Coronavirus threatens Europe’s pension industry

The coronavirus pandemic has dealt a blow to pension systems across Europe, heaping pressure on policymakers to introduce reforms to avoid a decades-long retirement crisis, according to an influential consumer group.

Big increases in unemployment will shrink the tax revenues used to fund state pensions and reduce contributions to retirement saving schemes run by employers and individuals. At the same time, cuts to interest rates and new government-backed bond-buying programmes have reduced the income pension funds earn from their fixed-income investments.

Guillaume Prache, managing director of Better Finance, which represents European savers, said that economic headwinds and the emergency measures taken by governments in response to the pandemic represented "the perfect mix" to destroy the long-term value of pension savings.

“Governments have explicitly chosen to sacrifice the protection of pension savers in favour of the artificial reduction of EU member states’ debt costs by granting unprecedented subsidies in the form of negative interest rates and massive public debt purchases,” said Mr Prache.

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Even before Covid-19, savers faced challenges generating enough income for their retirement. Better Finance examined private pensions data from 18 European countries for up to 20 years and found that a 50:50 equity/bond tracker fund has outperformed the vast majority of pension products, with high fees reducing returns for savers.

While Dutch Pillar II pension plans, occupational pension schemes that employers and employees both pay into, delivered annualised returns of 5.5 per cent after fees and inflation over the decade ending in 2019, equivalent plans in other countries failed to match this.

Voluntary privately funded pension plans, known as Pillar III schemes, delivered net annual real returns of just 1.3 per cent in France, 1.6 per cent in Germany and 2 per cent in Italy over the latest 10-year period available.

Returns generally improved strongly in 2019 due to buoyant equity and bond markets but some of those gains have been eroded this year.

Wide variations in the performance of pension savings schemes across countries are a concern to EU policymakers.

Better Finance urged regulators to impose standardised disclosures of pension funds’ past performance data to make it easier for savers to compare products. It also called for the EU to protect retirement savers if insurance companies, which are key providers of pension products, go bust.

Mr Prache added that it was "disappointing" that the European Commission had not acted to curb the payment of financial inducements to advisers, which Better Finance said created conflicts of interest and encouraged the sale of unsuitable and expensive pension products.

The call from Better Finance comes as concerns mount that rising unemployment will prompt older workers to raid their pension savings early.

"Spending pension savings now means that money will not be available for later life and there could be consequences during retirement," said Alistair Byrne, head of retirement strategy for Europe at State Street Global Advisors. "People need to be conscious about the contribution gap in their pension savings and the impact that will have on their retirement."

Mr Byrne cautioned that low interest rates would also increase funding strains on companies that offered defined benefit schemes where pension benefits were linked to salaries while in employment.

“Liabilities for DB schemes are increasing. The problems caused by coronavirus could result in more companies finding themselves less able or less willing to support their DB scheme,” he said. – Copyright The Financial Times Limited 2020.