-European pension product.

"When we look at the economic, social and demographic viewpoints — the social security pensions are not sustainable. Something has to give. We need multipillar solutions," warned Janwillem Bouma, chairman of PensionsEurope, a pan-European pensions association.

However, he added, "cross-border solutions will not solve the problem," adding that until pensions and taxation aren't dictated by individual governments, "it is very hard to talk about standard (pan-European) solutions." Panelists said both collective and individual options are equally needed.

Because labor laws and taxation policies are being set by individual European countries, instead of the European Union regulators, plan sponsors who want to broaden the coverage have to opt for a multiple employer and multilocal vehicle that ringfences regional assets into separate compartments.

Olga Ruf-Fiedler, savings and pensions leader for Europe, the Middle East, Africa and India at Dow Chemical Co., said that "managing assets in different locations is cumbersome, expensive and difficult, so there are limited (chances) to leverage scale in terms of fees and administration."

"There is a lack of portability for participants as multinational corporations have to move their employees around a bit. And there is also the inconsistent employees experience ... because each country has different ways to manage their pensions," in how contributions or benefits are taxed, she said.

But a "pan-European vehicle can help maximize retirement outcomes for employees and employers, and achieve economies of scale," she said, speaking at a separate panel from Mr. Bouma.

And a benefit of a multicountry vehicle is "you need one board and one set of legal advisers," she added.

But multicountry platforms pose legal and administrative burdens, too, because executives have to deal with regulation of the platform's home country as well as domestic regulations for each location's sleeve.

"Companies still have to be multilocal," argued Christian Lemaire, global head of retirement solutions at Amundi, speaking on the same panel as Mr. Bouma.

Still, Mr. Lemaire said that "cross-border solutions help to achieve greater control of cost efficiency and a powerful administration tool." Amundi manages €60 billion ($68 billion) in cross-border assets.

But, Hans Van Meerten, professor of international pension law at Utrecht University, said during the same panel that "IORP II, (which boosted cross-border plans) didn't achieve what it was supposed to do" since local governments still retain control.

"We have only few cross-border (vehicles in Europe) because it is harder to operate a cross-border (plan)," Mr. Van Meerten said.

The pan-European pension product "can be a solution to (a savings gap) because the national competence isn't really (an issue, since) it's a third-pillar product," Mr. Van Meerten added.

Collective DC

Some speakers, concerned about general generational dissatisfaction and participant experience, said collective defined contribution is the right model.

Richard Poole, legal director, pensions and employee benefits at Royal Mail Group PLC, said collective DC is better than pure DC because of the risk-sharing element that is not found in pure DC.

However, Nico Aspinall, chief investment officer at the 5 billion ($6.4 billion) People's Pension, the multiple employer vehicle sponsored by sponsored by B&CE, said most U.K.-based DC plans were created in benign financial market conditions. "The next 30 years could be completely different," he said. "I don't see the position between (DB and DC) to be dramatically different. In 30 years, DB, DC and CDC (all are) going to suffer."

Mr. Aspinall also questioned the probability of a scenario under which CDC would outperform DB and DC. Mr. Aspinall didn't think that the collective plans that rely on individualist approach are the picture of institutional DC expected to be seen in the future. "There is nothing in DC which says that we couldn't share that risk, that we couldn't set up a unit called longevity and self-insure the assets," Mr. Aspinall said.

Need to use technology

Speakers over the three-day conference agreed regulators should start to use technology and behavioral economics to pin down the level of contributions and plan design format that will be right to manage the growing retirement assets for informal workers.

John Nurthen, executive director, global research at research firm Staffing Industry Analysts Inc., said during a separate presentation that the largest global firms use vast amounts of contingent labor and spend on these workers — defined by the firm as gig economy workers, including temporary workers, consultants, agency workers, freelancers and seasonal workers.

"About a quarter of the population is not doing standard work at the moment, they are working on a contingent basis," he said. The gig economy is valued at $3.7 trillion, according to SIA's data. SIA is a Crain Communications Inc. company, the same parent company of Pensions & Investments.

"There is going to be fewer (full-time) workers. You will see people semi-retire," and retirement plans need to take that into account, Mr. Nurthen said.

Katja Bjerstedt, chief economist at Varma Mutual Pension Insurance Co., which has €47 billion in assets under management, said "we should look outside of the pension box when we think how (pension funds will) survive. We should think about longer careers, changes in the labor market, changes in the economic structure and see how we can re-educate people to make sure that everybody contributes to the pension systems in the future."

Manuel Garcia, senior consultant in the labor markets and social security division of the Inter-American Development Bank, said during a separate panel that employment informality poses a huge problem for pension systems.

"In Mexico, the regulators are trying to use technology and behavioral economics to try to induce people to save more and to bring them to the formal (employment)," he said.

In Peru, the government is experimenting with a local Uber-type company "to see what works to motivate drivers to save for retirement … to see what works better … if it is a default (contribution level) or direct (engagement) about the level of contributions. That's very exciting," Mr. Garcia said.

Some regulators also are opting for more traditional forms of engagement. Last month, Chile announced a reform that will increase employee contributions for the national pension system to 14% from 10%. "Maybe that's not enough but it is a huge step," he noted.