June 23, 2013 5:07 am

Saving for retirement is ‘a losing game’

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Saving for retirement is “a losing game” for hundreds of millions of European citizens as high charges and taxes destroy the value of pensions, according to the European Federation of Financial Services Users.

“If pension savers cannot enjoy [positive] real returns then there is no point in making private provision,” said Guillaume Prache, managing director of EuroFinuse.

The investor lobby group highlighted the case of an occupational Belgian pension fund that wiped almost a fifth off the real value of a saver’s pension pot after it underperformed a basic equity/bond benchmark by 40 percentage points between 2000 and 2012.

Mr Prache said this was not entirely due to the poor performance of capital markets over that period but mainly because of commissions paid to intermediaries that were not disclosed to pension fund participants.

Pension funds across many European countries have delivered negative real (inflation-adjusted) returns, averaging minus 1.6 per cent over the past five years, according to the OECD.

These results raised “serious concerns”, said EuroFinuse. It also pointed out that actual returns were even worse, as the OECD’s analysis did not take fees or taxes into account for most pension funds.

EuroFinuse looked at real after-tax returns to pension savers in France, Spain and Denmark in the first phase of a Europe-wide analysis.

In France, private pensions provided by life insurers with assets of €1.4tn delivered real after-tax returns of just 0.8 per cent a year between 2001 and 2011.

Private pensions in Spain, meanwhile, suffered negative returns of minus 1.5 per cent a year between 2002 and 2011.

Only Danish pension savers saw positive real returns, averaging 2.7 per cent a year between 2007 and 2011, helped by the efficiency of ATP, the country’s largest pension fund.

Mr Prache said the outlook for pension savings was “grim” as expected returns from bond markets were low or negative and taxes on savings were rising in most European countries, while charges and fees on pension funds showed no signs of falling significantly.

Noting that a European Commission green paper from 2007 had highlighted pensions as “major, once in a lifetime, financial decisions for consumers”, Mr Prache said policymakers needed to act promptly to design simpler low-cost vehicles that were easily accessible without requiring guidance from a financial adviser.

Taxes should also be reformed to encourage long-term retirement savings and regulatory regimes should be harmonised to reflect the interest of pension savers and not product providers.

EuroFinuse also called for existing European fund disclosure rules to be extended to pension products along with the publication of all costs and data to show true (inflation-adjusted, after-tax) returns to savers.

The disclosure of historic after-tax returns has been mandatory for decades for all US domiciled investment funds but there is currently no such requirement at an EU level.

“It really is time to stop-making long-term investment a losing game for hundreds of millions of European pension savers,” said Mr Prache.

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