EUROPE - Transparency, member information, investment strategy and governance are all key elements that will fall under the spotlight of the European Commission's consultation on a European pensions framework, according to Karel van Hulle, head of the insurance and pensions unit for the EC's Internal Market and Services DG.

Speaking at an EFRP meeting in Brussels yesterday, van Hulle revealed both himself and Georg Fischer, from the Employment and Social Affairs DG, and another colleague, will investigate wide-ranging pensions strategy which include how individuals might be better informed about the risks their pensions carry, as well as whether the current regulatory regime is appropriate to a European pensions framework.

His key responsibilities are already focused on the IORP Directive and Solvency II so van Hulle - in his capacity to look at the second and third pillar pension regimes - will assess whether the IORP Directive needs to be adapted to better incorporate defined contribution pensions, among other key factors.

"It is not for the Commission to say everyone has to do it this way," said van Hulle. "There are implications for the IORP Directive and transparency is the key. We have problems that people don't know where they stand [in relation to retirement income]. It is absolutely clear that education is not the solution, but we need to do more. Should the Commission do more on education and on auto-enrolment? And is the IORP Directive properly equipped to deal with DC schemes?" he asked.

Among the issues to be reviewed, van Hulle said the EC will look in particular at how investors can be better informed of investment risks. He cited a risk profile diagram for UCITS investments - showing investors selecting between 1 and 7 as their preferred profile and investment strategy, with 1 being low risk and low reward and 7 being high risk, high reward.

He said the review is also likely to question the linkage between investment strategy and remuneration, and where commission might fit too.

The green paper will also consult on whether there is any need to review investment rules under Article 18 of IORP Directive, to ask what the pros and cons of investment strategies might be, and will also look at active management to ask whether it leads to short-term decision-making on what should be long-term investments.

The paper will also question the independence and governance of pension trustees, according to van Hulle.

"What type of investments do [trustees] adopt? What is their guidance? Do they have sufficient knowledge about what they are doing? We have a number of rules that can be spelled out a little more clearly," he added.

He noted there are no solvency rules for DC schemes, while there are solvency rules for providers under Solvency II, so the ongoing row between IORPs and providers is likely to be resurrected as he asks of IORPs: "What do you do about the risks to operational risk and liquidity risk?"

"I think what we really want is working schemes to show there is an appropriate solvency treatment which is risk-based, and if you offer guarantees your risk increases. You need to offer an appropriate solution - just risk-based, that is all I want," he argued.

In a later discussion on DC pensions, where members of the audience questioned whether it is necessary for pension fund members to have a lot of in-depth information about their pensions, van Hulle suggested one solution to the lack of investor knowledge might be to create a database which shows what the individual might receive in income when they retire at 65 or 67.

Following evidence from the EFRP suggesting 80% of DC members use the default fund, van Hulle also suggested it is not because the subject is difficult that they do not engage, but argued it is a "two-way street" between members and pension providers, whether they are through occupational plans or as individuals.

"The solution now is not to put the burden on the consumer. The problem with pensions is it is a long-term issue. We need to find a clear way of showing what it means to them. And because there is not enough transparency in information, 80% of people in default funds is not good," said van Hulle.

As a result of the discussion, van Hulle said decumulation and how income may be distributed at retirement is likely to be included as a focus of the green paper, which is described as approximately 10-15 pages in length "with annexes".

Brendan Kennedy, chief executive of the Irish Pensions Board - also sitting on the EFRP discussion panel - noted annuities were first designed to last 7-10 years, but today have to last an average of 25 years, so annuity providers are struggling to deliver products which offer good return guarantees over such a long period.

In response, Georg Fischer argued it was up to the pension industry to devise and design new ideas for the decumulation phase, and meet this challenge.

"I would not believe that you would call something a pension and it doesn't insure you for longevity. If the insurance industry cannot provide them, you should go back to the drawing board," said Fischer.

Van Hulle added: "Decumulation is definitely a question we should raise. I think you need to design new products for a system that has changed. Traditional annuities will have to change. Where is the creative thinking?"

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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