At the conference, Patrick Hoedjes, Head of Policy and Supervisory Convergence Department at European Insurance and Occupational Pensions Authority, with a mandate to support improved pensions outcomes for European workers, made a number of points:
Introducing supplementary pensions to a country significantly improved pension sustainability and supported GDP through providing more fiscal space for older people to spend their money, as well as creating the financial literacy to create a more conducive country investment environment. Specifically, some additional points were:
- That the move to the auxiliary pension system required that the pension leaders be very thoughtful about investment strategy for the best interest of members.
- While having individual Pension Accounts improved financial literacy, this did not mean that all members had the capacity to make decisions in their long-term interest and therefore providing choice should be considered carefully
- The Department had a toolbox of auxiliary pensions that could be referred to when a country decided to introduce DC supplementary pensions.
- As part of the auxiliary pension system implementation, a country should also include a de-accumulation capability. This allowed higher risk to be accepted over the longer phase of pensions and lead to better outcomes.
- Auto-enrolment is a key benefit
Tilmann Galler, Managing Director, Global Market Strategist, J.P. Morgan Asset Management, made the point that volatility and uncertainty was significant, but that this environment that funds managers were paid to manage in.
Tilmann also noted that Europe was now better placed from a policy certainty than the USA and therefore a better investment destination
He also noted the need to further move out of predominantly investing in public markets and increase investment in illiquid assets. Many of the larger pension funds are doing this already and while it challenges liquidity, it improves the risk-return characteristic of funds.
Tilmann and Patrick are emblematic of the deep expertise in pensions that exists in Europe and of the desire and ambition of European thought-leaders to create a more modern capital markets environment in Europe to provide more substantial financial support for the aging European population.
It also demonstrates that Greece, as part of the European Union and of the Euro Zone, has access to the complete set of skills and capabilities to build a robust and modern auxiliary pension system, taking it on the path to greater prosperity. But is this access enough?
Perhaps we can learn from countries that have been on this path – none more evident than Australia, who since the 1980’s pursued an objective to reduce the load on the Pillar 1 publicly- funded Pension system by introducing supplementary pensions, called Superannuation. Australia had a secondary objective in building this system. That was to lessen the dependency on foreign capital for growth and government debt.
As a result, in 40 years Australia has found itself in a position where, not only is the pool of capital that the auxiliary pension system has created now 4th in the world at over 2.5 trillion Euro, but that according to independent review, its citizens on a median basis, are the single most wealthy in terms of the assets they own.
Moreover, the cost of the national Pillar 1 pension system has been maintained at around 2.5% of GDP, even though over 40% of its citizens are eligible for the full amount, and a further 22 % are eligible for at least part of this. And all this entirely independent of whether a citizen has ever worked, ensuring gender equality. Something employment-based systems are challenged to do.
So how did they do it, and what are the lessons for Greece?
Firstly, it encapsulates much of what Patrick noted made a good system:
- ‘Superannuation’ is a simple auxiliary pension system which, received contribution from employees (via their employers mostly) into a small number of very large ‘Superannuation Funds’.
- However, the employee assets in the ‘Superannuation Funds’ are entirely separate from the sponsoring organisations and require that each fund is governed by a separate and independent board with skilled Directors.
- While the ‘Superannuation Funds’ offer choice, this is as an alternative to a default option. The regulations place a very high requirement on the Directors to provide investments in the best financial interest of members.
- The Superannuation System includes provision for a de-accumulation phase with tax benefits to encourage people (most do) to continue in the ‘Superannuation’ system post-retirement.
- The Superannuation System has auto-enrolment – which meant that the system achieved scale very quickly.
- As simple as the Superannuation System is, it is regulated extensively with very stringent oversight and sanctions.
It looks like a good system, so what can Greece learn from this?
Firstly, let us look at its history: The Superannuation system was defined in discussions with employers and unions. It included both as sponsors of multi-employer organisations but explicitly removed the right to access to the funds before the predetermined retirement age. Australia, having an British Commonwealth style common law system has Trust law which is extremely robust in separating employees’ money from those that manage the money. Europe has similar provisions and so has Greece.
The Superannuation System was initially ‘seeded’ as a result of a consensus between Unions, Employers, and Employees, whereby employees would divert a portion of their next increases into accounts in individual names within a Superannuation Fund. This percentage is now 12% of wages. To rapidly expand the system in Greece, there would need to be a similar consensus.
Through Europe, Greece has access to all the building blocks to build excellent auxiliary pension multi-employer funds. And these building blocks are necessary – from Custodial Services to Funds managers, Funds Advisers, Legal Advisers, Marketing People, etc.
However, on closer analysis of the Australian System, these were in fact not the only factors of its success. The Australian pension system started off by recognising that Superannuation was actually an extension of the employment conditions of employees. That is, all employees – even those that worked for themselves.
To make that work, it had to build the plumbing. And this took decades! What do we mean by plumbing? It was that the flow of money, the interaction with regulations, the valuation of assets, the inbuilt compliance systems, and the administration back end had to be in place. To explain:
Something as simple sounding as auto-enrolment, it is not obvious. It requires that each employee, on joining the workforce, is automatically enrolled in a Superannuation fund of their choice (or one as a default), they are fully informed about the details, and a portion of their pay is directed accordingly.
This means that all employers are required to integrate with relevant gateways that allow each employee’s contributions to be diverted to whatever fund they wish; the funds are transferred at the time the employee gets paid; and that, if the employee moves from Fund A to Fund B, the employer is able to seamlessly transact with the new fund.
This also means that the system interacts with the Tax System, and the Administration systems of each of the Superannuation Funds.
Having enrolled the employee, each fund must be able to maintain discrete accounts, so as to communicate simply to employee exactly the value of their account and should they chose to transact to change investment options or go to another Superannuation Fund, to enable this to occur at a value that is fair to them and the remaining members.
Given that all the money is pooled to ensure scale, this requires that any movement of money must occur with within a system that balances each transaction against the fund, while taking account of the movement of prices and values instantaneously. This involves custodians setting up unit pricing systems, and Superannuation Funds having account-based administration systems that can interact with the Custodians. We can go on, but my point is that the complexity is not in the legal authority to set up the pension funds, but in the systemic requirements for it to work. Adding illiquid assets sets up a whole different challenge.
If this sounds like the complexity of a banking system, it is. Except that in handling the requirement to transact daily on assets without daily pricing, it’s actually even more challenging. It’s taken 40 years to mature in Australia.
So, what about Greece?
Certainly, the talent and experience of creating and managing actual multi-employer pension funds is there. But we are talking about a system that reaches into every single employer / employee transaction, and this requires robust technology, common protocols and cyber-security proof sharing of information throughout the system.
Our view is that to build out the existing skills and strengths that Greece can access in Europe, on the existing nascent, but well-constructed system, we need to focus on the needy-greedy of the operating system (plumbing).
* John Livanas is CEO, State Authorities Superannuation Scheme, Australia, Director, Australian Council of Superannuation Investors, Member of Investment Subcommittee, University of Sydney, john@livanas.com
Steve Bakalis is visiting Professor, School of International Trade and Economics, Central University of Peking, China, steve.bakalis@gmail.com
George C. Bitros is Professor of Political Economy, Emeritus, Athens University of Economics and Business and head of the Research Council, Institute of Fiscal and Economic Studies, Athens, Greece.
