Taking control: why individuals must be the driving force in financial planning
- International and domestic regulators are redefining Europe’s pensions system to reflect the new social contract.
- Working longer and saving more will be the cornerstones of a successful European retirement system.
- Individuals must become more responsible and take control of their retirement. Accessibility of information as well as support and guidance in handling challenging financial decisions will gain in importance.
European nations boast some of the most robust retirement systems in the world. Governments across the continent have long promised a solid financial foundation on which citizens can build their retirement. Though not without flaws, these state-funded systems have successfully allowed workers to leave employment with at least basic financial security. However, with a majority of Europeans today expecting to live to 80 and beyond, the social contract on which these systems are based is undergoing significant change. Individuals must take more responsibility for their retirement than ever before.
The global financial crisis has undermined governments’ efforts to support their citizens financially. Consequently, budgets have been stretched to their limits, and ongoing austerity measures have seen state benefits cut considerably. Persistent low interest rates continue to damage the value of long-term savings—and this comes at a time when life expectancy is greater than at any other point in history. Governments can no longer afford to fund state pensions to current levels.
Against this bleak backdrop, a clear opportunity has emerged: the chance to rewrite the social contract so that individuals are placed in control of their financial future. Politicians, employers and the financial industry are at present working together to cultivate a new approach to retirement saving that will equip individuals with the tools necessary to build a longer self-determined life.
From wild wood to fertile field
In a speech addressing the pensions industry last year, Gabriel Bernardino, the chairman of the European Insurance and Occupational Pensions Authority (EIOPA), described the European pensions system as an “impassable forest”.
Chairman of the European Insurance and Occupational Pensions Authority (EIOPA)
“And the younger people will no longer be in a position to finance the retirement of their grandparents’ and parents’ generation. The protracted low interest-rate environment forces pension funds to increase contributions and, in some cases, to lower the nominal value of pensions.”
Mr Bernardino warned that it was time for the EU to rethink retirement saving if member states want to balance their books without sacrificing the future economic security of Europe’s retirees. In his speech, he said that EIOPA plans to transform the European pensions system from a “wild wood to a fertile field” by focusing on strengthening governance, improving transparency and enhancing sustainability in workplace and private savings.
For EIOPA to achieve these aims, it must introduce government policies that encourage people to work longer and save more, says Professor Axel Börsch-Supan, the director of the Munich Center for the Economics of Ageing: “Almost all of the current pension systems discourage people from working longer, and this is the most important reason for early retirement.” He cites policies, for example, that prevent people from continuing to work while drawing a pension. “These disincentives are very serious and if they were not in place, then people would work longer.”
Governments across Europe are already taking action to remove such disincentives. In Switzerland, for example, the government has proposed increasing the age at which people can draw their occupational pensions from 58 to 60—a move that Hanspeter Konrad, the director of the Swiss Pensions Association (ASIP), says is a big step towards meeting the challenges of increasing longevity.
Redressing popular misconceptions
Introducing policies that allow individuals to work longer will only be effective coupled with an understanding of the positive role that older people play in the workforce, notes Professor Börsch-Supan. “There are so many prejudices about older workers,” he says. “One is that older workers are less productive; they can’t keep up with modern times any more. That is really nonsense.” According to Professor Börsch-Supan, there is “no evidence” that workers later in life are less productive, nor is there anything to suggest they are more likely to suffer ill health or make serious mistakes.
Although it will take time to overturn misconceptions about the value of older workers, there is evidence of an increase in people aged 55 to 64 participating in European workforces. Data from the 2015 Melbourne Mercer Global Pension Index  shows that Swiss labour force participation rates—for those aged 55 to 64—increased from 70% in 2011 to 74% in just four years. In France, rates increased by 6% over the same period, and in Germany rates also continued to rise.
The Mercer study notes that allowing older people to remain part of the labour force is “one of the most positive ways of developing sustainable retirement systems.” A proactive solution, working longer allows individuals to continue to earn and contribute to long-term savings, draw on their savings for a shorter period of time and, on a personal level, remain productive and engaged in society.
Individuals in charge with need for advice
As governments create policies that enable individuals to work longer, and employers respond with practices and environments that encourage longer working lives, individuals must play their part in contributing to the new social contract. Personal savings in particular are critical to ensuring a longer self-determined life.
As private pensions become more important, individuals will need support in saving. “They need information from different sources, including the internet and professional advisers,” says Ivo Furrer, the chief executive of Swiss Life in Switzerland.
Chief Executive Officer of Swiss Life Switzerland
Income demands across the retirement journey are subject to peaks and troughs depending on each individual’s circumstances. In the early stages of retirement, income needs may be high to support an active lifestyle and then tail off, rising again as the costs of paying for healthcare increase. Individuals need to plan for these events before and during retirement to ensure that their income is flexible enough to respond to both expected and unexpected situations.
The role of advisers is important, as they guide people through challenging or even life-changing financial decisions. However, questions remain about how accessible the savings landscape is to the lay person, Mr Bernardino says. “To regain the trust of citizens we can no longer hide behind jargon.”
Mr Furrer endorses this view and says that he has already seen improvements in communication with customers. “To achieve transparency, we have to make sure that the advice is easily understood. We have discovered that a good way to communicate with customers is through videos, as they can thus visualise the experience and relate to the situation,” he says.
Financial products are also changing to reflect the new environment. If individuals are to take control of their retirement income, they need financial offerings that are flexible enough to adapt to changing circumstances, Mr Furrer says. “We think constantly about the customers’ changing needs.”
Funding the future
Politicians, employers, financial institutions and individuals are still catching up with a rapidly shifting retirement landscape. Governments need to continue developing and rewriting policies to facilitate a new contract between citizens and the state. Employers are only just coming to terms with an ageing workforce, and employment practices to retain and motivate older workers are still in their infancy. Individuals, too, must rethink their attitude to retirement, recognising the importance of working and saving longer if they are to afford a longer self-determined life. But change is happening and the social contract is being rewritten.
“I am positive,” Mr Furrer says. “I believe that people have a sense of urgency and want to come together to find a solution that works not just for one party, but that is acceptable to all.”
 Mercer (2015), Melbourne Mercer Global Pension Index, Australian Centre for Financial Studies, Melbourne. http://www.globalpensionindex.com/wp-content/uploads/Melbourne-Mercer-Global-Pension-Index-2015-Report-Web.pdf