We suggested that the policy of reducing social contributions rates needs to be reassessed. Bulgaria should continue undertaking measures to increase social security revenue by eliminating the abuse of paying contributions on the minimum wage as well as to include high wages in the insurance base and by facilitating longer working lives. Jung Lichtenberger, European Commission in Brussels
Mr Lichtenberger, the implementation of the multifund system in the supplementary pension insurance is among the most discussed topics. What is your impression – how is the idea
accepted in the European countries and globally?
The multifund system has become very popular over recent years, especially in South American countries. In the European Union, too,
there are multifunds. They have emerged in Estonia, Hungary, Latvia, Lithuania and Slovakia. In a number of other EU Member States, including Luxembourg, the Netherlands, Portugal and the UK, there
are also defined-contribution schemes that offer investment options to the scheme members in order to better match individual risk profiles.
While there is no EU policy in this field, multifunds touch on various policy areas. The Directive on Institutions for Occupational Retirement Provision (IORP), for example, provides for a prudent
person approach in the investment rules. The IORP Directive also contains specific provisions to ensure good communication between the pension fund and its members. Pension funds are required to
make available a written statement of investment policy principles. Moreover, 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 shuld be communicated to the members.
Finally, multifunds are also related to other EU policies such as those in the areas of risk disclosure and financial education.
What is your comment on the adequacy of the moment for the implementation of the multifund system? Will it be effective in the current situation of crisis environment and shaken customers’
confidence?
The ongoing crisis is a painful reminder that markets can go down, too. For people that rely on defined-contribution schemes to finance their retirement this has very serious consequences. Giving
choice to investors should, however, not be a cyclical objective. The goal of investment choice is to enable scheme members to select the optimal investment portfolio that matches their particular
risk-return preference and ultimately, maximizes their retirement income. It is, however, important that an increase in choice and responsibility is accompanied by measures that adequately equip
individuals to make these choices.
The philosophy of the multifund system is based on multiformity, diversity and freedom of choice. Are the insured though ready for such a free personal choice?
I am alarmed by some recent surveys that suggest that many people do not know the difference between a stock and a bond, or that they are not aware of the different risk associated with investing
in a single bond and investing in a portfolio.
Сhoice should be accompanied by education. Education in general, including financial education, is a matter for the EU Member States to decide for themselves. To complement the national approaches,
the European Commission is also actively involved in financial education. We take the view that the best way to increase the financial capability of consumers in the Internal Market is through the
development of coordinated strategies in individual Member States. The role of the Commission is to urge the Member States to tackle financial education issues and exchange best practice. In terms
of concrete action, this means that we take initiatives to organise expert meetings, European databases, on-line tools for teachers and support events through patronage.
The implementation of the so called “auto pilot” or lifecycle funds are discussed in Germany as a variety of the multifund system, where the responsibility of the risky portfolio lays
entirely on the companies. What do you think about this idea?
I do not want to comment on specific developments in one EU Member State. Generally speaking, it is well known that defined contribution schemes shift the investment risk to the individual
household. Investment returns are highly volatile and so are the benefits that a member can acquire upon retirement. Volatility can be reduced in two ways. One possibility is to provide
defined-contribution schemes with a guarantee of the contributions paid in and possibly some minimal rate of return. In effect you are shifting some of the investment risk back to the pension fund.
Such guarantees exist in a number of EU Member States, including Germany. Another possibility is to use a lifestyling investment approach, where the investment risk is gradually reduced over the
life cycle. The two options are not mutually exclusive. Some EU Member States are using both.
Which model would you recommend for Bulgaria?
Minimum return guarantees and lifestyling investment strategies succeed in smoothing the fluctuations in replacement rates, but come at a cost in terms of missing out on potential market upswings.
The advantages of one approach over the other depend probably on the features of the pension system. A carefully conduced impact assessment well-calibrated to the Bulgarian pension system is likely
to provide further insights.
What is your assessment of the Bulgarian pension system?
The design of pension schemes and social security systems is basically the responsibility of Member States. The European Commission does not take a dogmatic view on different types of pensions or
systems. What matters for us in our role is that the overall EU level aim that pension systems are adequate and sustainable is achieved. We hope to facilitate Member States in reaching that aim in
three main ways:
1) Sharing best practice and policy advice;
2) provide legitimacy for the national reform effort and peer pressure; and
3) offer a reference framework – objectives and indicators to monitor progress.
This take place within a process known as the Open Method of Co-ordination. We have recently published a major report – the Joint Report on Social Protection and Social Inclusion 2009 as part of
this. The Joint Report includes a wealth of information and highlights some of the key challenges facing Member States' pension systems.
In the case of Bulgaria we emphasised that the key challenges are improving pension adequacy and financial sustainability. This, in turn, calls for more social security revenues. We therefore
suggested that the policy of reducing social contributions rates needs to be reassessed. Bulgaria should continue undertaking measures to increase social security revenue by eliminating the abuse
of paying contributions on the minimum wage as well as to include high wages in the insurance base and by facilitating longer working lives.
Jung Lichtenberger is an official in the "Insurance and Pensions" Unit of Directorate General Internal Market and Services of the European Commission in Brussels. He heads the team that deals with European pension fund issues and in particular with the Directive on Institutions for Occupational Retirement Provision (IORP Directive). His area of competence also comprises life assurance regulation, Solvency II and accounting. Before joining the European Commission in 2007, he worked for more than 7 years at the European Central Bank in Frankfurt in the area of financial market analysis and monetary policy. He studied economics, finance and statistics in the UK and obtained a Master of Business Administration (MBA) in France.
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