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Defined Contribution In Europe: the Direction

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One of the most important developments in the retirement landscape over the past years is the global trend away from defined benefit (DB) plans towards defined contribution (DC) plans. This shift is …

One of the most important developments in the retirement landscape over the past years is the global trend away from defined benefit (DB) plans towards defined contribution (DC) plans. This shift is having an immense impact on public policy and the retirement industry.

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  • 1. No. 4|2009International Pension PapersDefining the Direction ofDefined Contribution in Europe:Results of an Expert Survey
  • 2. Allianz Global Investors International Pension Papers No. 4|2009 Content Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 DC Pensions in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Survey Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1. The future development and significance of DC plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2. Drivers of the trend towards DC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3. Obstacles to better DC plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4. Future investment regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5. Future plan regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6. Design of the payout phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7. Prospects of pan-European pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8. The financial crisis and its impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 The pan-European perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Sample Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Recent Publications / Masthead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
  • 3. Allianz Global Investors International Pension Papers No. 4|2009Defining the Direction ofDefined Contribution in Europe:Results of an Expert SurveyBackgroundOne of the most important developments in the retirement landscape over thepast years is the global trend away from defined benefit (DB) plans towards definedcontribution (DC) plans. This shift has taken many different forms and shapes aroundthe world and is having an immense impact on public policy, the retirement industry,and the retirement income security of future retirees. In western Europe, where definedbenefit plans have traditionally dominated pension markets, occupational definedcontribution plans have also seen a strong upswing. However, the change is multifaceted,its scope varies from country to country, and its future direction is uncertain.Given the ongoing transformation described above, the intention of this survey is tocontribute to a better understanding of current trends; its primary focus is on theexpected future evolution of DC in Europe. As the future is notoriously difficult to predict,we invited pension experts to share their views on how they expect the retirementlandscape to develop. The theory here is that by drawing on the profound insights andexpertise of the survey participants, a solid and well-founded snapshot will emerge ofwhat we are likely to see in the future.Participants in this survey include pension experts from pension funds, academia,regulatory agencies, consultancies, international organizations, asset managementfirms, insurance companies and associations; all in all, the survey incorporates theunique perspectives of 216 respondents. In geographical terms, the survey focuseson the six largest pension markets in western Europe – France, Germany, Italy, theNetherlands, Switzerland and the United Kingdom. The survey was a cooperative effortbetween Allianz Global Investors and the Centre for European Economic Research(ZEW), who carried it out. Before conducting this survey, we held intense discussionswith a number of experts. Their input was invaluable, and their time and contributionare greatly appreciated. We are also extremely grateful to everyone who took part inthe online survey. Without them, this report would not have been possible. 3
  • 4. Allianz Global Investors International Pension Papers No. 4|2009Key Points• A vast majority of European experts are expecting occupational defined contribution schemes to continue to grow in their respective markets and they are able to confirm that the shift towards defined contribution plans is well underway. The majority of experts in most countries are even expecting defined contribution plans to dominate the future occupational pension markets. The key driver of this shift is cost calculability, with cost reduction playing a lesser role.• Poor financial education is seen as the biggest obstacle to improved defined contribution plans. The regulation most likely to be introduced in the future is automatic enrollment.• Lump-sum payments and mandatory annuitization are not considered to be suitable solutions for the payout phase of defined contribution systems. Among the other options available, inflation-indexed annuities receive the greatest support.• The evolution of a pan-European pension market within the next 10 years is controversial, with experts split into almost equal camps. Most experts believe that a true European market will only be able to evolve once further changes have been made to existing social, labor and tax laws, and that these plans will be of the defined contribution type.• According to the experts surveyed, the financial crisis will not lead to a political rollback of funded pensions. However, it is expected that the crisis will both accelerate the shift towards defined contribution plans and increase the importance of protection mechanisms. Investment strategies with built-in risk-management features are expected to see the greatest upswing.4
  • 5. Allianz Global Investors International Pension Papers No. 4|2009IntroductionP ension systems are undergoing a fun- damental transformation in westernEurope, where public pension benefits in many, Italy, the Netherlands, Switzerland and the United Kingdom) within the next five to 10 years. Participants were asked tomany countries have been reduced so that specify whether they consider themselvesincreased fiscal sustainability can be experts in one of the national markets orachieved in the face of future demographic in the pan-European market. Results of thepressures. At the same time, funded pension pan-European experts are presented in theplans – in particular, occupational pension second part of this study.plans – are expected to fill this gap, therebyproviding a substantial and increasing share The following eight issues were addressedof retirement income. To this end, a multi- in this survey:tude of new schemes has been introducedover the past years*. 1. The future development and significance * For more details, see of DC plans Allianz Global Investors Many of the new occupational schemes 2009, “Funded Pensionsare of the defined contribution (DC) type. 2. Drivers of the trend towards DC in Western Europe.”Though DC schemes are becoming increas- (http://publications.ingly popular in western Europe, underlying 3. Obstacles to better DC plans allianzgi.com/en/this general trend are broad differences PensionResearch/among the individual European countries 4. Future investment regulation Documents/AllianzGI_in institutional design, regulation and in- Western_Europe_vestment strategies. Given that many of 5. Future plan regulation Study.pdf).these differences are country-specific, it isdifficult to make an accurate prediction of 6. Design of the payout phasethe future of DC in Europe. 7. Prospects of pan-European pensions In order to explore this issue more fullyand get a glimpse of what the future might 8. The financial crisis and its impacthold, this study focuses on how expertsbelieve DC plans will develop in the biggestEuropean retirement markets (France, Ger- 5
  • 6. Allianz Global Investors International Pension Papers No. 4|2009DC Pensions in EuropeI n general, DC and funded pensions play different roles in the overall design ofEuropean pension systems. In countries In countries with generous state pensions, the need for funded pensions is lower – as are per-capita pension assets in general.such as the United Kingdom and the Nether-lands, where public pension benefits are The way in which funded pensions are * Though mandatorylimited, funded pensions are indispensable designed varies greatly across Europe. In occupational pensionscomponents of retirement income. In coun- Switzerland, occupational pensions are man- do exist in France, thesetries such as Italy and France, public pensions datory; in the Netherlands, they are quasi- schemes (Arrco andare generous and replace a major portion of mandatory. In Italy, employers must set aside Agirc) operate on a pay-pre-retirement income. In Italy, for example, a portion of each employee’s salary for sever- as-you-go basis. Fundedpublic pensions provide a replacement rate ance pay (as a result of reforms made in 2004, schemes are voluntary.of 79% gross and 88% net. Therefore, the these contributions can now be transferred In Germany, employeesimportance of funded pensions and the de- to a pension fund). In France and Germany, have the legal right to agree to which retirement income security occupational pensions are mostly volun- deferred compensationis dependent upon them differs widely. tary*. And though occupational pensions in scheme.Table 1: Pension system characteristics Replacement Per-capita Pension assets Design of DC design rate from public pension assets 2007 occupational (of investigated schemes) pensions 2007 [bn EUR] pensions [gross] [EUR] France 66 20,200 1,229 Voluntary Individual accounts with investment choice Germany 43 13,100 1,074 Voluntary No investment choice and guarantee of paid-in capital Italy 79 7,400 435 Mandatory* Individual accounts with investment choice Netherlands 30 56,000 923 Quasi- No investment choice and mandatory risk-sharing between cohorts Switzerland 58 63,800 482 Mandatory No investment choice and prescribed rate of return United Kingdom 17 51,300 3,092 Voluntary Individual investment choice in most schemes* Contributions to the severance pay scheme (TFR) are mandatory and can be transferred to a pension fund. Source: Allianz Global Investors 2009, “Funded Pensions in Western Europe”6
  • 7. Allianz Global Investors International Pension Papers No. 4|2009 Defining “defined contribution” With the different types of defined contribution plans being offered in Europe, the delimitation between DB and DC is often not obvious and the understanding of what constitutes a defined contribution plan can differ from country to country. For the purpose of this survey, we had to come up with a common definition of what should be understood under DB and DC plans. In doing so, we based our definitions on work carried out by the OECD. Defined contribution (DC) occupational pension plans are pension plans under which benefits to members are based on the amount contributed to the plan by the sponsor and/or member plus the investment return thereon. In a pure DC plan, the sponsoring company has no legal or constructive obligation to pay further contributions to an ongoing plan in the event of an unfavorable plan experience. Defined benefit (DB) occupational pension plans are pension plans where benefits are linked through a formula to the members’ wages or salaries, length of employment or other factors. The financial and longevity risks are borne by the plan sponsor.**the United Kingdom are also voluntary right As the unique specifics of existing pensionnow, a new occupational scheme beginning plans in the individual countries make it dif-in 2012 foresees auto-enrollment for anyone ficult to assign broad definitions of DB andwho does not have an occupational pension DC to them, it had to be decided which of theplan. Table 1 provides a short overview of the existing plans could best be described as DC ** See OECD, “Private Pen–key differences between the western Europe- plans. The guiding and pragmatic principle sions: OECD Classificationan pensions systems addressed in this study. here was to select plans that come closest to and Glossary,” 2005 (www. the abovementioned definition of DC plans. oecd.org/dataoecd/5/4/ Not only does the design of funded pen- While the PERCO plans in France, the pen- 2496718.pdf). In countriessions differ, the extent of the shift towards sion funds in Italy and the DC plans in the such as Germany, theDC and the shape of DC plans themselves do United Kingdom fit the general definition sponsor is obliged to coveras well. Whereas France, Germany and the of DC plans above, the plans in Germany, possible shortfalls so thatNetherlands are overwhelmingly DB markets, Switzerland and the Netherlands include these shortfalls have athe shift towards DC in the United Kingdom, some characteristics of DB plans. For exam- balance sheet impact.Italy and Switzerland is further advanced. ple, either the plan or plan sponsor guaran- *** Details on the respec-A critical feature of DC plans is how they are tees a minimum return (Switzerland) or tive systems and plans canregulated (several countries put investment paid-in capital (Germany), or there is some be found in Allianz Globallimits on pension funds) and who takes in- form of redistribution and risk-sharing Investors 2009, “Fundedvestment decisions. For instance, French, (Netherlands)***. Country-specific plans Pensions in WesternItalian and British plans foresee individual considered to be DC plans for the purposes Europe” (http://publica-choice; while other countries studied (Ger- of this survey are shown in the following tions.allianzgi.com/en/many, the Netherlands and Switzerland) table. PensionResearch/Docu-leave the pension fund to take investment ments/AllianzGI_Western_decisions on behalf of its members. Europe_Study.pdf). 7
  • 8. Allianz Global Investors International Pension Papers No. 4|2009Table 2: DC plans in western Europe Country DC Plan France PERCO (Plan d’épargne retraite collectif) Germany DC plan with minimum benefit guarantee (Beitragszusage mit Mindestleistung) Italy Closed and open pension funds (Fondi pensione negoziali / fondi pensione aperti) Netherlands Collective defined contribution schemes Switzerland DC plans with minimum guarantee (Beitragsprimat) United Kingdom Trust-based and contract-based DC plans As a result, the past growth of EuropeanDC plans covers several national modelswith differing characteristics and mirrorsthe existing fundamental differences in theEuropean retirement landscape. WesternEurope is currently a long way from beinga homogenous retirement market. Thefollowing chapters explore what commontrends we are likely to see going forwardand how the European DC landscape islikely to develop.8
  • 9. Allianz Global Investors International Pension Papers No. 4|2009Survey Results 9
  • 10. Allianz Global Investors International Pension Papers No. 4|20091. The future development and significance of DC plansO ver the last years, DC pensions have become established retirement toolsin western Europe and are showing strong Dominance of DC/hybrid pensions: Pension experts in all the countries surveyed – with the exception of the Netherlands – are pre-growth rates; especially when compared to dicting occupational DC plans to dominateDB pensions. This is particularly true in the their domestic pension markets. In Switzer-United Kingdom, Italy and Switzerland. land and the United Kingdom, 90% of re-However, DC schemes in Germany, France spondents expect to see a dominance of DCand the Netherlands currently reflect only a pensions in their respective countries. Thesmall segment of a market otherwise domi- same is true for almost 90% of their counter-nated by DB schemes*. The survey shows parts in Italy and France. In Germany, 58%that a vast majority of European analysts expect DC pension plans to dominate theare anticipating a continued growth in oc- marketplace. Consistent with the marketcupational DC schemes in their respective structure in the Netherlands and its strongcountries and are able to confirm that there DB orientation, Dutch experts disagree withis an ongoing shift from DB to DC. In fact, DC the notion of DC dominance, despite theiris expected to dominate the pension market conviction of DC growth. Instead, they expectin most countries in the future. In compari- hybrid pensions to dominate. The Nether-son, the future expectations for hybrid plans lands is the only country in which hybridare much more modest. plans are expected to dominate in the future.Future growth of DC schemes/shift from DB Coexistence of DB and DC: Consistent withto DC: The overwhelming majority of pension the above results, Dutch experts were theexperts surveyed (89% on average) expect most likely to foresee the possible coexist-to see growth in the occupational DC market. ence of DB and DC plans (71%). German re-In France, the Netherlands and Switzerland, spondents came in next, with 55% agreeing.90% or more believe there will an increase or The majority of Italian respondents do noteven a very strong increase in DC pension expect DB and DC to coexist, while resultsschemes over the next five years. In Italy, of the other countries are varied. On average, * It must be kept in mindGermany and the United Kingdom, 85% to 45% expect to see the coexistence of DB and that, thanks to a long his-87% agree. It is widely held (81% of all experts) DC in the future. tory and correspondingthat there is an ongoing shift in occupational asset accumulation, thepensions from DB to DC. This seems to be majority of assets is oftenparticularly pronounced in Switzerland and still in DB schemes – eventhe United Kingdom, where 93% of Swiss in those countries with aanalysts agree that a shift is occurring as strong shift towards DC.do 97% of their British peers. The exception is ** Most countries alsoFrance, where significantly fewer experts expect to see strong(46%) have noticed a shift towards DC plans**. growth in 3rd pillar pen- sion savings. 93% of the experts in France, 89% in Germany, 83% in Italy, 66% in the Netherlands, 63% in Switzerland and 42% in the United King- dom agree that there will be an increase or even a strong increase in this type of plan.10
  • 11. Allianz Global Investors International Pension Papers No. 4|2009 The shorter the colored bar, the more respondents took either a neutral stance, did not know, or considered the question not applicable.Figure 1: Future development and significance of DC plans Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% The occupational DC pension market will increase There is a shift from occupational DB to occupational DC schemes In the future, DC plans will dominate the occupational pension market In the future, hybrid plans will dominate the occupational pension market In the future, DB and DC plans will exist alongside each other European average France Germany Italy Netherlands Switzerland United KingdomQuestions: From today’s point of view, how do you expect the following pension plan types (measured in plan members) to develop within your country overthe next five years? To what extent do you agree with the following statements regarding your country? 11
  • 12. Allianz Global Investors International Pension Papers No. 4|20092. Drivers of the trend towards DCI n order to understand the future evolution of DC, it is not only important to evaluatehow the DC market is expected to grow, it Of the other countries surveyed, insufficient funding is seen as an important though not crucial driver of this shift.is also important to determine the factorsdriving that growth. One way to address this Reduction of investment and longevity risk:question is to ask experts what they believe Reducing an employer’s investment riskare the advantages of DC plans over DB plans seems to be a major factor influencing DCfrom the employer’s perspective. The survey over DB plans. On average, 73% of all expertsshows that cost calculability is considered agree; around 80% agree in the Netherlandsto be the biggest asset of DC plans. Experts and the United Kingdom. This percentage isdiffer in how important they believe DC substantially lower in Germany and Switzer-advantages are in their respective markets, land, where local regulations stipulate thatsuggesting that different goals are being DC plans also guarantee paid-in capitalpursued in the shift towards DC plans. Lower (Germany) or a certain minimum returninvestment and longevity risk are important (Switzerland). Reducing the longevity riskdrivers, but their significance varies from to the employer is particularly important incountry to country. The impact accounting the United Kingdom, where 90% believe itstandards are having on the shift towards DC is a driving factor of DC schemes. At 80%,also varies widely across Europe. it is also clearly important in Germany. How- ever, in other countries, reducing longevityCost calculability and cost reduction: The risk is not considered crucial, least of all inmost significant advantage of DC plans seems Switzerland.to be their cost calculability. Of the expertssurveyed, over 90% in the Netherlands, Swit- Accounting standards/visibility of employerzerland and the United Kingdom, exactly 90% contributions: The adoption of internationalin Germany, and a strong majority in the accounting standards (IFRS and US-GAAP)remaining countries agree that this is a cru- and their associated mark-to-market account-cial factor driving employers to choose DC ing and balance-sheet effects is consideredplans over DB plans. Cost calculability ranks to be a reason for companies to move awaymuch higher than cost reduction. Only 50% from DB schemes. Almost 90% agree withor slightly less of the pension experts in the this position in the Netherlands and aroundNetherlands and Switzerland agree that re- 60% in the United Kingdom, while in Italyducing costs is one of the advantages of DC and France, the role of accounting standardsschemes over DB schemes. In Italy, France in driving the trend towards DC seems to beand Germany, this percentage is in the 60%+ relatively minor. Another conceivable reasonzone. The picture is quite different in the why employers are shifting to DC schemes isUnited Kingdom, where over 90% agree that that their financial contribution to the pen-cost reduction is one of the advantages of sion plan is easily visible and so has a strong-DC, suggesting that British firms are using er motivational impact on employees. ThisDC plans to pursue different goals than their is especially true in France, where 73% ofcounterparts in continental Europe. respondents believe it to be an important factor. However, all the other countries be-Insufficient funding of existing DB plans: lieve contribution visibility plays a minorIn the United Kingdom and Italy, 85% and role in motivating employers to choose an88% respectively agree that insufficient occupational DC plan.funding in existing DB plans is a majorfactor triggering the shift towards DC. InSwitzerland, 70% of the respondents agree.12
  • 13. Allianz Global Investors International Pension Papers No. 4|2009Figure 2: Drivers of the trend towards DC Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Calculability of costs Reduction of plan costs Insufficient funding in existing DB plans Reduction of investment risk exposure Reduction of longevity risk exposure Accounting standards Visibility of employer contribution for the employee European average France Germany Italy Netherlands Switzerland United KingdomQuestion: If employers choose an occupational DC plan over an occupational DB plan, which factors could motivate them in their decision? 13
  • 14. Allianz Global Investors International Pension Papers No. 4|20093. Obstacles to better DC plansT here is a broad consensus on the main obstacles to developing better DC plans.Topping the list is poor financial education, obstacle to improved DC plans. Insufficient contributions are considered to be a major obstacle to improving DC plans in Francewith inadequate advice coming in second. and the United Kingdom.While factors such as insufficient participa-tion and insufficient contributions are im- Insufficient tax incentives/level of costs/portant, not all markets agree to what extent. inadequate regulation: In general, insuffi-In comparison, hotly contested topics such cient tax incentives are not considered to beas tax incentives, costs, investment choice, a major obstacle to DC plans. Though morediversification or general regulation are con- than half of the pension experts in Francesidered to be largely unimportant, though and Italy believe insufficient tax incentivesthere are country-specific variations. do present an obstacle, all the other countries disagree. The Netherlands was the only coun-Poor financial education/inadequate advice: try to respond that the amount of costs andThe vast majority of respondents – 93% of fees are of major concern. In general, there isFrench, 88% of Italian and 84% of British – widespread satisfaction with how DC plansbelieve poor financial education is among are regulated. The pension experts stronglythe most important obstacles to improved disagree that inadequate regulation posesDC schemes. Given that, it is not considered an obstacle to the further development ofa pressing problem in the Netherlands and DC. In fact, more than 50% disagree in France,Switzerland, where there is no investment Germany, the Netherlands, Switzerlandchoice for employees. A similar pattern can be and the United Kingdom, and 40% disagreeobserved when addressing the issue of inad- in Italy.equate advice, which is seen as a major ob-stacle mainly in Italy and United Kingdom. Too few or too many investment choices/ insufficient diversification: In theory, bothInsufficient employee participation/lack of too few and too many investment choices canautomatic enrollment/insufficient contribu- hinder the acceptance of DC plans. However,tions: In voluntary DC systems, plan members neither possibility seems to be particularlycan choose whether or not to participate and, relevant to European markets. A substantialif so, how much they would like to contribute. majority of respondents does not believe aTherefore, short-sighted behavior can result lack of investment choices will hinder DCin lower-than-needed retirement income. market development. This applies equallyItalian experts believe that insufficient em- to countries with and without investmentployee participation is a critical obstacle to options. It can therefore be inferred that thethe DC market in Italy, with 92% reporting range of options is considered sufficient inthat it is actually hindering the development countries that do offer a selection of invest-of improved DC plans. This extraordinary ments and is a non-issue in countries wherelevel of agreement is very likely rooted in the there is a lack of investment choice. OnlyItalian pension reform of 2004, which foresaw a very small percentage (on average, 13%)Italian employees voluntarily transferring agrees that the insufficient diversification oftheir severance pay contributions into dedi- DC portfolios is a problem in their countries.cated pension schemes, though fewer than Thus, from the expert’s perspective, diversifi-expected actually did. Insufficient participa- cation in the investment of retirement assetstion is also considered a problem in France. seems to have become a guiding principleWith the exception of France, the lack of across Europe.automatic employee enrollment into a planis generally not considered to be a major14
  • 15. Allianz Global Investors International Pension Papers No. 4|2009Figure 3: Obstacles to better DC plans Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Poor financial education Inadequate advice Insufficient employee participation Lack of automatic enrollment Insufficient level of contributions to provide sufficient income in the payout phase Insufficient tax incentives Level of costs/fees Inadequate regulation of DC plans Lack of investment choices for employees Overload of investment choices for employees Insufficient diversification of DC investment portfolios European average France Germany Italy Netherlands Switzerland United KingdomQuestion: What are the most important factors hampering the development of better occupational DC plans in your country? 15
  • 16. Allianz Global Investors International Pension Papers No. 4|20094. Future investment regulationI n terms of investment regulation, the countries in our survey can be brokendown into two groups. The first group uses Investment guarantees: In the wake of the financial crisis, the issue of investment guar- antees has gained renewed popularity. Somequantitative investment regulations to of the countries surveyed already have vari-regulate pension investments (Germany, ous types of investment guarantees in placeSwitzerland, Italy)*, while the second applies (Germany and Switzerland), so the questionthe prudent person principle (the Nether- here is whether respondents in these coun-lands, the United Kingdom, France)**. The tries expect such guarantees to be extendedfirst principle can be considered tight regu- and whether their peers in the other coun-lation; the second loose. Results show that tries anticipate investment guarantees to bein half of the countries surveyed, tightened introduced by law. Results show that 40% toinvestment regulations are expected. It is 50% of the experts in France, Germany andgenerally considered unlikely that regula- Italy expect that there will either be an intro-tions will be relaxed and even more unlikely duction or extension of guarantees. In fact,that they will be abolished altogether. The there were relatively few experts in Germanyintroduction or extension of investment and Italy who disagreed. On the other hand,guarantees is again an issue in half of the a large majority of British pension experts iscountries surveyed. convinced that investment guarantees will not be introduced in the United Kingdom.Development of quantitative investmentlimits: There is no clear support for the pos-sibility of quantitative investment limitsbeing tightened. For countries applying theprudent person principle, this would implythat quantitative limits would first have to be * Though Italy appliesintroduced. While a majority of respondents some investment restric-in France, Germany and the Netherlands tions, it does not set anyexpects to see a tightening of investment limits on bond and equityregulations, the opposite is true in other investments in OECDcountries. That said, the proportion of un- countries.decided respondents is high. A majority ** The prudent personof Italian analysts believe that quantitative principle is qualitative ininvestment limits will be relaxed (38% who nature and is based onagree vs. 29% who do not). In all the other the premise that pensioncountries, the clear majority believes they funds or asset managerswill not be relaxed. There is an even stronger are obliged to investconsensus among respondents as to whether the same way a prudentor not investment restrictions will be abol- investor would invest forished. A strong majority in all countries does himself, particularly withnot expect this to occur. regard to diversifying assets. In the French PERCO system, union and employer representatives preselect several funds, at least three diversified funds among them, from which the employees can then choose.16
  • 17. Allianz Global Investors International Pension Papers No. 4|2009Figure 4: Future investment regulation Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Quantitative investment limits will be tightened Quantitative investment limits will be loosened Quantitative investment limits will be abolished Investment guarantees will be prescribed by regulation or existing guarantee regulations will be extended European average France Germany Italy Netherlands Switzerland United KingdomQuestion: From today’s point of view, how do you expect the regulatory protection mechanisms of the domestic occupational DC market to develop withinthe next five years? 17
  • 18. Allianz Global Investors International Pension Papers No. 4|20095. Future plan regulationT o a large extent, future regulation will determine the development of the oc-cupational DC market and several ideas Tax incentives for employers and employees: In general, most countries do not expect to see an extension of tax incentives for DC andare currently being discussed. According to occupational pensions in the next five years.results of this survey, automatic enrollment Again, only the French pension expertsis considered to be the most likely regula- strongly expect to see additional tax incen-tion to be implemented. In comparison, the tives introduced for both employers (60%)introduction of mandatory employee or em- and employees (73%). In Italy, a slight majori-ployer participation is considered less likely. ty expects to see additional tax incentivesOf the countries surveyed, all but France introduced, with most of the respondentsfound it unlikely that further tax incentives taking a neutral position. Respondents in allwill be introduced. The prospects for pure the other countries surveyed do not believeDC plans are also considered improbable. tax incentives will be introduced, with the United Kingdom, the Netherlands and Ger-Automatic enrollment/mandatory participa- many being particularly pessimistic.tion and offering: Automatic enrollment isconsidered to be the most likely regulation to Pure DC plans: The prospect of introducingbe introduced. It should come as no surprise pure DC plans, which imply individualthat 94% of analysts surveyed in the United investment choice and individual accounts,Kingdom, which is introducing automatic are quite modest in Europe. In countriesenrollment as of 2012, are expecting it. where they do not already exist (Switzerland,In France and Italy, where insufficient em- Germany and the Netherlands), experts areployee participation is an issue, a sizable not sure whether or not they will be intro-majority of the respondents also expect to duced. In fact, a slight majority in Germanysee such a regulatory move. In the (quasi-) and Switzerland does not expect them tomandatory markets of Switzerland and be introduced, while the opposite is true inthe Netherlands, obviously very few agree. the Netherlands.Surprisingly, experts in Germany do not seeautomatic enrollment to be on the agendain Germany; over 50% do not believe it willbe introduced and only 15% believe it will.Mandatory employee participation is evenmore strongly disregarded in Germany. At53%, France showed the highest expectationthat mandatory employee participation willbe introduced. A similar picture emergeswhen experts were asked whether they ex-pect it to become mandatory for employersto offer DC plans. Again, France had the high-est percentage of agreement (73%). The onlyother country expecting to see mandatoryemployer participation is the United King-dom, with a majority of 68%.18
  • 19. Allianz Global Investors International Pension Papers No. 4|2009Figure 5: Future plan regulation Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Automatic enrollment will be introduced Mandatory employee participation will be introduced Employers will be obliged to offer a DC plan Additional employee tax incentives will be introduced Additional employer tax incentives will be introduced Pure DC plans will be introduced European average France Germany Italy Netherlands Switzerland United KingdomQuestion: From today’s point of view, how do you expect regulations regarding the design of your domestic occupational DC market to develop within thenext five years? 19
  • 20. Allianz Global Investors International Pension Papers No. 4|20096. Design of the payout phaseT he rise of DC has crucial ramifications for the pension payout phase. In a DBworld, retirees do not have to worry about and Italy consider a combined payout solu- tion (withdrawal plan for the first 10–15 years of retirement followed by an annuity) to bethe payout phase because benefits are de- a good idea. This idea was met with morefined and known beforehand. However, in a limited approval in the other countries. SwissDC system, the question of how to convert experts would enthusiastically welcome aassets into retirement income is critical. combination of partial immediate annuityIn a pure DC system, retirees would receive and partial lump-sum payment. In fact,their accumulated assets in hand and then 75% of the Swiss analysts surveyed are inhave to decide how to invest their money. favor of this solution as were around 50%In principle, there are several drawdown com- in the United Kingdom, Italy and Germany.binations and solutions ranging between However, this particular mix would meetthe opposite poles of lifelong annuities and very strong resistance in the Netherlands.lump-sum payments*. The question in thesurvey, therefore, was not geared towards Annuities: Feedback on the various typesexpected developments, but was normative of annuities differed widely**. Leaving theand addressed how the payout phase should decision to retirees and relying on voluntarybe organized. It turns out that the inflation- annuities is not very popular amongindexed annuity is highly popular among European pension experts. The likeliest is inEuropean experts. Though lump-sum pay- Switzerland, where 45% would welcome thisments are not considered a good solution solution. The same is true of variable annui-across the board, there is no unanimous ties (in which retirees participate in invest-support for any other type of annuity. ment risk and opportunities), which found no more than 44% support in any countryLump-sum payment/withdrawal plans: Most (Netherlands). Mandatory immediate annui-experts agree that lump-sum payments are tization (in which accumulated capital isnot a desirable solution for the payout phase. converted into a life-long annuity) is also not * For an overview of theIn every country except France, where experts very popular. Though 54% of French respond- situation in Europe andare almost equally divided, the percentage ents are in favor of it, their German, Swiss alternative regulatoryof experts who disapprove of lump-sum pay- and British counterparts aren’t; the British, solutions, see Maurer,ments is much larger than the percentage of quite strongly. Raimond; Somova,those who approve of them. On average, only Barbara 2009, “Rethinking22% of respondents are in favor of lump-sum As it turns out, the most popular type of retirement income strate-payments. Withdrawal plans enjoy greater annuity is the inflation-indexed annuity. gies – How can we securethough still modest acceptance, with around 84% of Italian, 80% of Dutch and 67% of Ger- better outcomes for50% of all respondents in the United Kingdom man respondents believe it to be a suitable future retirees?” (www.and Switzerland considering them to be a solution. Inflation is considered to be such efama.org/index.php?good solution for the payout phase. In France, a tremendous risk, that it should be spe- option=com_docman&the number of proponents is greater than the cifically factored into retirement investing. task=cat_view&gid=261number of opponents, while in the Nether- With its history of low inflation, Switzerland &Itemid=-99).lands and Italy, respondents are almost is much less in favor of inflation-indexed ** For the purpose of thisequally divided. Withdrawal plans have more annuities. However, the current financial survey, we defined annui-opponents than supporters in Germany. crisis and possibility of higher inflation in ties as financial products the future is likely driving this concern that convert an employ-Combined payout solutions: The popularity among other countries. ee’s capital into a lifelongof annuity and withdrawal combinations income. In the case of his/largely depends on the country in question. her death, a bequest isMore than half of the experts in Germany not possible.20
  • 21. Allianz Global Investors International Pension Papers No. 4|2009Figure 6: Design of the payout phase Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Lump-sum payment Withdrawal plans Combined agreement (a withdrawal plan for the first 10 to 15 years and an annuity after that) Partial annuity starting immediately and partial lump-sum payment Voluntary annuity Variable annuity in which retirees participate in the investment risk Mandatory immediate annuitization Inflation-indexed annuity European average France Germany Italy Netherlands Switzerland United KingdomQuestion: In your opinion, how should the payout phase of occupational DC systems be organized? 21
  • 22. Allianz Global Investors International Pension Papers No. 4|20097. Prospects of pan-European pensionsT here is a long-standing political ambition to create a pan-Europeanoccupational pension market and, to this surveyed (82%) believe that pan-European plans will be DC rather than DB. The largest percentage of analysts of any one countryend, the EU adopted the IORP (Institutions not agreeing was in France, but even at that,for Occupational Retirement Provision) it was only 7%.Directive in 2003*. However, transnationalpensions in Europe are a complex matter Regulation of pan-European pension plans:and introducing them is not simply a ques- There is an ongoing debate as to whethertion of EU regulation. National social, labor the IORP Directive provides a sufficientand tax laws play a crucial role as does the framework for mandating a pan-Europeanwillingness of companies to take on such pension market. On the surface, the resultsplans. This section of the survey explores the seem to be quite clear. Of the respondentsprospects of a pan-European pension market prepared to take a position one way or thein general, its drivers and likely regulatory other, most of them believe the IORP Direc-developments. The results show no clear tive is not sufficient (76% in Italy and 43% onpicture of whether a pan-European pension average). However, most of the respondentsmarket will develop, but if it should, DC either took a neutral position or did notplans are likely to prevail. According to re- consider the question applicable to theirspondents, in order to create a European individual countries.market, additional legislative changes wouldhave to be introduced. There is cautious On the other hand, there is a clear consensusoptimism as to whether such changes will on what would be required to build a pan-actually be introduced on a European and European market and the results imply thatnational level. much remains to be done on the national level. The vast majority believe that a pan-Prospects and drivers of demand: There is no European market will only emerge onceconsensus as to whether or not a pan-Euro- additional changes have been made to social,pean pension market will emerge within the labor and tax laws within the Member States.next 10 years. The pension experts surveyed This opinion is shared by 76% of all respond-are almost equally divided on this matter. ents. However, it is not certain whether legis-On average, 42% agree and 40% disagree, with lative changes in that direction will ever beDutch and French respondents being more made. On average, 47% of the experts sur-optimistic than their British counterparts. veyed expect there to be changes initiatedHowever, there is a broader consensus on at the European level. However, a large pro-what is driving the demand for pan-European portion didn’t take a position one way or thepensions. Our experts believe it is due to other. The same is true of expected changeslarge multinational companies and not a on a national level, which is currently themore mobile workforce. Overall, 72% of the crucial level for changes in social, labor andrespondents believe that the demand for tax laws. Again, there is modest agreement *This directive providescross-border schemes will be driven by com- (Dutch analysts are the most optimistic, the framework for estab-panies; the idea that increasingly mobile followed by their German counterparts) with lishing pan-Europeanworkers will stimulate the development of a large number undecided. pension funds. SuchEuropean pensions receives a significantly pan-European pensionlower rating. funds are regulated by the home country alone.Should there be a pan-European market one The prudent personday, there is a broad consensus on how it will principle of investmentbe designed. The vast majority of all analysts regulation applies.22
  • 23. Allianz Global Investors International Pension Papers No. 4|2009Figure 7: Prospects of pan-European pensions Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% There will be a pan- European pension market (within the next 10 years) Demand for cross-border pensions will be driven by large multinational companies Demand for cross-border pensions will be driven by a more mobile workforce Pan-European plans will have DC rather than DB designs The current legislative framework (IORP directive) is sufficient for the establishment of pan-European plans A pan-European market will only develop once additional changes have been made to social, labor and tax laws in Member States Changes will be made to social, labor and tax laws at the European level Changes will be made to social, labor and tax laws at the national level European average France Germany Italy Netherlands Switzerland United KingdomQuestion: To what extent do you agree with the following statements? 23
  • 24. Allianz Global Investors International Pension Papers No. 4|20098. The financial crisis and its impactT he financial crisis is very likely to have a significant impact on the future develop-ment of DC plans and funded pensions in agreement and their counterparts in the Netherlands and Switzerland recording over 75%. Though the number of respondentsgeneral. Its scale and depth are causing reg- who agree is substantially lower in France,ulators, plan sponsors and pension funds Germany and Italy, the number who disagreeto review their approaches towards retire- is very low and a large number of respond-ment savings and investment. It is possible ents are undecided. It is considered extreme-to conceive several different outcomes rang- ly unlikely that the financial crisis will haveing from a general rollback of funded pen- the opposite effect (i.e., a reversal of the shiftsions to the introduction or strengthening from DB to DC). No more than 9% in anyof protection mechanisms in DC plans. country expect such a scenario to occur – notThe survey shows that the crisis is likely to even in quintessential DB markets such asaccelerate the shift from DB to DC, while a the Netherlands. 74% to 94% in the Nether-rollback of funded pensions is generally not lands, Switzerland, Italy and the United King-expected. Protection mechanisms – particu- dom do not expect a reversal; in France andlarly risk-management investment strate- Germany, 50% to 60%. Based on these results,gies – are anticipated to play a greater role it can be argued that the financial crisis willin DC plans. However, several countries also not stop the shift from DB to DC; quite theexpect to see changes in asset allocation and contrary. One possible reason is that the cri-the establishment or expansion of formal sis has painfully underscored the importanceinvestment guarantees. of investment risk, considered one of the main reasons for the shift (Question 2). ThisRollback of funded pensions: A possible effect naturally strengthens the incentive of planof the crisis is the rollback of funded pensions sponsors to change pension plan designs.and a strengthening of state pensions. Thismight happen if citizens were to lose confi- Protection mechanisms in DC plans: Whatdence in the ability of the financial markets the crisis is likely to change is the impor-to provide reliable retirement income and tance protection mechanisms play in DCso demand a reorientation of pension policy, plans. In this context, protection refers toor if politicians would exploit the uneasiness mechanisms put in place to protect pensionabout financial markets to promote greater plan members to some extent from capitalreliance on public pensions. However, almost market swings. The main approaches areall the experts surveyed believe this will not be changing asset allocation to less risky assets,the case. 74% to 80% of experts in the Nether- building risk-management strategies intolands, the United Kingdom and Germany do DC plans, and having the plan’s sponsor ornot believe there will be a rollback of funded regulation introduce formal investmentpensions. The same is true of about 60% in guarantees. The vast majority of pensionSwitzerland and 55% in Italy. In France, 27% of experts surveyed are convinced that suchrespondents disagree, while 34% expect to see protection mechanisms will play a greaterbacksliding from funded pensions. role. Germany (80%), the Netherlands (72%) and Italy (67%) highly expect to see assetAccelerating or reversing the shift from DB allocation changed to less risky assets.to DC: The survey paints a very clear picture While its proponents still overweigh itsof the impact the financial and economic opponents, this expectation is considerab-crisis is having on the shift from DB to DC. ly lower in Switzerland, France and theEvery country expects the crisis to accelerate United Kingdom.the shift. On average, 64% across Europeagree, with the British recording over 90%24
  • 25. Allianz Global Investors International Pension Papers No. 4|2009That built-in risk management investment ment guarantees to be introduced, but thestrategies (e.g. life-cycle, outcome-oriented rate of approval tends to be lower as in theor inflation-protected strategies) will gain case of risk-management investment strate-importance is accepted almost unanimously, gies (50% vs. 76% on average). While a fairwith 97% of Dutch experts agreeing, around share of experts (54% to 76%) in the Nether-80% in the United Kingdom, Italy and Germa- lands, France, Germany and Italy expect tony, and 75% in Switzerland. Though only about see more formal investment guarantees, the50% of French experts agree, only 7% disagree. overall mood in Switzerland and the UnitedSeveral countries expect more formal invest- Kingdom is much more pessimistic.Figure 8: The financial crisis and its impact Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Political efforts to roll back funded pensions and strengthen state pensions Accelerate the shift from DB to DC Reverse the shift from DB to DC Strengthen the role of protection elements in DC plans through a shift to less risky assets Strengthen the role of protection elements in DC plans through built-in risk-management invest- ment strategies Strengthen the role of protection elements in DC plans through more formal investment guarantees European average France Germany Italy Netherlands Switzerland United KingdomQuestion: From today’s point of view, what are the possible consequences of the financial crisis for the further development of DC occupational pensionschemes in your domestic market over the next five years? 25
  • 26. Allianz Global Investors International Pension Papers No. 4|2009The Pan-European PerspectiveT his survey not only includes the opinions of experts about their respective coun-tries, respondents had the option to decide market and is particularly suited to pension experts whose area of expertise is trans- national trends. The aggregate perspectivewhether they wanted to give a country-specific of these pan-European experts can provide aperspective or take a pan-European approach. bird’s eye view of European DC developments.A pan-European approach implies making The following sections compare their answersan overall assessment of the entire European to country averages.The future development and significance of DCRegarding the future growth of the European about the future of hybrid plans. ComparedDC market, both national and pan-European to over 50% of the pan-European pensionpension experts agree that there is a shift experts, only slightly more than 20% of thefrom occupational DB to DC plans in Europe national experts on average expect hybridand that DC is likely to grow and dominate plans to dominate the occupational pensionthe European pension market. However, pan- market in the future.European experts are much more optimisticFigure 9: Future development and significance of DC plans Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% The occupational DC market will increase There is a shift from occupational DB to occupational DC schemes In the future, DC plans will dominate the occupational pension market In the future, hybrid plans will dominate the occupational pension market In the future, DB and DC plans will exist alongside each other Pan-European European averageQuestions: From today’s point of view, how do you expect the following pension plan types (measured in plan members) to develop within your country overthe next five years? To what extent do you agree with the following statements regarding your country?26
  • 27. Allianz Global Investors International Pension Papers No. 4|2009Drivers of the trend towards DCThe two groups of respondents showed significantly higher. Insufficient DB fundingsimilar results when asked whether cost cal- and the reduction of investment risk ex-culability is the main driver of the shift from posure are considered to be more importantDB to DC. 95% of the pan-European experts drivers by the pan-European group thanagree. As compared to country averages, the the country average, however the differencespan-European experts ranked the reduction are not substantial.of plan costs and longevity risk exposureFigure 10: Drivers of the trend towards DC Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Calculability of costs Reduction of plan costs Insufficient funding in existing DB plans Reduction of investment risk exposure Reduction of longevity risk exposure Accounting standards Visibility of employer contribution for the employee Pan-European European averageQuestion: If employers choose an occupational DC plan over an occupational DB plan, which factors could motivate them in their decision? 27
  • 28. Allianz Global Investors International Pension Papers No. 4|2009Obstacles to better DC plansNational and pan-European experts agree the latter is a critical hindrance to thethat poor financial education is the biggest development of improved DC plans. Thoughobstacle to improved occupational DC plans. the reason for this big discrepancy is notThe rate of approval is even higher among obvious, it might be due to their differentthe pan-European respondents (83%). The perspectives. Whereas national experts tooksame is true for the possible obstacles “lack existing fee structures in their respectiveof automatic enrollment,” “inadequate markets into account, the pan-European ex-regulation of DC plans,” and – in particular – perts may have been forecasting the kind of“level of costs/fees.” A much larger percent- fees a pan-European market might haveage of pan-European experts (62%) believe should it be introduced.Figure 11: Obstacles to better DC plans Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Poor financial education Inadequate advice Insufficient employee participation Lack of automatic enrollment Insufficient level of contributions to provide sufficient income in the payout phase Insufficient tax incentives Level of costs/fees Inadequate regulation of DC plans Lack of investment choices for employees Overload of investment choices for employees Insufficient diversification of DC investment portfolios Pan-European European averageQuestion: What are the most important factors hampering the development of better occupational DC plans in your country?28
  • 29. Allianz Global Investors International Pension Papers No. 4|2009Future investment regulationWhen asked about the future development The two groups of respondents differed inof quantitative investment limits, the differ- their expectation of whether investmentences between pan-European and national guarantees would be introduced or extended.respondents are minimal. Neither expects Almost 50% of the pan-European expertsthem to be either relaxed or abolished. Re- believe this will happen; the average amonggarding a possible tightening of investment national experts is 32%.limits in the future, no clear picture emerged.Figure 12: Future investment regulation Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Quantitative investment limits will be tightened Quantitative investment limits will be loosened Quantitative investment limits will be abolished Investment guarantees will be prescribed by regulation or existing guarantee regulations will be extended Pan-European European averageQuestion: From today’s point of view, how do you expect the regulatory protection mechanisms of the domestic occupational DC market to develop withinthe next five years? 29
  • 30. Allianz Global Investors International Pension Papers No. 4|2009Future plan regulationPan-European experts agree with their na- introduction of mandatory participation fortional colleagues that automatic enrollment employees. Though the pan-European ana-is the most likely change to occur in future lysts are more optimistic than their nationalplan regulation. Slightly more than 50% are counterparts about both of these scenarios,expecting it and 40% believe we will see the they are more pessimistic that employersemergence of pure DC plans as well as the will be obliged to offer mandatory DC plans.Figure 13: Future plan regulation Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Automatic enrollment will be introduced Mandatory employee participation will be introduced Employers will be obliged to offer a DC plan Additional employee tax incentives will be introduced Additional employer tax incentives will be introduced Pure DC plans will be introduced Pan-European European averageQuestion: From today’s point of view, how do you expect regulations regarding the design of the domestic occupational DC market to develop within the nextfive years?30
  • 31. Allianz Global Investors International Pension Papers No. 4|2009Design of the payout phaseThere is a broad consensus on how the payout phase. A major difference can bepayout phase of occupational DC schemes observed in how the combination of with-should be organized. Lump-sum payments drawal plans in the first 10 –15 retirementare strongly rejected as is, to a lesser degree, years followed by annuities is assessed.mandatory annuitization. Both groups agree Though some 60% of pan-European expertsthat inflation-indexed annuities are the most believe this to be a sensible solution, nation-appropriate financial instrument for the al experts are much less convinced (39%).Figure 14: Design of the payout phase Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Lump-sum payment Withdrawal plans Combined agreement (a withdrawal plan for first 10 to 15 years and an annuity after that) Partial annuity starting immediately and partial lump-sum payment Voluntary annuity Variable annuity in which retirees participate in the investment risk Mandatory immediate annuitization Inflation-indexed annuity Pan-European European averageQuestion: In your opinion, how should the payout phase of occupational DC systems be organized? 31
  • 32. Allianz Global Investors International Pension Papers No. 4|2009Prospects of pan-European pensionsNational and pan-European analysts have parts that there will be changes in bothdifferent takes on several aspects of the national and European legislation that willfuture development of a pan-European pen- favor a pan-European market. While bothsion market. Generally speaking, the pan- groups of experts are generally skeptical thatEuropean experts adopt a more optimistic the IORP Directive provides a framework suf-view. One major point of contention con- ficient for establishing pan-European plans,cerns the question of whether there will be again the pan-European experts are morea pan-European market within the next 10 optimistic. However, there is a broad con-years. While 42% of national analysts believe sensus that a pan-European market will onlythis will happen, almost 70% of their pan- be introduced once additional changes haveEuropean colleagues are expecting this to been made to social, labor and tax laws, andtranspire. The pan-European experts are also that European-wide plans will have DC rath-more optimistic than their national counter- er than DB designs.Figure 15: Prospects of pan-European pensions Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% There will be a pan-European pension market (within the next 10 years) Demand for cross-border pensions will be driven by large multinational companies Demand for cross-border pensions will be driven by a more mobile workforce Pan-European plans will have DC rather than DB designs The current legislative frame- work (IORP directive) is sufficient A Pan-European market will only develop once additional changes have been made to social, labor and tax laws in Member States There will be changes on the European level (in the social, labour and tax laws) There will be changes on the national level (in the social, labor and tax laws) Pan-European European averageQuestion: To what extent do you agree with the following statements?32
  • 33. Allianz Global Investors International Pension Papers No. 4|2009The financial crisis and its impactBoth national and pan-European respond- crisis will lead to strengthening protectionents strongly agree that the financial crisis mechanisms in DC plans by changing assetwill accelerate and not reverse the shift from allocation to less risky assets, by buildingDB to DC. Their differences lie in whether in risk-management strategies and by intro-they believe funded pensions will be rolled ducing formal investment guarantees. Built-back and state pensions will be strength- in risk-management strategies is consideredened. The majority of national experts does to be the most important mechanism andnot expect this to happen while the pan- the feedback from pan-European experts isEuropean experts are split into two almost extraordinarily high (96%).equal camps. Both groups agree that theFigure 16: The financial crisis and its impact Disagree Agree-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Political efforts to roll back funded pensions and strengthen state pensions Accelerate the shift from DB to DC Reverse the shift from DB to DC Strengthen the role of protection elements in DC plans through a shift to less risky assets Strengthen the role of protection elements in DC plans through built-in risk-management investment strategies Strengthen the role of protection elements in DC plans through more formal investment guarantees Pan-European European averageQuestion: From today’s point of view, what are the possible consequences of the financial crisis for the further development of DC occupational pensionschemes in your domestic market over the next five years? 33
  • 34. Allianz Global Investors International Pension Papers No. 4|2009Sample DemographicsNumber of participants 0 10 20 30 40 50 60 70 80 90 100 31 Pan-European 15 France 47 Germany 26 Italy 35 Netherlands 30 Switzerland 32 United KingdomProfessional background of participants [%]0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20 Academic organizations 19 Asset management 19 Consulting companies 18 Pension funds 7 Insurance companies 7 Associations 5 International organizations 4 Authorities (regulatory, supervisory, etc.) 1 Corporate34
  • 35. Allianz Global Investors International Pension Papers No. 4|2009Recent PublicationsInternational Pension Studieshttp://publications.allianzgi.com/en/PensionResearch/Pages/PensionStudiesandPapers.aspxRetirement at Risk II – Challenges for U.S. Baby Boomers Approaching Retirement October 2009How the financial crisis affects pension funds: What analysts expect September 2009Private household financial assets: the golden days of the past are a long way off August 2009Investment Regulations and Defined Contribution Pensions July 2009Funded Pensions in Western Europe 2008 February 2009Retirement at Risk: The U.S. Pension System in Transition January 2009Pension Trends in Emerging Markets – The Rise of DC Plans and Its Consequences November 2008Funding Unfunded Pensions: Governance and Investments of Asian Reserve Funds September 2008Evaluating the Impact of Risk Based Funding Requirements on Pension Funds May 2008International Pension Issueshttp://publications.allianzgi.com/en/PensionResearch/Pages/Internationalpensionsissues.aspxPension funds and the financial crisis July 2009Western Europe: Fiscal pressures-ageing costs still on the horizon April 2009United States: Severe setback in financial and retirement assets March 2009Germany: Households financial assets dive January 2009& http://publications.allianzgi.com/en/PensionResearchMastheadPublisher: Allianz Global Investors AG, International Pensions, Seidlstr. 24-24a, 80335 Munich, Germany | International.Pensions@allianzgi.comhttp://www.allianzglobalinvestors.com | Author: Dr. Alexander Börsch, Senior Pensions Analyst, Allianz Global Investors AG, alexander.boersch@allianzgi.comEditor: Marilee Williams | Layout: volk:art51 GmbH, Munich | Printing: Christian Döring GmbH, Munich | Closing Date: October 29, 2009The entire content of this publication is protected by copyright with all rights reserved to Allianz Global Investors AG. Any copying, modifying, distributingor other use of the content for any purpose without the prior written consent of Allianz Global Investors AG is prohibited. The information contained in thispublication has been carefully verified by the time of release, however Allianz Global Investors AG does not warrant the accuracy, reliability or completenessof any information contained in this publication. Neither Allianz Global Investors AG nor its employees and deputies will take legal responsibility for anyerrors or omissions therein.This publication is intended for general information purposes only. None of the information should be interpreted as a solicitation, offer or recommendationof any kind. Certain of the statements contained herein may be statements of future expectations and involve known and unknown risks and uncertainties,which may cause actual results, performance or events to differ materially from those expressed or implied in such statements. 35
  • 36. www.allianzglobalinvestors.comAllianz Global Investors AGInternational PensionsSeidlstr. 24 -24a80335 Munich, Germany