Frankfurt, 10 July 2013, at EIOPA’s Closing Event of the Quantitative Impact Study for pensions. I had the privilege of being invited by EIOPA as speaker and panellist. Together with Matti Lappälä, Secretary General of Pensions Europe, I was speaking in Session 2 “What are the conclusions of the stakeholders regarding the QIS final results?”
I haven’t been talking much about the quantitative details of the study. Perhaps I should have done as I was representing the 20,000 actuaries in European in a way being the chairman of the pensions committee of the European Actuarial Consultative Group. Instead I went back to the where worker’s pensions originate. The QIS for pensions is about worker’s pensions or more formally occupational pensions. This is first of all the field of employers and employees, the social partners. An occupational pension is part of the total reward package agreed by social partners.
Social partners agree whether they want to have a pension plan in place and , if so, what the characteristics of the pension plan are. Pensions are about payments once we retire. So pensions are very long-term contracts. Social partners have agreed to pension plans for many decades. We have had many decades behind us of good economic growth and supportive demographic development. In my view these are two important reasons why social partners have generally not been very clear about the exact nature of the pension promise. Is the promise a hard promise? Fully guaranteed? Or is the promise much more a desired goal an ambition? My feel is the latter, but in the course of time social partners had to face more and more legal requirements resulting in stronger pensions than social partners originally agreed to. The problem is, though, that social partners have not been very detailed about the strength of the pension agreement. Neither have they strongly opposed those increased legal requirements as imposed by the governments over time.
Now we are facing a completely different economy. Benne van Popta, Vice-Chairman of Pensions Europe, referred to this in his key note speech. We are still in the midst of a deep economic crisis. This crisis is already the second one starting in the same decade. We knew that the baby-boom generation is about to retire as from 2010 onwards leading to a dramatic shift in the demographic structure. And further we have the very good new that we are living longer and longer. But this good news is not yet reflected in the amount of pension savings necessary to fund for this.
In Europe we see very different pension systems in each Member State. Even within Member States the pension systems may differ widely. Social partners agreed on pensions building on national social security and with the specific company and worker’s profile of that industry in mind. So we see very different pension systems throughout Europe. These systems worked very well for a very long time. Times have changed now. We face an increased pressure forced by the worsened economic situation and outlook, by the demographic change where we rapidly will have less actives per pensioner than ever before and the increasing life expectancy is putting even more weight to this demographic change.
The European Commission has started the review of the European pension directive and have consulted EIOPA as European Insurance and Occupational Pension Authority to advice on this review of the directive. One element of EIOPA’s advice in February last year was the use of a Holistic Balance Sheet (HBS). This HBS is meant to be a framework in which all the very different pension systems in Europe can be evaluated in a consistent way. So to be very clear it is not trying to change the characteristics of the pension plans in the Member States, it is measuring the different characteristics of the pension plans in a consistent way. The aim is to provide quantitative information about the many building blocks that can be identified in the financial set up of pension plans. Quantitative information. Objective information. Information for all stakeholders, not only for supervisors.
It is this proposed concept of an HBS as framework for the consistent evaluation of all those different pension plans in Europe that has been assessed in more detail in this QIS, Quantitative Impact Study. Right after EIOPA’s advice to the European Commission it became clear that most stakeholders were against the proposed quantitative measurements, were against such a framework as the HBS. This is still the case. Many times has been heard since the advice and at this closing event that the pension field doesn’t want to be confronted with higher capital requirements and doesn’t want to see changes resulting in higher pension liabilities.
What are they afraid of? If pensions are agreed by social partners and social partners are happy with their pension plans just as they are then there should not be a fear that there is a need for more money to cover the pension promises, should there? This stance results in many comments on the HBS and its components, the models used to quantify the various financial building blocks and especially the incorrectness and incompleteness of the models. And even if the models were OK than the assumptions used for the valuation are not correct and need further discussion or, even better, no further discussion at all since it would be much better to just “stop it”. This was the remark and conclusion of Withold Galinat, Vice President Benefits Policies & Coordination at BASF in Germany.
I voiced a different opinion. I suggest to go back to the pension promise itself. What have social partners meant? How do they assess the current situation? How do they want to go forward? The answers to these question should be based on objective and transparent information about the (financial) state of the pension plan. This is exactly what the framework of the HBS aims to provide. Of course we should continue discussing whether the methods are good or need improvement. Of course we should continue discussing which parameter values would be most appropriate. I think that EIOPA has made much progress. It is the first time that we see the results of a study aiming at an objective measurement of pension plans in Europe. And although I fully admit there we are not happy yet with some proposed methods, it is an important first step in the direction of more objective information on where we are with our pension plans.
Now to Dante, Dante Alighieri, the great Italian poet and writer. Currently I am reading “Inferno” from Dan Brown. Dan Brown uses a motto free after Dante’s Divina Comedia. It says:
“The hottest places in hell are reserved for those who
maintain their neutrality in times of great moral crisis”
In Frankfurt Matti Leppälä referred in his speech to hell though I can’t remember in which context. In the discussion this gave me the opportunity to refer to Dan Brown and this motto. We can debate about the model and its parameters and we should continue that debate. But we also know that there are many cases where it will be impossible or at least very difficult to live up to the promise made. We, all those present at the closing event, are experts in pensions. We know that we have problems in sticking to the promise. We know, because we are experts in pensions. We don’t necessarily need the exact model. A model is a simplification of reality anyway. But since we know, it is our call to put it openly on the table or to not to say anything and keep it as it is. To speak for myself: I want to be in the first category. I want to speak up about where we are. Just to share my observations as an expert. Sharing this information with all stakeholders and especially I with the two parties who agreed the pension, employers and employees, social partners.
Social partners could discuss the facts and decide whether they are happy or not, whether they want to keep it as it is or would want to make changes. I have no position in how they should decide. This is their space and not that of independent actuaries. We, actuaries, can help inform all stakeholders. In my opinion it is our duty to inform the stakeholders. The financial pension issues that we see in some large EU member states will not just disappear. If we cover them and don’t discuss them we are pushing problems further into the future. Problems that likely become worse rather than better. We push financial issues forward to a next generation. In my view consumer protection is key. We should be open and honest in discussing financing issues. Consumer protection is not necessarily about more capital, about more money it is first of all about more information, unbiased information. Consumer protection is also not necessarily about giving guarantees. No, we live in a world full of risks. Risks cannot be avoided. What we can do and should do is being as transparent about them as possible in an as early stage as possible. That is why I believe that consumer protection is not necessarily about more capital but it is for sure about more information. We, experts, should speak up. I want to speak up as Dante teaches me that it is the best way going forward. We should show our true colors.