Savings & Investing

A private solution for
a public good

May 3, 2016
By Allan Polack

Europe has a growing pension gap with half of EU’s population without financial savings.

With the demographic development and the pressure on public deficits a growing group of Europe’s elderly people will become a proletariat with unacceptable social impact which could eventually lead to constitutional risks.

With the current macroeconomic environment in Europe, the possibility of a first or second pillar solution forcing citizens into long term saving is not feasible. However, a solution building on a voluntary third pillar private framework could also ease the problem.

EU is missing a pan-European private pension product (PPP) giving ability for Europeans to save in a trusted product, and thereby giving the possibility to secure long term benefits for a large part of senior future European citizens.

Core description of solution

Europeans need a PPP that is easy to understand and offers default investment options, as most citizens are incapable or unwilling of making such investment decisions. To successfully construct a pan-European PPP, the product characteristics must accommodate for a variety of issues and fulfil the following criteria:

  • Transparent: Cost, valuation and individualized ownership.
  • Transferable: Free competition among providers with the competitive parameters being price and investment return.
  • Common standard, also for decumulation.
  • Be regulated under EU regulation.
  • Common operation platform for product information, transfers and disbursement.

Transparent; because most Europeans have little trust in financial institutions, it is crucial, that the solution provides the individual with the understanding that savings in a PPP is the individuals own money. The PPP must be simple and easily understood by a non-specialist.

Transferable; because competition will bring forward the best solutions and value.

Common standard, also for decumulation; as the structure of the decumulation must seek to secure adequate income levels in the long run, i.e. entire retirement period.

Be regulated under EU; because investors must be protected from mis-selling and those close to retirement against extreme negative outcomes. Regulation should also incentivize against inefficient investments such as deposits yielding too low returns compared to the investment horizon. Furthermore, the regulated PPP with common standards should also provide for lower costs.

Common operation platform; because the individual must have easy access to all relevant information when deciding upon and utilizing the PPP.

Solution and implementation

The timing for introducing a PPP is good. A well-defined single market under the Capital Market Union, as articulated by the Commissioner Jonathan Hill, could accommodate for the deep differences between European countries’ pension framework with some very enhanced and others practically non-existing. Lower costs, due to scale, are an immediate benefit, and a single market would also deliver eased access and transferability.

The PPP should have a long-term perspective in asset allocation and be highly diversified, following an allocation range governed by a regulator and reflecting the long-term investment horizon of pension savings, including investments in illiquid products. It should be portable at EU level and have the same product characteristics across countries. It would not be redeemable on a daily basis and early withdrawals should be discouraged.

The product should be licensed by a European supervisor, such as EIOPA, giving it a unique product label. The licensing criteria would focus on size and simplicity, and would discourage the issuance of a multitude of funds by individual financial institutions, as is the case with UCITS today. EIOPA would manage a website with all relevant information (e.g. descriptions of concept, providers, return and TER), making it easy for users to compare competing offers.

A private solution
for a public good

Hear Allan Polack describe his one idea for how a private solution could be used for public good.

Allan Polack

About the author

Allan Polack
Group Chief Executive Officer, PFA Pension

Allan Polack took over as Group CEO of PFA Pension in April 2015. PFA is Denmark’s leading life and pension company. Prior to joining PFA, Allan Polack held the position as CEO of Nordea Asset Management since 2007. From 2002-2007 Allan held the position as CEO of Nordea Life & Pensions. Allan Polack holds a M.Sc. in Economics and Business Administration and has completed an Advanced Management Program from INSEAD.

Furthermore, Allan has been chairman of a taskforce under CEPS/European Capital Markets Institute regarding long-term investment in retirement savings, and he is board member of The Stockholm Environment Institute (SEI) (international independent non-profit research institute), FIH Holding A/S and The Danish Insurance Association.