Multifunds and lifestyling in the European Union

CEEC Forum seminar on multifunds

Sofia, 18 September 2009

Jung LICHTENBERGERInsurance and Pensions Unit

DG Internal Market and Services European Commission

Email: Jung-Duk.Lichtenberger@ec.europa.eu

Outline

• The situation in the European Union

• Relation with EU policies

1. The situation in the European Union

• From defined-benefit (DB) to defined-contribution (DC)

• EU enlargements in 2004/2007 more DC in the EU

• DC investment risk borne by the member

• Focus on accumulation phase (not pay-out phase)

• Multiple funds in a pension scheme (« multifunds »)

– Portfolios with various risk profiles to accommodate different risk-return preferences of members

– Encourage active participation of member in investment process

1. The situation in the European Union

Multifunds:

EE, HU, LV, LT, SK

Investment options:

LU, NL, PT, UK

1. The situation in the European Union

• 3 portfolios in the multifunds

• Increasing upper investment limits for equities

EE HU LV SK

Conservative 0% 10% 0% 0%

Balanced 25% 40% 15% 50%

Progressive (dynamic, active, growth)

50% 40%(min) 35% 80%

1. The situation in the European Union

• Protection against volatility; two options:

– guarantees of the principal and possibly some minimum rate of return

• some investment risk back to pension fund

– Lifestyling: automatic decrease of exposure to risk as member gets older

1. The situation in the European Union

Lifestyling:

- ES, IT, LU, PT, UK

- HU, LT, SK (with multifunds)

Guarantees:

BE, BG, DK, DE, IT, PL, RO, SK

Both: IT, SK

1. The situation in the European Union

• Default funds: if the member does not actively choose.

• Lifestyling investment could be an essential component of a well designed default option for DC pension plans.

2. Relation with EU policies

Member States remain competent for overall organisation of pension system !

Pension issues important for the European Commission in many ways:

• MARKT– Internal market for occupational retirement provision (IORP Directive)– Financial supervision and stability (EIOPA)– Insurance, banking and investment regulation (life, reverse mortgages, UCITS)– Consumer information and financial education– Free movement of capital

• EMPL: Open Method of Coordination, Insolvency Directive, Portability Directive proposal, coordination of social security

• TAXUD: cross-border taxation issues

• ECFIN: Ageing projections and fiscal sustainability

• Mobile labour force: researchers (RTD)

2. Relation with EU policies

• No EU legislation on multifunds and lifestying investment strategies

• But many related areas:

– Institutions for Occupational Retirement Provision (IORP) Directive

– UCITS IV Directive – KII sheet – Financial education

2. Relation with EU policies

IORP Directive

• Investment rules (Article 18):

– Diversification requirements for the entire portfolio

– Prudent person principle (how would you serve yourself?)

– Quantitative limits

– More stringent national rules if « prudentially justified »

2. Relation with EU policies

IORP Directive• Quantitative limits applying to the entire multifund

• No supervision of portfolio limits and switching for IORPs

Stock Real estate/ fixed assets

Invest. funds

Bonds Single issuer/ group

Foreign assets/

ccy

EE Yes Yes Yes

HU Yes Yes Yes Yes Yes Yes

LV Yes Yes Yes Yes Yes

LT Yes Yes Yes

SK Yes Yes Yes

IORP Yes Yes Yes Yes

2. Relation with EU policies

IORP Directive

• Good communication between IORP and members is key!

– Information to be given to members/beneficiaries (Article 11):

“where the member bears the investment risk, the range of investment options, if applicable, and the actual investment portfolio as well as information on risk exposure and costs related to the investments”

2. Relation with EU policies

IORP Directive

– Statement of investment policy principles (Article 12):

• Investment risk measurement methods

• Risk management process

• Strategic asset allocation with respect to the nature and duration of pension liabilities

2. Relation with EU policies

IORP Directive

– Conditions of the pension scheme (Article 9):

• Financial, technical and other risks associated with the pension scheme

• Nature and distribution of those risks

– But no common EU approach on communication between IORP and member

2. Relation with EU policies

IORP Directive

• Some provisions on governance (Article 9):

– run by persons of good repute with appropriate professional qualifications and experience (or employ suitable advisers)

– properly constituted rules regarding the functioning of the pension scheme

2. Relation with EU policies

UCITS IV Directive – Key Investor Information (KII)

– Level 1 framework directive requires a harmonised and standardised KII sheet

– Includes: how to communicate risk?

– Level 2 implementing being developed: technical advice from CESR to COM expected soon.

– EU consumer testing exercise done: Report published recently.

2. Relation with EU policies

This may work ! Simple, visual and easy to compare funds

2. Relation with EU policiesFinancial education

Industry regulation (prudential & conduct)

Information disclosure

Financial education

Member protection

2. Relation with EU policiesFinancial education

• Some recent findings of national surveys:– Many people fail to plan ahead adequately for retirement.– People do not take adequate steps to choose products

that meet their needs.– 52% of the surveyed people could not tell the difference

between a stock and a bond. – 40% of a group of surveyed people were not aware of the

different risk associated with investing in a single bond and investing in a portfolio.

2. Relation with EU policies

Financial education

• A Member States competence (IT, PL UK on pensions).

• COM coordinates and facilitates exchange of best practice.

• COM initiatives (December 2007 Communication):

– Expert Group (government, industry and academia)– Database– On-line tools– Patronage of events

• First results to be taken forward by next COM?

Conclusion

• Multifunds and lifestyling are also available in the EU

• Related to several EU policies

• Much more DC now than in the past

• Learn from experience in new EU Member States to identify best practice.