FundForum 2012: Scale and compulsion key to long-term savings
“We’re just not good at creating scale in Europe,” commented Francis Jackson, EMEA regional executive for JP Morgan Worldwide Securities Services, in the fourth CEO panel discussion, on how to tackle the problem of long-term savings.
Moderator Thomas Seale, chief executive of European Fund Administration, noted that pay-as-you-earn public pension systems have been described as little more than elaborate Ponzi schemes. “Asking the younger generation to pay taxes to support the older generation is nothing more than building debt,” he said. “Private pension plans are still a drop in the ocean.”
Some 73 per cent of the audience voted that the solvency of EU public pension schemes would spark the next sovereign debt crisis, and Guillaume Prache, managing director of Euroinvestors, believes it could be even worse.
“It’s a slow release poison,” he said. “Governments have been sweeping the issue under the carpet for years and will continue to do so. What we need is clear and mandatory disclosure from all governments.”
A plurality of the audience (37 per cent) said governments should try fiscal incentives to boost private pension take-up before imposing mandatory enrolment.
However, Todd Ruppert, president of T. Rowe Price International Investment Services, argued that the challenge lay in the difficulty of behavioural modification. “Delaying and not setting aside enough are the two big sins,” he said. “Individuals are procrastinators, which is why a mandatory solution is the way forward.”
Jackson noted that the Netherlands has a successful compulsory scheme supported by a state-reinforced model, and that the major problem with the UK was that participation in private saving schemes were not obligatory. “New Zealand’s super trusts have attracted huge volumes of savings since 2007,” he said. “But it’s a flexible model, whereas in the UK you put your money away for 30 years and have no access to it.”
Increasing awareness is vital, according to James Dilworth, CEO for Europe at Allianz Global Investors: “The biggest problem is that people are starting work later and living longer.”
According to Prache, simple, transparent long-term products are required to rebuild people’s trust. Allan Polack, CEO of Nordea Savings & Asset Management added: “We’ve not focused much on these long-term schemes as asset managers. We need to ask what we can do to develop the right products.”
Can Ucits be part of the solution? Said Ruppert: “401K assets are mainly in US mutual funds, so I think UCITS funds can be useful.” Three-quarters of US investors buy mutual funds for retirement purposes. “In the US, mutual funds really took off when the 401K framework was introduced,” said Dilworth. “That framework is missing in Europe.”
Polack said Ucits were not a full solution for long-term investing because of their liquidity requirements. Something akin to a pension Ucits was needed, with two key differences: they would need to be able to invest in long-term assets, and contain some kind of insurance component.
Scale is vital, though. “Australia’s superannuation trust programme is huge, and it works because of scale,” Jackson said. “It’s 40 per cent cheaper than smaller direct contribution plans in Europe. Managers, banks and insurers all need to support this and ensure that the scale is there.”
Ruppert agreed: “Because it’s a mandatory solution, the Australian model removes the problem of participation. We also need a huge increase in financial literacy and even introduce a course into schools.”
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