Demystifying pensions

Ladies and gentlemen,

Thank you so much for inviting me to join you today to speak about pensions.

It’s a pleasure to be in Greece and to be reminded – through all the sights and landmarks – of the great history that is enshrined here. And I don’t mean just Greek history but also the history of European civilisation.

And being in Athens also brings to mind the stories of the great gods – like Athena – and the mythology and mystery that surrounds them.

This is part of the beauty of myths – how they are carried from generation to generation – stories that become embedded in society.

There are certainly a lot of myths concerning pensions. Stories that are circulated, often contradictory, but gradually appearing to be more fact that fiction.

How may times have we heard people say that it is not worth saving for retirement because the state will take care of us in old age. Or – on the other hand – that we shouldn’t bother saving into the state retirement scheme because it will have run out by the time we need it.

On top of that, there are many people who are just so daunted by the prospect of saving for retirement that they find that it is easier to do nothing rather than make sense of the complexities.

In some senses, it can be similar for governments – overhauling pension systems can seem like a monumental task – requiring Olympian effort, some might say.

Today, in my remarks, let me do some demystification.

Let me give some facts on developments in pensions.

Let me shed some light on the difficulties of boosting the establishment of workplace pension schemes and the challenge of engaging people and enrolling them into such schemes.

Because the truth is that we need to pay more attention to pensions. This is an important topic, rightly highlighted by this conference and it is good that we are asking questions today. And let’s not  limit the conversation to the second pillar. Let’s touch on all three pillars of the pension landscape.

Where we are today

Let me start with a short overview of where we are today.

It’s true that the pensions landscape is fragmented in Europe. There are different schemes and systems in place across the Member States.

On the other hand, nearly every country faces the same challenges: for example, increasing life expectancy and ageing populations. According to the World Economic Forum, looking at the global population, for the first time in human history, people aged 65 and over outnumber children aged five or younger.

In Europe, the number of people aged over 65 is going to rise dramatically. Today, for every retired person, there are almost three people of working age. Look ahead 50 years, and this number drops by almost 50% - so just over 1.5 working-age people per retired person.

This shrinking number of people in work will increase the pressure on pension systems across Europe with fewer people paying into the state pension system.

This is one of the reasons why the adequacy and sustainability of pension schemes are so high on the agenda of policy makers and governments.

The major challenge here is how to provide citizens with adequate retirement income and to ensure as well that public finances are sustainable.

This is key to prevent poverty in old age. And it is urgent, for today, on average in the EU, almost one in five people are at risk of poverty in old age. We also have to contend with the gender pension gap, for the reality is that a woman’s pension is likely to be a third less than a that of a man and as such the risk for a woman to live in poverty in old age is 35% higher than for men

But there are ways to address the adequacy and sustainability of pensions and we are seeing measures being put in place in many countries in Europe.

For example, some countries are increasing the retirement age, so that people work – and therefore contribute to their pension – for longer.

There is also the question of labour market participation and creating incentives for the economically inactive to join or re-join the labour market.

And of course there are other reforms to public pension systems like reviewing and reducing how pensions increase in the future.

These changes relate mostly to first pillar pensions – those provided by the state, sometimes known as pay-as-you-go schemes.

But I think that we need to think more broadly than that.

And if you will let return to mythology once more, I want call up the riddle presented to Oedipus by the Sphinx:

What walks on four legs in the morning, two legs in the afternoon, and three legs in the evening?

The Sphinx was referring to the different stages of human life: we crawl as a baby, walk with our two legs as adults, but require extra support from a stick in old age.

But there are another three legs that we need when we are retired: the three legs – or pillars – of different pension schemes. And it is becoming more and more clear that we will have to draw upon all three pillars for a reasonable income in retirement.

I have already talked about the first pillar.

Second pillar

Now, let me say something about the developments that we are seeing in the second pillar – also known as occupational or workplace pensions.

The first thing to mention is of course the shift from defined benefit to defined contribution pension schemes. This is a growing trend that is changing what pensions mean for many people. Gone are the days when you would spend most of your working life with one company and leave that company safe in the knowledge that you would continue to receive a stable income – most likely a percentage of your final salary – for the rest of your life.

Now, today’s reality is that the risk and responsibility was shifted to the employee. And this risk continues into retirement, since savers now have to contend with managing a lump sum or pot, rather than a defined steady income.

And so to refer back to the theme of this conference – boosting second pillar growth – the question is ‘how do we empower people to take the right decisions over their workplace pension?’

I said before that for many people the very idea of saving for retirement is complex.

So the first thing we need to do is  make it simpler.

One way is through information. And pension tracking systems, in particular.

In many countries, people cannot find an overview of all their pension entitlements in one place. A tracking system would solve this and help people understand what income they can expect in retirement and start making assessment on whether this will be sufficient.

EIOPA has looked into best practices for tracking systems and has provided advice to the European Commission. Our advice included recommendations on content and design, and a roadmap.

Now it is  important to remember that tracking systems cannot be built overnight. They rely on different sources of information and must be digitally secure.

But I would say that it is always worth the effort to develop such a resource as once in place it will make it easier for people to make better informed decisions about their retirement.

But information alone won’t necessarily make people save into their workplace pension.

Instead, we have to consider how we make people actually participate in a workplace pension. Here a development we see is the introduction of mandatory enrolment. This is where people are automatically enrolled in a workplace pension scheme and then are given the possibility to opt out.

Italy and the United Kingdom both have this type of regime in place, introduced by their respective governments.

And what we see is that mandatory enrolment frameworks work! They take participation to much higher levels.

But again, like tracking systems – they are not quick to put in place. There are a lot of stakeholders to bring on board and schemes must be designed appropriately – so they don’t create too much of a burden for employers or providers.

And we also have to consider how they can work for smaller employers, like the possibility for small businesses to join forces.

Finally, what is important, is that , of course, pension schemes must be well run. They must engender trust from members and offer value for money.

This is where supervision comes in – and the IORP II regulation – which, while a minimum harmonisation framework, sets the standards for good governance.

And it is in our interest to ensure that the framework remains fit for purpose. This is something that EIOPA is working on and will provide advice to the European Commission later this year.

The areas that we are looking at include from a prudential and governance perspective, cross-border activities and information to members and beneficiaries, like the pension benefit statement. We will also be paying close attention to the shift from defined benefit to defined contribution schemes, sustainability and diversity.

Workplace pensions are a really valuable option for those who are in regular stable employment.

But what about those who don’t fit this category. The freelancers, the self-employed, the gig economy workers.

Third pillar

This is where the third pillar – or private pension – comes in. Let me say a couple of words about private pensions. These are also a valuable way for people to save. But again they should be easy to use, and offer value for money. This is also something that EIOPA is looking at – making sure that products suit the needs of the consumers that purchase them and that when all costs are taken into consideration, they offer value for money.

After all, affordable, accessible savings schemes are particularly important for people who are not in traditional forms of employment.

In past years, my colleagues have mentioned the pan-European personal pension product – or PEPP – as an example of a digital first personal pension designed for today’s workforce.

The product is now launched, and while take up has so far been slow, there is still a place for simple, cost effective, portable products in the pension mix.

That is an overview of the situation and developments at EU level.

Greece

Now, let me turn to the situation in Greece.

And, just as we are seeing some steps being taken at EU level to close pension gaps, the same is the case for Greece.

For example, during the last year the government introduced a new funded defined contribution pension arrangement – TEKA – in the first pillar. This is similar to the public pre-funded schemes in Denmark and Sweden, and should help young people start with their pensions savings.

When it comes to workplace pensions, there is also room to make progress. Participation remains voluntary and there can be difficulties in establishing schemes.

But the challenges are not insurmountable.

As we see countries moving away from defined benefit schemes, we also see different types of defined contribution schemes developing. For countries at the early stages at the IORP journey, this is an really good way to learn about what works and what could work.

And this is somewhere that EIOPA can lend a hand – bringing people together to share experience and good practice.

There are also some key steps and milestones to consider in moving IORPs along and implementing mandatory enrolment.

For example, the first steps would be defining the requirements and setting up the legal framework. It’s also important to get many different stakeholders on board. And so I would envisage a consultation phase, covering near, medium and long term options.

You’d have to consider legal frameworks for mandatory enrolment, followed by pilots and evaluation, before a wider national roll out.

I’ve said all this in a few sentences, making it sound so easy. I know that it is not. Olympian is a word I used earlier.

In reality, a project like this could take some 10 years to achieve, but if you want to increase pension savings and close pension gaps, then I would say that this is something that has to be done.

People need to save

Because the truth is that people are not saving enough for retirement. This is not just the case in Greece, but across Europe.

We recently surveyed people across Europe for our consumer trends report about pensions, insurance and savings.

The answers are sobering.

Of those surveyed, only 18% paid into a workplace pension and only 20% had a personal pension.

Only 45% of people believed that would have enough money to live comfortably in retirement. In Greece, this figure was fewer than 30%.

And on top of this, many people are experiencing a cost-of-living crisis. This means less disposable income and less money to put into savings. And this means less retirement income later.

And these are the reasons that we need to pay attention to pensions. That we need to boost not just the second pillar but ensure that all three pillars work together to offer people a sustainable and satisfactory income in retirement.

In conclusion

Let me conclude by saying that I think all of us are in no doubt that reforming and strengthening pension regimes are needed. And not just needed, but urgently needed.

And none of us are in any doubt that what’s required is no easy task.

But, you are not the first to embark on this journey, so you are not creating from scratch. In fact, there are schemes and frameworks in place across Europe that have made this journey and these are experiences to learn from.

And, what can I say – in this country, with its history of gods and goddesses of superhuman strength an character – I am sure that you are up to the task. And that the effort will be worthwhile, because in the long run it will improve the lives of so many people, enabling them to live a more comfortable retirement.

Ladies and gentlemen, thank you very much.