The Perfect Pension Storm in Europe?
Insurers managing significant books of group and individual defined-contribution (DC) pensions are obviously nervous following the outbreak of COVID-19 (coronavirus). Markets are down and will not completely recover for a while, so those businesses will take a hit on assets under management (AUM).
This situation must be understood against the backdrop of the greying of Europe. Approximately 747,636,000 people live in Europe. Nearly 20 percent of that population was 65 years old or older in 2018, according to Statista. For comparison’s sake, only around 15.8 percent of the U.S. population fell into that category in 2018.
A report by Eurostat, the statistical office of the European Union, highlights that a fair share of this older demographic is still working:
The share of people aged 55 years or more in the total number of persons employed in the EU-28 increased from 12.1% to 19.7% between 2003 and 2018; this development was uninterrupted, as the share rose each year. The number of people employed increased at its fastest pace among people aged 60-64 years, with the total number of employed people in this age group more than doubled; the number of people aged 65-69 years and 55-59 years who were employed also increased at a rapid pace, rising by 95% and 65% respectively.
The Perfect Pension Storm?
Can you see where this is heading? We have an ageing, but still employed workforce that is very large and already starting to run into the coronavirus buzz saw. COVID-19 has significantly impacted the workforce, with many people across all age demographics being laid off. Some people in the older age group may decide that they have enough pension fund monies accumulated and do not want to compete for one of the few jobs still available, triggering a perfect storm for pension providers: a huge run on pension funds at a time when the global economy and stock market are hurting.
People enrolled in a DC plan are likely have their funds safeguarded to a degree by phased switching from equities to more secure funds as they approach retirement. Depending on where they live in Europe, and their service, they could get a nice financial severance package. So why not recycle the severance through the pension fund for tax purposes and then start to drawdown on it?
Potential Impact on Insurers
A person could have pension funds spread across several insurers, so s/he will choose the best one to recycle their severance with and could also consolidate their funds with that insurer. These are crucial decisions for long-term financial stability, so many people will seek advice. An advisor is only going to recommend suitable insurers for fund consolidation and that may not even be an incumbent.
Insurers who are not selected will be paying out the whole of each individual’s pension funds in transfer values to a competitor, which will quickly become a major pain-point.
With the possibility of a new bubble of people taking retirement and moving substantial amounts of long-term capital around the insurance market, European pension providers want to be the recipient of those funds. Even though they are going immediately into a decumulation program, it’s better to receive and start incrementally paying out, than not receiving anything and having to divest significant amounts.
What are the most important selection criteria?
- Breadth of offerings – annuity, drawdown, guaranteed income annuity with guarantee residual capital after five years, tax free cash – plus the ability to bundle these as packages
- Funds applicable to post-retirement
- Easy to set up provisions
- Online maintenance of provisions. (start to purchase annuities over time)
- A seamless, digital online experience for agents and enrolees
It will be exceedingly difficult to possess/offer these capabilities with antiquated legacy systems. As Europe’s population continues to grey, perhaps the time to invest in new technology is now…