The asset management industry is ill equipped to deliver pre-retirement defined contribution (DC) products to the European market, according to delegates at last week’s Fund Forum in Barcelona.

When asked if the fund management market was able to deliver pre-retirement solutions to investors, 34 per cent of attendees at the conference said it was not. Only 6 per cent said the market was very well prepared.

In terms of post-retirement products, the results were even more damning. Some 52 per cent of the audience said the fund management industry was not prepared in any way to deliver such solutions, with just 4 per cent believing the industry was very well equipped.

“As DC becomes more important in Europe, it becomes more imperative that we get it right,” said Todd Ruppert, chief executive officer and president of T Rowe Price Global Investment Services.

Managers, however, put the blame squarely at the door of both the European and individual country governments.

“We do not even have the most fundamental framework in place at a European government level to make DC work,” says Alain Dromer, CEO at Aviva Investors. “We have some starting points, such as Perco in France, but this is just a drop in the ocean.”

The worry, he adds, is that “as government deficits get smaller and government spending improves, the urgency among states to create capital funding solutions will decrease”.

Joachim Faber, CEO of Allianz Global Investors, agrees. “Unfortunately, some European governments have no clue as to the magnitude of the pension problem and the benefits funded solutions can bring,” he says.

At the start of the year, the European Fund and Asset Management Association (Efama) released a research paper that called on the European Commission to implement a formal legal framework supporting DC as a viable cross-border vehicle. Efama claims negative publicity surrounding DC is based on “non-factual claims and misgivings”, and believes these plans are the perfect tool for diffusing Europe’s “ticking social time-bomb”.

Bernard Delbecque, director of economics at Efama, said at the time that “not enough of the European population is saving into a pension and one of the reasons is that DC schemes are not regarded as adequate by some stakeholders and governments”.

Mr Faber, Mr Ruppert and Mr Dromer all point to Australia and the US as possible blueprints for a successful European DC model.

Indeed, figures from Watson Wyatt’s 2008 Global Pensions Assets Study found that Australian superannuation fund assets have increased on average by 14 per cent a year over the past 10 years, with those assets now equivalent to approximately 105 per cent of the value of Australia’s annual gross domestic product. Ten years ago, it accounted for just 46 per cent.

Graeme Miller, head of the investment consulting practice at Watson Wyatt Australia, said: “The year when global DC assets overtake defined benefit assets is approaching, yet the provision of smart DC investment solutions remains slow and expensive, threatening to under-deliver when the time comes. However, best practice models from places like Australia are likely to permeate through to other markets via the forces of globalisation.”

Mr Dromer agrees: “Australia is definitely the front-runner in all things DC and there is much Europe could learn from that market. The US model is also interesting but does not come without its problems.”

T Rowe Price’s Mr Ruppert cites some of those problems: “Thirty six per cent of people do not contribute to a DC plan in the US and of those that do 89 per cent don’t contribute the maximum. A further 6.9 per cent don’t put in enough to qualify for matched contributions from their employers.”

Despite all the effort, he adds, “for most Americans, 401k plans have not provided sufficient savings for retirement”. It does not matter who manages that money, he continues, “the less money someone puts in, the less money they get out. A system needs to be developed in Europe that gets people to put their money in and simplicity of product design is very important in making that happen”.

OUR VIEW

Things look bleak for the future of a European defined contribution (DC) model.

Superannuation fund assets in Australia, meanwhile, have increased on average by 14 per cent a year over the past 10 years, with those assets now equivalent to approximately 105 per cent of the value of Australia’s annual GDP.

European regulators would do well to keep a close eye on what they are up to. In the meantime, the mood in Europe is not overly positive.

“We do not have a European DC system in place at all,” said Joachim Faber, chief executive officer of Allianz Global Investors. “The country by country systems available in Europe are unsatisfactory and the Australian model should be adopted and moulded into a European platform.”

Alain Dromer, CEO at Aviva Investors, agrees, saying that Europe does not have even the most basic framework in place at a government level to make DC work. He adds that while there is a glimpses of hope in examples such as France’s Perco, it is but a “drop in the ocean”.

The worry, for Mr Dromer, however, is that “as government deficits get smaller and government spending improves, the urgency among states to create capital funding solutions will decrease”.

We watch and wait.

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